Budget '98 seeks to synthesise irreconcilable elements. Its strategy to "pump-prime" the economy may end up worsening the situation if some key assumptions go awry.
IN his polemics against Proudhon, Marx said that Proudhon tried to make synthesis, but it became a composite error. Is this the fate of the 1998-99 Budget?
A synthesis is an attempt to hold together seemingly irreconcilable elements. But if the attempt fails, these elements will not only pull in opposite directions, but their interactions may complicate matters further, generating the composite error.
The first thing to consider is the authorship of the Budget. Formally it is the Budget of the BJP-led coalition Government. But it is very doubtful whether there was any kind of brainstorming of the coalition partners to work out a Budget strategy. It is becoming evident also that most of the coalition partners are primarily concerned with extracting favours, economic and political, from the Government and that they do not bother to have any common programme of governance, notwithstanding the celebrations of the National Agenda for Governance a couple of months ago. So, at best it is a BJP Budget and, as will be shown later, there are some visible BJP features in it. However, the BJP does not have a well-thought-out economic philosophy or policy, although from time to time the party has claimed to be committed to 'Gandian socialism', swadeshi, and so on, all rather vague but emotive catchwords. Hence it may be inferred that the 1998-99 Budget of the Central Government is essentially a bureaucratic exercise, prepared by the three or four high-powered men in the Finance Ministry who have been there for the past few years in spite of the frequent changes in government. Yashwant Sinha, the former bureaucrat, would have found it easy to go along with what they had done, giving it some cosmetic political touch.
If this inference is right, some aspects of the Budget make sense immediately - the accent on continuity, for instance, especially of the reform process that was started in 1991, in spite of all the noise that the BJP made against it while the party was in the Opposition and in spite of the loud proclamation in the National Agenda document that India must be built by Indians.
The urge to synthesise can also be attributed to the bureaucratic underpinnings of the budget. The bureaucracy in the Ministry of Finance is more attuned to take into account what it perceives to be the problems of the economy than the preferences of the party in power, although it certainly will not brush aside the latter. It may find some ways of accommodating them too.
From a certain economic perspective the main problem in 1998-99 is to "kick-start" the economy, the industrial sector in particular, from the recession it fell into in 1997-98. And if that recession is treated as a cyclical phenomenon, then according to a theory that reigned supreme in the fiscal sphere for about half a century, the sure way to revive the economy is through "pump-priming", that is, to generate demand in the system through government expenditure. The legitimacy that deficit financing came to have in fiscal economics was based on this theory derived from Keynesian economics, which the bureaucrats must have picked up during their university days. But it would appear that Keynesian economics has fallen out of favour with those who now manage the World Bank and the International Monetary Fund; for them elimination of fiscal deficit is the first principle to be followed in any budget exercise. The 1991 reforms and the first Budget that followed it announced the acceptance of this principle by the Government of India; from then on, drastic reductions in the fiscal deficit per se became one of the primary objectives of budget-making. That it turned out to be a rather unattainable objective is a different issue: it is the commitment that matters.
A question that those who put together the 1998-99 Budget would have faced was how the pragmatic need for pump-priming and a fairly high level of fiscal deficit as a corollary of it was to be combined with the seven-year-old commitment to bringing down the deficit. Herein was to be seen the synthesising genius of the bureaucracy. Fiscal deficit would be left at a rather high level so as not to compress the economy too much, but the withdrawal of the state from the economy would be demonstrated through a more aggressive programme of privatisation (a politically correct procedure for the BJP), a more vehemently stated opposition to the "inspector raj" and a more firm adherence to low levels of personal and corporate taxes.
There was a second area where, again, a synthesis had to be achieved. The BJP's swadeshi thrust had to be accommodated without departing and without appearing to depart from the ongoing processes of globalisation and the opening up of the economy to foreign capital. Counting on foreign private capital became even more imperative after the United States and Japan and international funding agencies announced economic sanctions following the nuclear explosions. Swadeshi would be achieved by imposing an across-the-board 8 per cent levy on customs duties (which was subsequently lowered to 4 per cent). It would also bring a substantial addition of revenue. Criticism from some quarters that this was a return to protectionism could be countered by pointing out that this was only a measure to provide a "level playing ground" to domestic industry.
The commitment to opening up and to globalisation would be emphasised by providing a series of concessions to non-resident Indians (in itself a mini swadeshi-videshi synthesis!), mainly raising from 1 per cent to 5 per cent the limit of individual investment in company equity. According to the Finance Minister, these and similar measures are expected to lead to a doubling of the flow of foreign capital in the next two years. Further, since privatisation is considered to be an essential part of globalisation, the Budget has provided for a bold programme of disinvesting public sector units - to a far greater extent than any previous government had ventured to do.
HOW effective can these exercises in synthesis be to tackle the problems that confront the economy? The answer will depend not only on an appraisal of the remedies suggested but on an understanding of the nature of the problems. Consider the pattern of industrial growth. After an impressive take-off in the 1960s, thanks to the import substitution policy, industrial growth began to sag and by the end of the 1970s reached extremely low levels. But industrial growth picked up again in the 1980s when the policy of liberalisation was launched, especially during the second half of the decade. However, there was a sudden collapse in 1989-90. Industry remained depressed in the early 1990s as well, but started picking up soon, thanks to some aspects of the reforms started in 1991; it recorded a high growth rate of 12.1 per cent in 1995-96. But in 1996-97 it came down to 7.1 per cent and, according to provisional estimates, to 4.5 per cent in 1997-98. Something of a cyclical pattern of alternating high and low rates can be seen here. If such indeed is the case, contra-cyclical pump-priming of the kind that the 1998-99 Budget attempts may be a remedy.
However, this pattern of industrial performance can be given a different kind of interpretation. It is possible to argue that the Indian industrial sector has not come to have the conditions conducive for sustained growth and that except when industry was propped up (the 1960s, a few years in the 1980s and the 1990s), industrial performance has been generally poor. The conditions required for sustained industrial growth are adequacy of infrastructural facilities on the one hand, and a broadbased and rising level of purchasing power on the other. The crash programme of industrial growth in the 1980s exerted severe pressure on infrastructure, and in the name of reforms and reduced state activity, public responsibility for augmenting infrastructural facilities was substantially abandoned in the 1990s. Private investment, domestic or foreign, did not move into infrastructure. Hence the need for increasing and improving infrastructural facilities has been widely recognised and, in fairness to the Finance Minister and his team, it must be noted that the 1998-99 Budget addresses itself to this issue.
The second condition for sustained industrial growth is less perceived and is unlikely to enter into bureaucratic discourse because to recognise it will be to concede that without drastic structural and institutional changes, industrial growth cannot be made sustainable. A careful analysis of the performance of the Indian industrial sector, the manufacturing sector in particular, will show that after a big spurt and a splash, markets for many manufactured goods suddenly become saturated; this makes for inadequate utilisation of capacity, which in turn acts as a disincentive for investment. This is a typical problem where purchasing power is not broadbased. However, the constituency that Indian industry generally targets - foreign capital - is eager to reach, and those whom the bureaucrats count on is the top 10 to 15 per cent of Indian consumers who, to be sure, constitute one of the largest markets in the world. But if that market is saturated, pump-priming and fiscal pampering of the affluent classes - two crucial elements of the 1998-99 Budget - may not succeed in reviving industrial performance at all.
On the contrary, the large deficit resulting from the unwillingness to tax those who can afford to pay, the spending based on big borrowing and the expenditure for infrastructure may release an inflationary pressure which will certainly be supplemented by the cost escalation resulting from the additional customs levy and the hiking of many excise duties. In the meanwhile, the real purchasing power of the people will get reduced because of the variety of levies affecting them - the hikes in indirect taxes, railway fares and postal rates, not to speak of the rise in the prices of foodgrains consequent on the raising of procurement prices. With the increase in costs and the unlikely increase in spending on mass consumption goods from the manufacturing sector, the already saturated industries may move from recession into paralysis.
THAT brings us to the second synthesis. Notwithstanding the explicit protectionist tendency, the Budget does not make any departure from the policies of the 1990s of dependence on foreign investment to sustain Indian industry, in spite of the threat of sanctions following the nuclear explosions. In an interview after the Budget was presented, the Finance Minister brushed aside suggestions of adverse consequences following the sanctions. "I am absolutely upfront about it," he said. "I think those who are talking about factoring in sanctions in the Budget do not understand the situation at all. It is pure politics" (The Economic Times, June 4, 1998). And yet the special concessions announced for NRIs are in the form of an insurance against risk. Can the funds from NRIs revive the sagging industry?
Here the Budget-makers probably had in mind the Chinese experience; overseas Chinese account for a very high proportion - nearly 60 per cent - of all foreign investment. Can overseas Indians be persuaded to follow suit? It is very unlikely because overseas Indians are predominantly professionals, unlike overseas Chinese who are mostly in business and are on the lookout for large-scale investment opportunities. That apart, the bearish state of the capital market and the pronounced hesitancy of foreign institutional investors (FIIs) to enter and remain in India do not provide an encouraging environment for those who may attach a high premium for the safety of their funds.
If the flow of foreign funds - whether NRI or fully foreign - does not take place as expected and if inflation and other factors prevent exports from picking up, the balance of payments problem may also flare up.
Hence, there is the distinct possibility that the smart strategies that the 1998-99 Budget claims to have to revive the economy and to get it moving towards a higher and sustainable growth may not only fail, but may make the situation worse than what it is at present. After all, that is precisely what happened to the 1997-98 Budget which was initially hailed as "the Dream Budget."
