THE year 1975, which witnessed the most pronounced slump in the capitalist world since the Great Depression of the 1930s, was for India a year of remarkably strong economic performance. This contrast underscores the insulation which the Indian economy had enjoyed from the vicissitudes of world capitalism in the dirigiste era. This insulation, alas, has ended with the onset of "liberalisation"; and 1998-99 is proof of this. The recession in the capitalist world has not only been imported into the Indian economy, but imported with a vengeance, through the dumping of foreign goods on the Indian market, giving rise to a combination of an enhanced trade deficit, an industrial recession, and, in consequence, lower government revenue and a larger fiscal deficit. The current crisis of the Indian economy represents the denouement of the policy of "liberalisation" introduced in the 1990s, which sought to downplay the role of the state as an investor and producer, and to link the fate of the Indian economy with that of the world economy, ostensibly to import high growth. Instead of importing higher growth, however, we are importing crisis, and there is no spontaneous end to it in sight.
This crisis, to be sure, is not of Yashwant Sinha's making. He neither has jurisdiction over the world economy, nor is he responsible for ushering in "liberalisation". What was required of him, though, was a strategy to cope with the crisis. His Budget for 1999-2000 displays no such strategy. On the contrary, he has put himself into the "liberalisation" straitjacket with the zeal and the naivete of a neophyte.
This naivete is disquieting. When it is apparent that the initial phase of "liberalisation" has brought the economy to its current crisis - which, incidentally, would have been far more acute but for the remittances of the unsung expatriate workers - he and his officials are talking of unleashing a "second generation of reforms". When the whole world is agitated by the depredations of speculative finance, he actually wants India's state-owned financial institutions to "behave like foreign institutional investors" (The Hindu, March 4), that is, to act as pure speculators rather than demand a say in the management of the companies they invest in. The fact that this could destabilise the management of several Indian-owned companies and expose them to takeovers by foreign speculators seems not to bother him in the least.
Likewise, in the midst of the present crisis, Yashwant Sinha's professed primary concern is with reining in the fiscal deficit! One may find, if one cuts through the miasma of misleading statistics (as C.P. Chandrasekhar has done elsewhere in this issue) that he has not actually succeeded in doing much about it, but the mindset is disquieting. It amounts to an acceptance - as valid economic theory - of the ideological pronouncements of the Bretton Woods institutions, which denounce all fiscal deficits in their effort to "roll back" the state. It concurrently negates the possibility of any autonomy vis-a-vis these institutions, which requires above all the autonomy of theory. Examples of IMF-World Bank ideology masquerading as theory abound in the budget speech. The high interest rates, for instance, are supposed to be the result of the fiscal deficit, when elementary economics teaches us that the interest rate is a monetary phenomenon, a matter of monetary policy. No doubt, a Finance Minister is not expected to be an economist, but it is a shame if the Finance Minister of India takes World Bank handouts as his source of theoretical wisdom.
The idea that the fiscal deficit has to be checked at any cost characterised the colonial government's drastic pruning of public expenditures in response to reduced revenues during the Great Depression of the inter-War years. This had then compounded the recession and worsened the condition of the country's infrastructure. It had then been justifiably pilloried by nationalist writers. The re-surfacing of this idea is an illustration of the throwback to the colonial times that we have of late been witnessing in matters of economic policy.
SINCE the crisis of the economy is the result of inadequate demand compounded by the dumping of foreign goods, any attempt to overcome it must also take two forms: first, restraining imports, and secondly, expanding domestic demand, for which the most obvious, effective, direct and appropriate instrument is public investment.
The Government, however, has done neither. Even in the face of rampant dumping, the Government has done precious little to protect domestic producers. To be sure, dumping is always difficult to prove, but the question of successful legal defence arises only when the government plans to initiate some action. Of this, however, there has been no evidence.
The across-the-board customs duty surcharge of 10 per cent and the drifting down of the rupee may be cited as instances indicating a move towards greater protection for domestic producers. But the surcharge replaces a special additional duty of 5 per cent so that its extra effect, together with that of the depreciation of the rupee - which is expected to be of the order of 5 per cent - would be insufficient to provide protection.
What is more, being across-the-board measures, these would also raise imported input costs and would be rather ineffective in providing protection. For this very reason, however, they do have serious inflationary consequences.
As regards expanding public investment, the Budget has been remarkably timid. According to the official briefing by the Finance Ministry, it is based on the assumption that nominal GDP would grow by 13 per cent in the coming year. The total Plan expenditure, however, is scheduled to increase by only 6.9 per cent compared to the previous year's budget estimates, and by 12.6 per cent compared to the much lower revised estimates. In other words, the proportion of Plan expenditure to GDP is, according to the Budget's own provisions, expected to decline compared to the already reduced levels of last year's revised estimates.
Even this, however, presumes that additional resources of the order visualised are indeed mobilised. The gross tax revenue is supposed to grow by 19 per cent, within which excise duties are supposed to increase by 20 per cent and customs duties by 18 per cent. These rates are somewhat higher than have been witnessed in the recent past and it remains to be seen if Yashwant Sinha goes through with this effort. If there is a revenue shortfall compared to the budgetary provisions as has happened in the current year, then even the meagre increases proposed in Plan expenditures may not materialise.
Central Plan outlay, though lower in absolute terms than last year's budget estimates, is expected to grow by 17 per cent compared to the revised estimates, and this fact may be adduced as evidence of the Government's commitment to a larger public investment effort. The outlay for important sectors like rural development, however, scarcely shows an increase despite an expansion in the definition of this sector. What is more, over 60 per cent of the increase in Central Plan outlay is supposed to come from internal and extra budgetary resources of public enterprises. Since these resources, however, are also being drawn upon to finance disinvestment of public sector equity, which in turn is being used to show a lower fiscal deficit, not much credence can be placed on the Plan outlay estimates.
Yashwant Sinha, by his own admission, pins his hopes for reviving the economy not on public investment but on three other things: first, the boost to housing that he has given in the Budget; secondly, his emphasis on improving the rural economy; and thirdly, the streamlining of the tax system which would enthuse industry to invest. Now, a few minor tax concessions are unlikely to give much boost to construction activity. Likewise, a few minor schemes are unlikely to make much difference to the rural economy when the Central Plan outlay on rural development itself is stagnant in absolute terms. And to expect private investment to respond to a mere streamlining of taxes, and that too to an extent where it leads to an industrial revival, betrays an extreme form of naivete. The enthusiastic response of the stock market to the budget proposals may give a contrary impression, but stock market booms and upsurges in productive investment are two entirely different things, a fact that was underscored by the Harshad Mehta boom of the early-1990s.
Productive investment languishes when the market for commodities is stagnant. A stock market boom, which incidentally is perfectly compatible with a stagnant economy, is simply incapable of stimulating investment in such a situation. Yashwant Sinha's Budget implicitly espouses a notion of supply-side economics, which does not recognise the importance of the increase in the size of the market for investment decisions. This is an economic doctrine which has the distinction of having failed in every context where it has been tried. Moreover, the view that tax concessions to the better-off sections is the answer to all economic crises is not just wrong; it is socially-divisive, and hence pernicious as well.
Yashwant Sinha's Budget is both too much and too little. It has innumerable schemes and provisions. But each of them is paltry and insignificant, and all of them together do not add up to a strategy other than a pious hope in the efficacy of supply-side measures, particularly if undertaken in bulk.
