Crisis, what crisis?

Print edition : March 13, 2009

Pranab Mukherjee, the acting Finance Minister, on his way to present the Vote-on-Account Budget on February 16.-PANKAJ NANGIA/BLOOMBERG NEWS

THESE are extraordinary times, declared acting Finance Minister Pranab Mukherjee in his speech to place the Vote-on-Account Budget of the Central government for the coming financial year. Yet, the numbers in the Interim Budget themselves showed that there was little, if any, acceptance by the Centre of these extraordinary times, which should have called for at least something out of the ordinary in terms of fiscal action.

Of course, this is a government that in recent months has been in denial, unable or unwilling to accept that the economy has already entered what could become a very serious downturn. Even so, the prospect of general elections normally concentrates the minds of most political parties, and forces them to think at least a little bit about the effects of their actions upon the electorate.

It is clear that the two economic packages announced so far by the United Progressive Alliance (UPA) government to deal with the downturn have been partial, weak, and generally not very effective. So it was almost universally expected that the government would use this last opportunity to take some measures to counter the rapid economic deterioration of the past few months.

It has been obvious for some time now what these measures should be because it is quite evident where the economic pain is being felt. It is unfortunate that most of the burden will be borne by those who did not really gain from the previous boom, the workers and peasants whose real incomes barely increased even as the national income grew rapidly. The deceleration in output growth has translated sharply and directly into employment losses, especially in labour-intensive export sectors, construction, and some services. As a result, many migrant workers are being forced to return home, often to poor and less-developed areas with few economic opportunities. Farmers producing cash crops are being hit by the global collapse in the prices of those crops.

Meanwhile, retail food prices have not come down, so food consumption of the poor is adversely affected. Real, and sometimes even nominal, wages are falling, and the incomes of self-employed workers, who constitute more than half the workforce, are under threat.

Small-scale producers in all sectors are being squeezed by the pincer movement of falling demand and credit crunch. Investment projects are being curtailed by the liquidity trap conditions in which banks are willing to lend only to the most secure borrowers, who in turn are unwilling to invest because of greater uncertainty. State governments tax receipts have fallen and so they are increasingly strapped for cash and unable to meet even essential spending on the basic public services that they are dominantly responsible for, not to mention development.

It is clear that in this context, the Central government has to spend, and in ways that directly have an impact on the lives of groups that have been hard hit. For months now, sensible people have been calling upon the government to expand public spending, not just in general but specifically to increase employment and promote the labour-intensive activities that are facing difficulty; to support livelihoods in agriculture and small enterprises; to ensure access to food at reasonable prices through the public distribution system (PDS); and to ensure more funds to State governments.

But all the measures announced so far have been feeble and many of them like the across-the-board excise tax cuts and freeing of export bans on unprocessed material have been worse than useless. The much-vaunted fiscal stimulus amounted to less than 0.5 per cent of the gross domestic product (GDP) in actual public spending, and the other measures have simply transferred more resources to banks and private investors without ensuring that they take steps to increase investment and production, or retain employment.

The UPA government seems to have blown its last chance to prevent the economic crisis from getting worse, making it hard to comprehend what exactly the government is thinking, or even what it wants. The argument made to justify the inertia is a sudden concern for propriety, which according to government spokesmen, demands that a government not introduce major policy changes or big tax measures in a vote on account.

But the UPA government was not constrained by any such notions of propriety when it introduced more than 30 Bills in Parliament in its last session. Many of these Bills will have huge implications for our polity, economy and society if they become law, yet the government is clearly seeking to rush them through without adequate discussion in Parliament, and certainly without any public awareness of the issues.

In any case, the significantly changed global and domestic economic landscape of the past six months has provided the government with an open opportunity to move beyond mechanistic interpretations of propriety. There is certainly no reason to feel constrained to act decisively in such a period of economic stringency, when hard times are clearly upon us. Indeed, the need for countercyclical spending has caused the government to bypass the self-imposed constraint on more spending in the form of the Fiscal Responsibility and Budget Management (FRBM) Act, which it has correctly chosen (on its own, one might add) to ignore at present.

Export of pepper during the first nine months of the current fiscal dropped in quantity and value compared with that of the corresponding period last year. Farmers producing cash crops are hit by the global collapse in prices.-K.K. MUSTAFAH

In this context, the failure to do anything meaningful is just one more example of a government in denial, one that is so satisfied with its own performance that it is failing to see the material reality facing most of its citizens.

The self-approbation is so great that even the thought of facing the electorate does not lead to any sober assessment of the current problems or active engagement to deal with them. The Finance Ministers speech was remarkable in its complacent recounting of the UPA governments achievements since 2004, with almost no sense of urgency in dealing with a rapidly deteriorating economy.

It is true that certain of the governments actions in particular the National Rural Employment Guarantee Act that was passed under pressure from the Left parties and progressive groups and in the teeth of opposition from important government leaders have been positive and are bringing economic and political benefits. Yet the implementation has been below par, partly because the Central government had turned extremely tardy and niggardly in transferring the relevant funds to the States. And the current climate of job losses and reduced potential for viable self-employment means that the government cannot rely on this alone but must consider other actions.

But fiscal conservatism seems to have triumphed over all these considerations. Consider the overall fiscal stance that is being proposed for the next few months. According to the Finance Ministers speech, the current years fiscal deficit is likely to be 6 per cent of the GDP.

This may seem like a lot, but remember that a big chunk of this is because of reduced tax revenues, partly because of the slowdown itself and partly because of misguided tax cuts that were supposed to provide an impetus to private spending but did not do so. The large increase in non-Plan revenue spending has mainly been because of the Sixth Pay Commission award, which has nothing to do with the governments own attempts at promoting economic recovery. Similarly, expenditure on the food subsidy has increased, but ordinary consumers and the poor have not benefited in fact, allocations to the PDS in the States have been curtailed drastically, making cheap food less accessible. Instead, public procurement increased with the monsoon-induced good harvest even as off-take from the PDS reduced, so there are increased stocks with the Food Corporation of India and, therefore, its carrying costs have gone up.

In any case, even this fiscal stance has been insufficiently countercyclical in its impact. But for the Interim Budget for the first four months of 2009-10, the UPA government has proposed hardly any increase in expenditure, along with a recovery of revenues, such that the fiscal deficit is actually projected to come down to 5.5 per cent of the GDP compared with the current year.

Worse, while State governments are getting lower revenues than budgeted for, the Interim Budget does not propose any real increase in Central assistance to State Plans. This is appalling because the next Budget is unlikely to be presented before July, and in the next six months, the fiscal constraints in the States will reduce citizens access to public services and aggravate the economic crisis.

Similarly, there is no evidence of particular attention being paid to employment-intensive sectors such as construction, which surely could have benefited from a large dose of public investment for affordable housing. The chances of a proper relief package for agriculturists to cope with the price shocks appear to be remote because the total expenditure for the Ministry of Agriculture is projected to be flat.

Food has emerged as a critical issue, and Central PDS allocations to the States have been cut at a time when food prices are very high. Yet, the allocation for the Department of Food and Public Distribution, which manages the food distribution and accounts for the food subsidy, has actually been reduced, falling from an estimated Rs.45,536 crore in the current year to a budgeted Rs.44,744 crore in the coming year! In the context of very poor overall nutrition indicators in the country, and increased fears of food insecurity, such a decline, along with the fact that foodgrain allocations to the States are being reduced, is unforgivable.

The Finance Ministers speech made much of the impetus to be provided to rural infrastructure through additional spending. But the Ministry of Rural Development is actually slated to receive less money in 2009-2010 than it is getting in the current year.

Instead of providing money where it matters, there is a foolish proposal to further subsidise private investors in public-private partnership projects, by providing refinancing of 50 per cent of the bank loans for such projects. Surely it would be much simpler and cheaper for the government to encourage our public sector enterprises to undertake such investment, but the obsession with private provision even in these chaotic times rules out such an obvious possibility.

The one area in which the Interim Budget does allocate a very significant increase in spending is Defence, for which total allocations are projected to increase by a whopping 34 per cent over the current years budget estimate, and 24 per cent over the revised estimates for this year. This will make Defence alone account for nearly 15 per cent of all government spending in 2009-10. Defence spending in India is a sacred cow that no one dares question, but surely it is worth questioning some of this increase, especially when so little transparency is attached to the expenditure. It is also worth noting that the UPA government was not constrained by any notion of propriety in declaring such a large increase in this one item.

All in all, this is more than simply a disappointing Interim Budget. It is actually a disturbing statement of the lack of acceptance of economic reality by the UPA government and shows a degree of inertia in protecting the material interests of common people that is alarming.

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