BUDGET BURDENS

Print edition : March 13, 1999

Budget '99 is not a grandiose and flashy display, in the manner of some of its predecessors; yet, far from dealing with critical economic problems of the day, it sets in train processes that may accentuate them.

THE annual budget presented by the Union Government represents the most important expression of the fiscal strategy of the government, and also of the general direction of its approach to the economy. That is why the chief question that arises with respect to any budget exercise is how it addresses what are believed to be the most significant economic issues of the period.

But the Budget speech by the present Finance Minister took this to extreme lengths. The first hour of the speech barely touched on actual fiscal policy, and was instead devoted to holding forth on a whole range of economic issues which are essentially the preserve of other Ministers. Statements of intent proliferated, until the speech began to sound like a preview of various policies that are planned to be announced by other economic Ministries.

Listeners could be forgiven for wondering whether there would be any statement on the Budget itself, any indication of how the Government would use fiscal strategy to steer the economy out of the current mess. But such a focus was largely absent in the speech, actual fiscal measures were rushed through, and much was left unsaid especially with respect to expenditure patterns. The chief merit of the proposed Budget is that it is not a grandiose and flashy display, in the manner of some of its predecessors. The chief demerit is that, far from dealing with the critical economic problems of the day, it actually sets in train processes that may further accentuate these problems.

It is not as if the Finance Ministry is unaware of the severity of these problems. The annual Economic Survey - released by North Block just a few days before the presentation of the Budget - accepts that the fiscal and revenue deficits of the Government are unsustainable, that the industrial recession is unabated, that investment rates are down, that agricultural performance has become a major source of concern, that the external trade situation is worsening and that the balance of payments looks increasingly fragile.

Indeed, the Government's own Economic Survey points out that with the exception of agriculture which rebounded somewhat after the negative growth of the previous year, all other sectors (with one exception) have decelerated in growth terms. The only other sector that showed substantial growth was the services sub-sector of "public administration and defence", which increased only because of the salary increases consequent upon implementation of the Pay Commission report. However, even this did not result in a proportional increase in consumption, and appears to have been largely saved in the expectation of worse times ahead. The Survey admits that "demand factors seem to have played a significant role in the slow recovery of manufacturing growth", thereby suggesting that it is aware that the low growth of effective demand must be counteracted somehow, and that expectations regarding the economy need to be revived.

The Survey also points to the urgent need for increasing public spending on infrastructure, and on education and health especially in the rural areas. The section on social sectors, including poverty and employment, mouths the usual platitudes and makes the usual claims about the long-term trend of reduction of poverty, but even here the Survey has been forced to admit that the performance in this area has been far from satisfactory and needs particular attention.

But all this awareness seems to have done precious little to galvanise the Government into effective action. Virtually none of these problems has been squarely confronted, except through little statistical and accounting tricks that do nothing to help the actual situation. Is this therefore a statement of helplessness on the part of the Government, an official washing of hands in the face of apparently insurmountable difficulties ?

Consider the basic issue of dealing with the industrial recession. In periods of demand downturn governments must spend more, to counteract the decline in private consumption and to ensure that employment and economic activity are maintained. It speaks volumes for the fiscal management of the present Government that over the current fiscal year 1998-99, it actually managed to spend less in money terms than its own targets in Plan outlays generally.

Finance Minister Yashwant Sinha (right) arrives in Parliament with Minister of State for Finance, R. Janarthanan, on February 27 to present the Union Budget for 1999-2000.-ANU PUSHKARNA

Thus, total Central Plan outlay actually spent was lower than the budget estimates by a whopping amount of nearly Rs.17,000 crores, in a year in which such expenditures would have been crucial to stabilise the economy and reduce the negative implications of economic deceleration. Such a shortfall in Plan expenditure was not a reflection of more responsible behaviour in terms of controlling expenditures in order to limit the fiscal deficit; rather it reflected general ineptitude. Thus, in important areas such as agriculture, rural development and irrigation, the shortfall came about because the Government was simply unable to get its act together and push through Plan projects in time.

In other sectors such as energy, industry and minerals and transport, this shortfall reflects the gap in internal and extra-budgetary resources of public sector enterprises operating in these sectors. And this gap is the direct result of using PSEs to solve the Central Government's fiscal problems, by twisting their arms to cross-purchase each others' shares as part of the Government's so-called "disinvestment". While this process managed to raise Rs.7,500 crores more for the Central fisc, it reduced the resources available for expansion and productive investment for these enterprises, with obvious negative implications for their own growth. Consider too the planned investments in infrastructure, an area the Government also recognises as especially urgent. The performance of the infrastructure sectors (barring the single exception of telecommunications) has been both dismal and deteriorating over the recent past. Yet Plan outlays in these critical sectors are projected to be below the levels budgeted for last year, even though it is now well established that private investment will not rush in to fill the gap.

Similarly, the Budget does not have any expenditure measures designed to counteract the economic stagnation. It has very little to offer in terms of encouraging real economic revival. The Finance Minister expressed his concern about agriculture deceleration and the decline in per capita foodgrain production. He also packaged his Budget as one for farmers, and by and large the press accepted this uncritically.

But the Central Plan outlay for agriculture and allied activities is actually projected to fall compared to last year's budgetary outlay. In fact, the proposed Plan outlay for 1999-2000 on agriculture, rural development and irrigation taken together, although somewhat higher than the actuals during 1997-98 and 1998-99, is in real terms less than the expenditure during every year between 1993-94 and 1996-97.

The concern for the poor and for social expenditures is expressed by simply putting the responsibility on to gram panchayats, which are not functional in large parts of the country, especially where such spending is most needed. Further, since all the new taxes are in the form of surcharges which are not shared with the States, they add to fiscal centralisation. They also contribute to the continued shortage of resources for the State governments, which are mainly responsible for crucial expenditures on education, health, power and transport infrastructure.

It is interesting that a Government that is so dependent upon regional parties in the coalition has acted to work against the interests of the states so substantially. If the Government's allies, especially those in Andhra Pradesh and Maharashtra, have the ability to analyse the figures closely they will discover that the Centre has actually taxed them so heavily through higher prices of food and diesel, and diverted so much of expenditure control regarding rural development from the States to the Centre, that it is bound to erode their credibility in the coming elections.

The Finance Minister has made some feeble efforts indirectly to spur a revival in demand for industrial products. These include tax concessions for housing with the aim of spurring a housing boom, tax concessions for mergers and amalgamations to accelerate corporate takeovers, a relaxation of controls on monopoly and easier terms of entry for foreign investors in sectors like pharmaceuticals. These minor supply-side measures would have at best a limited impact in what is essentially a demand-constrained situation. Similarly, the across-the-board customs surcharge is likely to have mixed effects for industry.

The critical role of the state in boosting demand in periods of recession thus appears to have been forgotten. With government expenditure constrained as projected and taxes raised in order to reduce the fiscal deficit, demand growth will remain weak, foreclosing an industrial revival. Hence, it is likely that these measures would contribute more to a greater concentration of capital and the growth of big, especially foreign, businesses rather than any increase in industrial growth.

THE real benefit in the Budget goes of course to finance capital with the Government deciding to exempt interest earned on investments by individuals and corporates in mutual funds, which reinvest much of that money in the stock markets. Further, tax on dividends has also been done away with, providing a virtual bonanza to financial investors and big finance capital in order to revive the stock market. Put simply, more has been done to revive the financial sector rather than the real commodity producing sectors, especially industry. But financial expansion in this context may lead to a diversion of investible resources away from the real sectors, thus aggravating the economic decline.

Indeed, the Budget is likely to encourage the heightened concentration of capital, through a fiscal package which facilitates mergers and acquisitions, along with various other concessions. Since periods of recession are associated with increased concentration in any case, this means the reduction of true competition in Indian industry. And this avenue for investment is also made more attractive for foreign and non-resident Indian investment, for whom rules have been substantially relaxed. Such investors are thus being encouraged to buy up existing Indian assets rather than go in for the more risky and difficult job of creating new productive capacity.

While the proposed expenditures of the Budget are not likely to generate additional growth, the pattern of raising resources is basically regressive. Most of the additional revenue mobilisation is to be through indirect taxes along with hikes in administered prices already announced, so that the effect on consumers is distinctly inflationary. This sets the scene for a classic stagflationary path, which is even more worrying since large parts of the world economy seem set to fall into deflation.

The burden of all of this finally falls on the working people and middle classes, who would not only have to pay higher prices and more taxes, but would have to deal with the problem of unemployment generated by decelerating growth in both the public and the private sectors, as well as be affected by the greater tendencies towards monopoly in industry. All talk of agriculture, the Dalits and human development in the Budget speech is mere rhetoric, to shroud this fundamentally pro-finance and pro-big business character of the Budget.

What is notable, however, is that in this Budget Yashwant Sinha has desisted from grandstanding himself as a great reformer and has actually made some effort to increase tax revenues. The reality after eight years of "reform" budgets is that there is simply no scope for massive give-aways. Indeed, the fiscal situation is such that the Government can actually do precious little either for infrastructure or for the poor and the social sectors without rolling back significant parts of the reform agenda itself. That, however, would be expecting too much from a Bharatiya Janata Party Government which has been desperately trying to curry favour with international capital after its Pokhran fiasco last year.

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