Restating the faith

P. Chidambaram after tabling Economic Survey 2006-07 in Parliament on March 27.-R.V. MOORTHY

Economic Survey 2006-2007, which ascribes the high growth to economic reform measures, emphasises the neoliberal agenda.

AS most readers of Frontline are no doubt aware, the Economic Division of the Ministry of Finance of the Government of India brings out every year a publication called the Economic Survey (ES). It is placed in Parliament during the budget session prior to the presentation of the Union Budget. The ES provides a detailed description of the performance of the economy during the financial year and presents the viewpoint of the Finance Ministry (and presumably, the government, although it is not entirely uncommon, the principle of collective Cabinet responsibility notwithstanding, for different departments/Ministries to speak in different voices, by design or default) on key issues of economic policy. It also sets out the Ministry's views on the outlook for the economy and its various facets for the near-term. While all this is in the text of the ES, the ES also provides, both in the tables contained in the body of the text, and much more elaborately in the Appendix of statistical tables, a great deal of valuable information about the economy. This information includes data for the current period and time-series data. It should be required reading for all graduate students of economics. The statistical material in the ES, though not all of its text, should also be both intelligible and of interest to the interested lay reader.

The ES typically begins with a general review of the economy. It then covers, in successive chapters, public finance, monetary and banking sector developments, capital and commodity markets, prices and food management, external sector, industry, agriculture, infrastructure and social sector. It must be noted that while the ES presents the viewpoint of the Ministry of Finance, its discussions, analysis and conclusions are far from representing any kind of professional consensus. The current ES, namely Economic Survey 2006- 07, is no exception. While it provides, as its predecessors did, a great deal of useful data, its interpretation of the data and its observations - which are not necessarily based on a careful analysis of the data - are highly contentious.

The current ES begins by highlighting the high rates of growth of the gross domestic product (GDP) of the Indian economy for four years in a row, beginning with 2004-05. It attributes this growth performance, without providing any analytical argument to back up such attribution, to the pursuit of reforms and fiscal prudence. It sees the Fiscal Responsibility and Budget Management Act (FRBMA), enacted in 2003 under the NDA government and notified by the UPA government's Finance Minister on July 5, 2004, three days before he presented his government's first Budget on July 8, as the key to fiscal success and high growth.

After claiming that "[t]he economy appears to have decidedly `taken off' and moved from a phase of moderate growth to a new phase of high growth", the ES goes on to pose what it calls "two issues and three priorities". The two issues it poses are "sustainability of high growth with moderate inflation" and "the inclusive nature of such high growth". The three priorities, according to the ES, are: rising to the challenge of maintaining and managing high growth; bolstering the twin pillars of growth, namely fiscal prudence and high investment; and improving the effectiveness of government intervention in critical areas such as education, health and support for the needy.

The thrust of the argument of the ES is that fiscal rectitude is the key to sustaining high growth and that the issue on inclusive growth is not one of expanding outlays for the poor, but primarily one of improving the effectiveness of government spending. While there can be no disagreement on the need to improve the effectiveness of spending, it by no means follows that this is the main issue. The tone and tenor of the arguments in the ES is that government spending is at best a necessary evil. Thus, it argues that the "potential contradiction" in the short-run between remunerative prices for farmers and fair prices for consumers should not be reconciled through "an expensive compromise of fiscal rectitude". The ES lauds the FRBMA and asserts: "The experience of the past few years has clearly demonstrated the benefit of fiscal prudence along the FRBMA lines." The ES goes on to say that "it is important to resist the temptation of fiscal profligacy in the anxiety to enhance public investment." It hails the conditionalities imposed on State governments by the Twelfth Finance Commission's policy of tying Central assistance to adoption of neoliberal policies.

The ES takes a dig at the Planning Commission. After quoting the Planning Commission's observations, in the context of outlays in the Eleventh Plan, on the constraints posed to an increase in plan spending by the requirements of the FRBMA, the ES states: "It is necessary to take a more long-term view of the implications of the FRBMA than a myopic one of how it constrains liabilities and hence GBS [gross budgetary support to the Plan] in the short run."

The ES ascribes the high growth to economic reforms, and sees it, in classically pre-Keynesian manner, as now driven by high savings (deriving, in significant part, from the decline in the dependency ratio, and the assumed `demographic dividend') leading to high investment. Its argument that fiscal rectitude is the key to high growth rates can be stood on its head.

It is indeed far more plausible to argue that increase in investment - spurred, among other things, by global demand in particular sectors where India currently has a huge wage advantage in respect of skilled workers and employees, and helped along by numerous tax concessions and `incentives' - has led to growth of output and to rising tax revenues of the government, even while tax rates have remained the same or fallen. This has had the effect of improving fiscal and revenue deficit figures. But, more fundamentally, the obsession with reducing the fiscal deficit, which underlies the FRBMA, has no basis in theory, and is a modern-day variant of what Professor Joan Robinson once described as the `humbug of finance'.

The fiscal deficit is the difference between the total (current plus capital) expenditure of government and its `non-debt' receipts. Essentially, it refuses to reckon as receipts the borrowings of government, on the grounds that these constitute liabilities for the future. This amounts to delegitimising government borrowing in a system where private entities are allowed to borrow freely from (often publicly owned) financial institutions. There is no automatic implication in theory that a government deficit is inflationary, nor can there be some magic value of the fiscal or revenue deficit as a percentage of GDP that is somehow `optimal'. The implicit assumption behind the argument in favour of minimising the fiscal deficit is that the economy is already at full employment.

Keynes showed long ago that, in a situation of less than full employment of resources, government deficits could in fact enhance output and contribute to economic growth. But the ES accepts and peddles the pre-Keynesian fiscal fundamentalism that underlies the FRBMA.

Even granting for the sake of argument that fiscal or revenue deficits are to be held below specified limits, it need not follow that increasing public investment implies `fiscal profligacy'. After all, deficits can be limited by increasing revenue rather than only curtailing expenditure. Given India's abysmally low tax-to-GDP ratio, there is surely room for greater taxation of wealth and high incomes. But this route is anathema to the neoliberal view to which the ES subscribes.

In a thinly veiled attack on subsidies, the ES laments: "The NCMP [National Common Minimum Programme] mandate of targeting all subsidies sharply at the poor and the truly needy like small and marginal farmers, farm labour and urban poor, remains to be implemented."

The validity of this reading of the NCMP by the ES apart, one wonders how the ES regards the abolition of tax on long-term capital gains and halving of the tax on short-term capital gains from stock market activity in this context. After all, removing or reducing a tax is, in terms of revenue implications, no different from providing a subsidy. In fact, the ES may have unwittingly stumbled upon an uncomfortable truth, rather different from what it thinks it is saying.

Recalling that the FRBMA stipulates that public expenditure must be reoriented to the creation of productive assets, the ES argues that plan and capital expenditures constitute the nearest approximation to productive expenditure. It also argues that "the distinction between revenue and capital expenditures is... an essential ingredient for policy formulation and efficient resource allocation." While this may appear to becommon sense, it also needs to be remembered that the classification of an item of expenditure as revenue or capital is not always unambiguous. For instance, expenditure on education and health is being increasingly recognised as productive, even though much of this will be reckoned as revenue expenditure.

The ES notes that the NCMP has pledged to raise the expenditure on education to 6 per cent of GDP and that on health to 2-3 per cent of GDP. Yet, its own figures (Table 10.3) show that, during 2004-07, years of high growth and buoyant tax revenues, the combined expenditure of the Central and State governments on education has remained below 3 per cent of GDP, while that on health has varied between 1.26 per cent and 1.41per cent of GDP. The data in the ES show that agriculture has done poorly. But the ES has an exceedingly superficial analysis of the agrarian crisis. It dismisses the enormous efforts of the National Commission on Farmers with the comment that "there are several programmes already under implementation by the Department of Agriculture and Cooperation on the lines recommended by the Commission".

It has an equally superficial analysis of inflation. It has a particularly uncritical box (Box 4.5) on commodity futures markets, and sees the latter as "providing an opportunity for farmers, traders and consumers to obtain a reasonable price".

In the chapter on industry, the ES is forced to admit that the performance of the manufacturing sector in terms of employment generation has been poor. It notes that between 1987-88 and 2003-04 there was a decline in the number of persons engaged in the organised manufacturing sector. We learn from the ES that between 1987-88 and 2003-04, while the share of profits in value-added rose from 11.6 per cent to 45.5 per cent, the share of wages came down from 56.4 per cent to 35.7 per cent. It is also worth noting from this table that between 1996-97 and 2003-04 the output of organised manufacturing rose by 75 per cent while employment actually declined by nearly 20 per cent from 95.36 lakh to 78.70 lakh. The ES also notes from National Sample Survey data that unemployment rates have risen between 1993-94 and 2004-05. However, it takes comfort in the fact of an apparently faster growth of employment between 1999-2000 and 2004-05, in contrast to the sharp slowing down of employment growth between 1993-94 and 1999-2000. Here and there in the ES, reality thus breaks though the heavy fog of neoliberalism.

The rates of GDP growth may have been high over the last three or four years, but it is too early to assert that we are on a new and higher growth path. Agriculture and the rural economy remain steeped in a crisis, and unemployment remains a huge issue. Large-scale labour migration, another vital issue with significant implications of mass deprivation, is invisible in the ES. Our human development indicators are abysmal. Poverty remains widespread, and is very inadequately reflected in the official numbers that the ES presents uncritically.

On one count, one can agree with the ES. In the final chapter on the social sector, the ES says: "Accountability and transparency, especially through the PRIs, need to be emphasised to ensure good governance and delivery of quality services through public action for most social sector programmes." The only remark one would like to make is: Why are accountability and transparency being invoked only in the context of PRIs and social sector programmes? Is private, large capital, domestic and foreign, beyond accountability and transparency?