The effects ofa neoliberal reform scheme pervade P. Chidambaram's Budget for 2007-08.
BEING an instrument that serves to manage the pace of growth and the distribution of its benefits, the annual Budget of the Union government is influenced more by the ideological inclinations of those in power than by current circumstances. Those inclinations are obviously significant. By changing both the tax-cum-subsidy regime and the level and pattern of expenditures, budgets can be crucial determinants of incremental outcomes in terms of growth and distribution.
When Finance Minister P. Chidambaram rose to present his Budget this year, a number of features of the current economic situation are likely to have influenced his thinking. The first of these is that he, along with Prime Minister Manmohan Singh, is seen as being one of the architects of India's liberalisation and reform drive. This is an image he wanted to retain, as reflected in his statement that "the UPA [United Progressive Alliance] government has remained committed to economic reform, fiscal prudence and monetary stability." But given the prevailing circumstances this was not the commitment that mattered.
A second feature of the current scene is the extreme imbalance in growth. While the overall gross domestic product (GDP) growth has been high and is accelerating, for some years now Indian agriculture has been in a severe crisis and the peasantry across the country is distressed. Finally, while growth in the Indian economy is high, there are clear signs that it is threatened by an inflationary crisis affecting, among other commodities, food articles. Inflation, by transferring incomes to producers of the commodities concerned, increases profits at the expense of the real incomes of net purchasers of these commodities. It implies, therefore, that imbalances in the distribution of the benefits of growth are not merely sectoral but also visible in the distribution of incomes across different sections of the population.
Given these circumstances, both the rhetoric of inclusive growth and the results of recent elections required that the Finance Minister make an effort to correct these imbalances through both his tax and expenditure proposals. What is striking from the "report card", which serves as the preamble to the Budget speech, is that while the Finance Minister seemed to be conscious of these elements of his context, he was in a mode of partial denial. In his view, these were not challenges to confront but factors that he had already addressed in his past Budgets. To quote the Finance Minister, while growth had rendered revenues buoyant, he had "put to good use these revenues to promote inclusive growth, equity and social justice". Therefore if the task is already under way, doing more of same should serve his purpose. Not surprisingly, the Budget stays with what he has done. A wrong reading, influenced more by inclination than fact, has meant that the Finance Minister has left unexploited what was a moment of opportunity.
In fact, the combination of high growth and inflation offered the Finance Minister an unusual opportunity. If growth is accompanied by inflation, revenues are bound to be unduly buoyant. Inflation, as noted earlier, increases profits even while it squeezes the revenues of the ordinary citizen, a fact reflected in the balance sheets of the corporations. This provides an opportunity to skim off a part of the surplus delivered by growth and inflation to the more well-to-do in the population. This opportunity offered by growth and inflation was visible in the ability of the Finance Minister to realise the rather optimistic projections he had made in his Budget for 2006-07. That Budget assumed a high level of buoyancy in tax revenues, and seemed optimistic at the time. However, gross tax revenues rose (with some help from the collection of past arrears) by 27 per cent in 2006-07 relative to 2005-06. Revenues exceeded budget estimates in every area of taxation except excise duties, with the increase being most marked in the case of corporation and service taxes, the two areas that benefit most from the current pattern of growth.
If the Finance Minister had decided to build on this success and tax away a part of the increase in surpluses, revenues next year should rise even more than they did in 2006-07. Since the government believes that non-agricultural growth would more or less take care of itself (fuelled by the high level of corporate savings and investment), these additional revenues could have been used to support the peasantry experiencing a crisis, to compensate the ordinary citizen for the ravages of inflation, to spend more on generating rural employment and to outlay more on social sectors such as education and health.
Part A of the Finance Minister's speech seemed to suggest that this was what he was going to do. The focus of the Budget, he said, was agriculture; rural employment was to be strengthened by extending the National Rural Employment Guarantee Scheme (NREGS) to 330 districts from 200 districts; inflation was to be contained; and the social sectors were to be emphasised. By the end of Part B of the speech, however, it was clear that the Finance Minister did not plan either to garner additional revenues or to spend them in ways that justified his rhetoric.
It hardly bears stating that a big push of the kind required in the current context would imply that government expenditure would rise relative to GDP. This is the first area where the Budget proves a disappointment. Total expenditure is budgeted to rise by 17 per cent in 2007-08. While this is higher than the 15 per cent recorded in 2006-07, it is not very much more than the likely 16 per cent increase in nominal GDP, assuming a growth rate of 9 per cent and inflation of around 7 per cent.
Moreover, the claim that the focus of this Budget is on the agricultural sector, which is in the midst of a crisis, is clearly not justified. The Central Plan outlay on agriculture has hardly increased as a proportion of GDP. Even to the extent that agriculture is being supported, it is through measures that are expected to increase productivity. One such is irrigation. But medium- to long-term measures such as investments in irrigation, strengthening of extension services and more research and development, while welcome if implemented, are not going to provide immediate relief to a farming community in distress. That requires restoring the viability of farming by ensuring that prices received by farmers are higher than their costs of production. One way of doing this would have been to strengthen and extend price support to farmers. However, no effort has been made to provide such support. On the contrary, as part of the import liberalisation thrust, customs duties on a range of agricultural goods have been reduced and this will further depress agricultural prices and farmers' incomes. The reduction in customs duties is being defended as a measure that will help moderate inflation. In sum, the Finance Minister is choosing to combat inflation by adversely affecting the livelihoods and incomes of the farming community.
While livelihoods will indeed be affected, inflation is unlikely to be curbed by these means. Dealing with inflation and moderating its adverse effects on real incomes require curbing speculation, strengthening the public distribution system (PDS) and increasing food subsidies. In this connection, the decision to ban forward trading in foodgrains is indeed welcome, but it is unclear whether this alone will do the job. On the other hand, there is no mention of strengthening the PDS and the budgeted outlays on food subsidies for 2007-08 reflect an increase of just 6.2 per cent - lower than the increase in the consumer price index and much lower than the increase in food prices.
With food remaining expensive, a source of succour to the poor would have been enhanced employment that puts purchasing power in their hands. An important means of delivering this is extending and strengthening the national rural employment scheme. The Finance Minister does promise to ensure this by, among other things, extending the NREGS from 200 to 330 districts. But the budget papers do not provide evidence of anywhere near adequate allocation of resources for this. Spending on the NREGS is to rise from Rs.11,300 crore in 2006-07 to just Rs.12,000 crore. The total expenditure on rural employment is budgeted to rise by just 3.5 per cent. Even the aggregate expenditure on the three flagship schemes - NREGS, Sampoorna Grameen Rozgar Yojana (SGRY) and Swaranjayanti Gram Swarojgar Yojana (SGSY) - is to rise by just 7 per cent, which amounts to stagnation in real terms.
For those looking for any real evidence of a commitment to "inclusive growth", what remains are social sector expenditures. On this front too the Budget disappoints. The expenditure on higher education is budgeted to rise significantly to accommodate the expansion in seats needed to implement enhanced reservation for backward classes. However, elementary education is to receive little support. The allocation for the National Rural Health Mission (less than Rs.10,000 crore) is grossly inadequate. The total expenditure on health has indeed increased by Rs.3,925 crore, which is well below what is required to meet the National Common Minimum Programme (NCMP) commitments. And despite the Supreme Court direction to universalise the Integrated Child Development Services, the allocation for ICDS has been increased by only Rs.674 crore to Rs.4,761 crore.
This divergence between allocations and rhetoric is inevitable, given the Finance Minister's unwillingness to garner additional resources except for implementing a modified Minimum Alternate Tax that would touch firms in areas such as the booming IT and IT-enabled Services sectors. In the event, as noted earlier, gross tax revenues are not expected to rise much faster than GDP. When this failure to mobilise much by way of additional resources is combined with the Minister's desire as a "reformer" to meet the Fiscal Responsibility and Budget Management Act (FRBMA) targets, expenditure increases have to be curtailed. This implies that very little can be done to address the imbalances accompanying high growth in the country.
In fact, there are signs that these imbalances could worsen. One area where this could happen is the development of the poorer States. The Finance Minister has made much of his decision to increase the Central Plan outlay, which is projected to increase by 22.5 per cent. But this he has done without supporting the States. Central Assistance to State Plans is expected to rise by just 8 per cent. Even in terms of their shares in Central taxes and loans and grants from the Centre to the States, the States' receipts are expected to rise only by 16.7 and 13.1 per cent respectively, which is less than the projected increase in nominal GDP.
These are not the only ways in which the effects of a neoliberal reform agenda pervade the Budget. In a measure ostensibly aimed at using India's foreign exchange reserves, estimated at $180 billion, to finance infrastructure projects, the Budget proposes to use funds flowing into finance (volatile) portfolio investments in the country for infrastructure projects. To realise this the India Infrastructure Finance Company Limited (IIFCL) is to be allowed to borrow foreign exchange funds from the Reserve Bank of India (RBI) in ways that are seen as not putting the Central bank at risk while improving returns from its investment. To that end the Budget recommends that IIFCL be allowed to set up two overseas subsidiaries that would be provided with foreign exchange credit by the RBI. Loans to one of these subsidiaries would be guaranteed by the government, which absorbs the risk. The resources borrowed from the RBI would then be on lent by the subsidiary to infrastructure projects in the country. In the case of the second subsidiary, the money borrowed from the RBI would be invested in highly rated securities, which would then be offered (presumably for a fee) as the collateral for borrowing by infrastructure projects in the country from international markets.
In sum, the risk associated with lending to infrastructure projects would be absorbed by the government or IIFCL. Since the borrowing in foreign exchange is meant for financing capital expenditures in areas that would produce infrastructure services, the risk of using up foreign exchange reserves that can in principle flow out of the country at short notice would of course be borne by the nation. In this era of emphasis on private investment and public-private partnerships, it may be presumed that these investments in infrastructure are likely to be undertaken by the private sector. That is, to ease borrowing to finance private sector investments in infrastructure, the risk is to be transferred either to the government or to the nation.
Brinkmanship of this kind is not surprising from a Budget that also seeks to push ahead with capital account convertibility, by allowing resident individuals to invest in overseas securities through mutual funds. While the details of these schemes are yet to be clarified, they are bound to increase the fragility generated by the unsustainable boom in India's stock markets consequent to increased foreign institutional investment. Unfortunately, similar courage is not in sight when it comes to providing some relief to the poor or redressing the glaring imbalances that characterise India's recent high-growth performance.