It is clear from Budget 2008 that the UPA, instead of abandoning its neoliberal agenda in an election year, has decided to stick to it resolutely.
THE Indian economy, like the world economy as a whole, is entering a period marked by both inflation and job losses owing to inadequate demand. This state of affairs can be conveniently described as stagflation (even though in the case of India the output growth rate figures, always nebulous, may not show a fall large enough to qualify as stagnation). Economic policymaking becomes tricky in such situations of stagflation: an expansion of demand to ward off job losses runs the risk of worsening inflation; and a contraction of demand for moderating inflation threatens to worsen unemployment. Policymaking in such situations, therefore, must go beyond simple macroeconomic instruments and adopt more complex modes of intervention.
In India, since the current inflation centres around food articles, especially foodgrains, what is needed is price control and supply management in the foodgrain market, together with a stimulation of demand in the non-food sectors, where the appreciating exchange rate and the slowing down of the world economy are curtailing demand. Price control in the foodgrain market itself requires larger government expenditure in the form of food subsidy; and demand stimulation elsewhere also requires larger government expenditure. The 2008-09 Budget, therefore, should have combined enhanced government expenditure with supply management of sensitive goods like foodgrains: the inflationary potential of such enhanced expenditure then would not have mattered because of supply management.
What the Budget has actually done instead is expenditure tightening, because of which the provision for food subsidy is inadequate, so inflation will continue to rage; and the contractionary impulses are not countered, so job losses will persist. Stagflation, in short, will be aggravated, not ameliorated, by this Budget. The reason the Budget has done the very opposite of what was needed is the United Progressive Alliance governments ideological adherence to fiscal conservatism, which means taxing less, borrowing less (borrowing in the Budget is even less than what the Fiscal Responsibility and Budget Management, or FRBM, Act permits), and, above all, spending less. Contrary to general perception, the UPA, instead of abandoning its fiscal conservatism in an election year, has actually stuck to it resolutely. Even true-blue conservatives, ranging from Harold Macmillan to Ronald Reagan, were more flexible in this respect than the UPA has been.
This fact escapes notice because of the apparently massive debt waiver and debt-relief scheme for farmers. This scheme, of course, has to be welcomed, notwithstanding its two obvious limitations, namely, its not addressing the issue of debt to moneylenders (which accounts reportedly for almost half of total farm debt) and its blanket two-hectare limit, which not only discriminates against dryland farmers but may even leave out of its ambit the bulk of the farmers in the most crisis-hit and suicide-prone districts of the country. But even this massive relief scheme is one that is compatible with fiscal conservatism.
It may appear paradoxical at first sight that this scheme, the most significant announcement of the current Budget, does not figure anywhere in the Budget itself. But the reason is simple: it requires no budgetary resources. True, it should nonetheless figure in the Budget, but its not doing so is sheer jugglery to keep the apparent fiscal deficit low. The fact is that the debt waiver does not add to the effective fiscal deficit since it makes no claims on budgetary resources.
Under the waiver, all that the government has to do is to ask banks to substitute government bonds for agricultural debt in their portfolios. The government does not have to use any fiscal resources for this purpose. If the banks want to convert these bonds into cash, then, if the government so wishes, it can ask the Reserve Bank to buy these bonds; and if it does not want such conversion to cash, then it can raise the statutory liquidity ratio to prevent banks from converting them into cash. The only thing the government is obliged to do is to meet the interest payment obligation on these bonds whenever they fall due, and they will be only a fraction, a manageable one, of the total value of the bonds.
As a matter of fact, substituting banks farm debt, whose servicing has become problematical, by government bonds, even when the latter are not readily convertible into cash, improves banks portfolios; puts income in the form of interest payments into their hands; and exonerates the farmers from debt-payment obligations without any drain on fiscal resources. This amounts to killing three birds simultaneously without even throwing a stone.
The government, of course, may pretend otherwise. It may pretend that the debt waiver needs a lot of resources and use this claim as an excuse for selling public sector equity and generally carrying forward the neoliberal agenda. Manmohan Singh has already talked about the need to privatise public enterprises for financing debt waiver. But such claims are sheer bad faith. Likewise the government, while looking after scheduled commercial banks as they embark on debt waiver, may not be as solicitous about cooperative credit institutions. But these would simply be misdemeanours, which can be prevented if specifically resisted. The basic point remains that debt waiver makes no claims on fiscal resources (except through the minor channel of interest payments). For a government trying to reduce spending, a debt waiver does not come in the way.
Precisely because the debt waiver is so easy for the Central government (not, though, for State governments, which have to find fiscal resources to cover such waiver, since their borrowing is strictly controlled by the Centre), the real question is: why was it not done earlier? The answer simply cannot lie in the imminence of parliamentary elections. After all, important State Assembly elections have been happening all along; and even for parliamentary elections, the debt waiver, if anything, has come rather late since getting the waiver implemented by June will take some effort. The answer must lie in the ideological opposition within the government itself, which would use arguments exactly like what the corporate sector has been using to criticise it. This ideological opposition has been finally overruled by the imminence of parliamentary elections, but this overruling must also have been facilitated by the fact that a debt waiver is perfectly compatible with fiscal conservatism since it entails little additional expenditure.
Notwithstanding the fact that revenue receipts are expected to rise by 15 per cent over 2007-08 (Revised Estimate, or R.E.) and tax revenue net of transfers to States by 17.5 per cent, the Budget provides for an increase in revenue expenditure of 12.2 per cent, and in capital expenditure, after adjusting for the purchase of State Bank of India shares in 2007-08, by a mere 8.8 per cent.
Of course, the Sixth Central Pay Commission report is due and this would entail additional expenditure on the part of the government (which may also be why the government has kept some room for itself by pegging the fiscal deficit in the proposed Budget at only 2.5 per cent of the gross domestic product (GDP) instead of the 3 per cent permitted by the FRBM Act). But even if implementing the Pay Commission recommendations brings up the fiscal deficit to 3 per cent, the increase in capital expenditure would still have been only 8.8 per cent. Considering the fact that the Finance Ministers tax proposals entail a net revenue loss of Rs.5,900 crore, entirely on account of indirect taxes, that is, having nothing to do with the income tax concessions he has given, it is clear that the underlying ideology of the Budget has been tax less, spend even less, the ideology of financial conservatism.
This has left its mark on crucial social sector schemes. Comparing 2007-08 (R.E.) with 2008-09 (Budget Estimate, or B.E.), the expenditure on Sarva Shiksha Abhiyan is reduced even in nominal terms; the expenditure on elementary education is slated to rise in nominal terms by a mere 7 per cent, which implies stagnation in real terms; the expenditure on the National Rural Health Mission (NRHM) is supposed to rise by only 12 per cent, which entails a decline relative to the GDP; and the expenditure on the Integrated Child Development Services (ICDS) is to rise by a paltry Rs.852 crore, which is much less than what is needed to implement the Supreme Courts directive to universalise it.
Even the National Rural Employment Guarantee Programme (NREGP), where the number of districts covered is to be doubled, witnesses a mere 20 per cent increase in expenditure; true, the Chidambaram has promised funds to match demand under the NREGP, but an implicit rationing of funds (through delays in sanctioning additional funds) even in this supposedly rights-based programme is by no means uncommon.
Even more striking is the case of food subsidy, where the nominal increase is less than 4 per cent. Clearly, the government is not considering, even in the midst of inflation, any increase in the scale of the public distribution system (PDS), which has been sharply truncated of late. Besides, the budgeted amount is not even sufficient to maintain issue prices at the current scale of the PDS.
It has been argued that since, owing to the current bumper harvest, the country does not have to depend on expensive imports in 2008-09, the level of subsidies of 2007-08 will be quite sufficient, despite a rise in procurement prices, for maintaining the stability of issue prices. But, given the scale of increase in procurement prices proposed by the Commission for Agriculture Costs and Prices, which is by no means unjustified given the past squeeze on procurement prices, this is not true. The scale of the budgeted food subsidy, therefore, is too meagre to prevent the PDS-users from being hit by inflation. Fiscal conservatism has come in the way of protecting the poor from the ravages of inflation.
Fiscal conservatism has also come in the way of stimulating the economy. The Finance Minister of course argued the opposite, namely, that the excise duty concessions he gave were meant to stimulate demand for a range of industries. But his argument would have had force if the reduced indirect tax revenue had been accompanied by an unchanged government expenditure, that is, if there had been an increase in the fiscal deficit. But since controlling the fiscal deficit has meant that reduced indirect tax revenue has ipso facto been accompanied by reduced government expenditure, the magnitude of net aggregate demand stimulus would be nil, in the absence of a fall either in the propensity to save or in the propensity to import, that is, unless the cut in excise duties makes people either consume more at the expense of savings or buy more domestic goods at the expense of imports.
The Finance Ministers announcements about excise duty adjustments, however, are not large enough to affect these propensities; hence their demand-stimulating effect at the aggregate level (that is, ignoring demand-switches from one set of domestically produced goods to another) is negligible.
The concession to the peasantry in the form of debt waiver is balanced by a similar concession to the urban lower middle class through the increase in the exemption limit for income tax, for which again there is a certain case arising from the fact of inflation.
Nonetheless, the real piece de resistance of this Budget undoubtedly is the loan waiver. Indeed, one would not be too far wrong in calling it a one-point Budget. A one-point Budget, however, is fundamentally an irresponsible act; and for this very reason it may not even be electorally profitable. In a real economy, there are always several serious problems to contend with. In India at present, for instance, the problem of inflation-cum-job loss cries out for attention as does the distress of the peasantry. Ignoring the first problem completely and presenting only a loan waiver, no matter how laudable in itself, as a solution for the second is both irresponsible and also dubious electoral strategy.
Looking at it differently, the class orientation of the Budget is not towards the very poor but towards the lower peasantry and the urban lower middle class that pays income tax. (The ranks of these beneficiaries are soon to be swollen by government employees getting salary increases owing to the Pay Commission recommendations). The very poor, who are far more numerous than official agencies accept and hence constitute the bulk of the aam aadmi (common man), are paradoxically excluded from this Budget, which is presented in their name. But since problems of inflation and job loss, which affect the aam aadmi, also hurt the lower middle class, this exclusion of the bulk of the aam aadmi, a result of fiscal conservatism, may well recoil on the government. As an electoral sop the Budget may not be enough; as a solution to the countrys problems it is certainly not enough.