Against the grain

The near-9 per cent rate of growth since 2003-04 has been primarily driven by credit-financed housing and consumption demand.-K. ANANTHAN

The consumption-led growth strategy weakens parallel efforts to mitigate its adverse impact on human development.

The agricultural loan waiver valued at Rs.60,000 crore announced in Budget 2008-09 has dominated discussions on the Budget. Coming after four years of conservative reformism, in the midst of an agrarian crisis marked by farmers suicides, this sudden decision to provide relief to an indebted farming community has been interpreted as one driven by electoral considerations.

Does this mean that there is a retreat from or a halt to the reformist strategy that the Manmohan Singh government has been pursuing assiduously over the last four years? That would be headline news, especially because there are many in the government who believe that the near-9 per cent rate of growth since 2003-04 has been the reward for adopting such a strategy. Dominated by service sector and, more recently, the manufacturing sector, this growth has been primarily driven by credit-financed housing and consumption demand. This is inevitable since, even though government liabilities have been rising faster than revealed by the fiscal deficit figures which do not include off-budget transactions, public expenditures have indeed been limited by the effort to meet deficit targets set in the Fiscal Responsibility and Budget Management Act. However, despite this fiscal conservatism, high growth has been self-reinforcing. Being accompanied by rising inequality, it has delivered increased tax revenues that permit increases in government spending.

Sustaining this rate of growth, and even raising it, is a priority for the Finance Minister. Recognising the role of credit in stimulating growth, he has been repeatedly haranguing the banks to increase credit and reduce interest rates to counter a tendency towards deceleration in recent months. Not satisfied with their response, he has now decided to use the Budget as a means to stimulate demand. This he does not do by increasing government expenditure, which, despite the rhetoric in the Budget, has not risen by a large margin. While tax revenues are projected to increase by 17.5 per cent, revenue expenditure is expected to increase by only 11.8 per cent and capital expenditure by an even lower 8.8 per cent.

Two other initiatives have been used in the Budget to stimulate demand and keep growth going. First, by raising exemption limits and restructuring tax slabs, the Finance Minister has given individual income-tax payers a gift cheque worth anywhere between Rs.4,000 and Rs.50,000, in a year when government salaries are expected to be hiked by the Sixth Pay Commission. He is clearly betting that the beneficiaries would spend the higher income on consumption, resulting in a spike in demand. Second, the Budget provides for an across-the-board reduction in Cenvat (Central valued added tax) rates and significantly reduces excise duties on a range of goods that are clearly aimed at spurring demand, especially for automobiles and consumer durables. Both these measures are aimed at sustaining the growth story by spurring consumption demand with tax concessions rather than investment demand. Moreover, the stimulus is to come from private spending rather than public spending. This is a clear declaration of faith in a private, consumption-led economy, which is the hallmark of the liberalisation ideology.

One consequence of pursuing such a strategy is that much of the revenue increase that would be derived from persisting high growth is used up to sustain that growth. This has a number of unintended consequences. To start with, it undermines the ability of the government to limit inflation, which, even if running at below 5 per cent now, is likely to rise in the coming months and is much higher in the case of essentials. The danger of inflation comes not only from the supply side bottlenecks that high growth can run into. It is also being pushed by increases in the international prices of primary commodities, including oil and foodgrains.

The Finance Minister is conscious of this problem. Inflation is a real danger he has said in his Budget speech. Domestically, inflation is likely to be high because of the effect of increases in the prices of two sets of commodities: petroleum and petroleum products that are universal intermediates and therefore would have a cascading effect on the prices of a range of commodities and services that enter the consumption basket of the common man; and foodgrains and food articles that constitute a significant share of the budget of the common man.

The Finance Minister has clearly decided to do little to mitigate the effects of the former. Instead of resorting to an increase in oil prices by Rs.2 a litre for petrol and Re.1 a litre for diesel, the Finance Minister had the option of reducing duties to bring down retail prices. The exchequer has benefited hugely from the increase in oil prices on which duties are levied as a proportion of the price. The Oppositions demand has been that duties on petroleum should be changed to specific rates and adjusted downwards to mitigate partly the effects of oil prices. The Finance Minister has partly acceded to the demand to shift from proportional duties to specific duties in the case of non-branded products. But he has fixed the specific duty at a level where there would be no effect on retail prices and no relief for the consumer.

That leaves the prices of food, which too have been rising rapidly in recent times. There are two reasons why this trend is likely to continue. First, as the Finance Minister has noted, international prices have been rising sharply, and production trends this year are such that India is likely to be dependent on imported food to meet the requirements of its public distribution system (PDS). With the government importing at high prices, open market prices are likely to rise, given the knowledge that the degree to which the government would resort to imports would be limited by the high price in international markets. Second, since the government is importing food at high prices, it would be forced to adjust upwards the prices it pays to its own farmers, raising the floor price at which food is being sold in the domestic economy.

The Commission for Agriculture Costs and Prices has already recommended that the minimum support price (MSP) for paddy be fixed at Rs.1,000 a quintal for the common variety and at Rs.1,050 a quintal for the A grade variety for the 2008-09 kharif marketing season. This compares well with the currently prevailing MSP (including bonus) of Rs.745 and Rs.775 a quintal respectively. The recommendation, if accepted, would bring the price of paddy on a par with that of wheat, whose support price for this rabi season was fixed at Rs.1,000 a quintal as against Rs.850 a quintal last year. These changes, which reflect the desire to calibrate domestic prices to international prices, would definitely result in an increase in the prices of food articles.

One way in which the government can neutralise these trends is by expanding the PDS and increasing the allocation of food to it. In fact, the Finance Minister does suggest that managing the supply side of food articles would be the most crucial task in the ensuing year. But if this is done by procuring food at high prices within the country and abroad, inflation can be controlled only by increasing subsidies. However, having frittered away resources through tax concessions, the Budget provides for a rather small increase in food subsidies from Rs.31,546 crore in 2007-08 (revised estimates) to Rs.32,667 crore. This can hardly match the needs arising out of increasing the supply by procuring at higher prices, resulting in the pass through of inflation.

The resource limits set by a combination of tax concessions and fiscal conservatism have medium-term implications for inflation as well. This Budget makes no major effort at significantly reversing the long-term neglect of capital formation in agriculture, which has resulted in inadequate expansion of irrigation, low investments in land improvement, and the deterioration and dismantling of the system of extension services.

At a time when there has been a massive increase of investment in the economy from 22.1 per cent of GDP in 2001-02 to 33.8 per cent in 2006-07, the Finance Minister himself notes that gross capital formation (GCF) in agriculture as a proportion of gross domestic product (GDP) in the agricultural sector has only risen from its low of 10.2 per cent in 2003-04 to 12.5 per cent in 2006-07, even though agricultural GDP during these years was growing at a much slower rate than the aggregate GDP. Unable to hike sharply public investment in agriculture, the government is looking to private investment as an alternative. This has resulted in an emphasis on increasing the flow of credit to the rural areas, without recognising why even the limited flow of credit now has led the farming community into a debt trap.

The Finance Minister notes that agricultural credit doubled in the first two years of this government and is poised to reach a level of Rs.240,000 crore by March 2008. This will exceed the target set for 2007-08. And for 2008-09, the Minister has set a target of Rs.280,000 crore. But the point to note is that much of this formal credit has not gone directly to agriculture, but rather has taken the form of flows of indirect finance to seed companies and input suppliers. Further, even when credit has flowed to agriculture, it has been concentrated among larger farmers, as reflected in a sharp decline in small borrowal accounts.

Another fallout of the growth strategy incorporated in the Budget is the inadequate attention paid to the social sectors. Despite increased allocations for higher education and much attention devoted to the social sectors in the Budget speech, most areas, including primary education, the Integrated Child Development Services (ICDS) and health, are given small or no increases in allocations in real terms. This only bears out the fact that the government cannot choose to adopt any strategy of growth and then put a human face on it. The ability to mobilise resources and the way mobilised resources are allocated are influenced by the nature of the growth strategy. And a neoliberal, consumption-led strategy of the kind being pursued forecloses or weakens parallel efforts to mitigate its adverse effect on human development.

In sum, like the previous Budgets presented by Finance Minister P. Chidambaram, this one too is the handiwork of a convinced conservative economic reformer. He has assiduously worked to favour private capital with tax concessions, sops and other benefits and contributed to sustaining a process of growth, which is accompanied by significant increases in inequality. While agriculture and Indias farmers languish, and the working people and the unemployed poor still suffer the effects of slow income growth and deprivation, India churns out news of the successful upper middle class, the wealthier rich and the rising number of billionaires. This inequality and the deprivation that accompanies it take the sheen off the high GDP growth figures.

That has its implications. Chidambaram is also a politician who belongs to a party that must fight elections at least once in five years. And the next general elections are only a year away. He must therefore have been under pressure to change track at least for one year and offer concessions that reflect an effort to appease the poor and less well-to-do. Given his inclinations and his beliefs on what wins elections, he must have resisted this. But finally, and possibly at the last moment, he has had to relent. The net result is the inclusion of a few passages in the speech launching a debt relief programme that he claims will benefit four crore farmers and involve an outlay of Rs.60,000 crore.

This enforced compliance with needs set by electoral compulsions has meant that the scheme not only goes against the essential grain of the Budgets philosophy, but is also poorly conceived. First, there is no indication as to how the banks would be compensated. This has resulted in speculation that the government would adopt as yet unspecified off-budget manoeuvres to cover the debt write-off estimated at Rs.60,000 crore. The mode of financing matters because it can influence the nature and efficacy of the debt relief.

A large part of farmers debt, especially that of poor farmers, is from informal moneylenders. If private high-cost debt is to be wiped out, the moneylenders would have to be compensated with hard cash. For this reason, the Radhakrishna Committee, which had been set up to examine the problem of farmers debt, felt that it was necessary to set up a debt redemption fund that can provide loans to farmers to clear these debts. Clearly, the government is not willing to do that, and so the waiver is restricted to credit provided by the formal banking system. As a result, the worst-off farmers would not get relief. Further, since the full write-off is restricted to farmers with two hectares or less of land, the measure is likely to exclude small and marginal farmers in dryland areas. As a result of these features, the scheme is not being received well in many parts of the country.

This perhaps is unavoidable. Short-term relief for the farmers would be conceived well if it is part of a long-term effort to restore the viability of farming. But that is not an essential part of an agenda that promotes a consumption-led growth strategy and seeks agricultural salvation through corporate farming. In the event, the Budgets political thrust is also doomed to fail.