A tactical compromise

The Budget represents a tactical adjustment in the march along a neo-liberal path, which should not be confused for a new trajectory of "liberalisation with a human face". This adjustment has been necessitated by the pressure exerted on the "liberalisers" from several quarters, in particular the Left.

THERE is no gainsaying that the 2005-06 Budget differs from other recent budgets both in its rhetoric and in the somewhat larger allocations it makes for social sectors and rural development, including employment generation. True, the absolute amounts involved are still very small, and fall far short not only of the needs but also of what was asked for in the Left parties' memorandum. True, even these small provisions may not materialise if, on account of tax shortfalls, which are bound to arise this year as they did last year, owing to the significant overestimation of tax receipts in the Budget, the Fiscal Responsibility and Budgetary Management (FRBM) Act comes into play and expenditures have to be scaled down. Even so, the change is noteworthy.

There is also no gainsaying that this change does not signify a shift away from the neo-liberal package of policies that this government, like its predecessors, has been following. On the contrary, many of its suggestions, such as the opening up of the mining and pension sectors to foreign direct investment (FDI), encouraging crop diversification at the expense of foodgrain self-sufficiency, the reductions in customs duties on a range of capital goods, not to mention the significant cut in corporate income tax rate to 30 per cent from 35 on domestic capitalists, emanate from the neo-liberal perspective. And when one adds to this the pronouncements of the Economic Survey on capital account convertibility and on "labour market reform" (which means in effect the institutionalisation of the right to retrench), it is clear that no change of direction away from neo-liberalism is being contemplated.

This immediately raises two conceptual issues. First, how is it that within a regime committed to neo-liberalism, additional financial resources have been found for rural development and social sectors? Finance Minister P. Chidambaram appears to have given out substantial tax concessions all around and yet managed to increase the Gross Budget Support (GBS) for the Total Plan by 16.9 per cent over the previous year (BE to BE) and the Budget Support for the Central Plan by 25.6 per cent, even while ensuring a marginal reduction in the fiscal deficit to 4.3 per cent of the gross domestic product (GDP). For a government that till the other day kept asking `Where is the money?' when any worthwhile proposal was mooted, including a universal Employment Guarantee Act (EGA) as promised in the Common Minimum Programme (CMP), this is a remarkable turnaround. How has this become possible?

Secondly, does the fact that the government has made larger provision for rural development and social sectors while remaining committed to a neo-liberal course suggest that we have finally arrived at "liberalisation with a human face", confounding critics who have been claiming it to be a contradiction in terms? What in other words is one's perception of the Budget? Let us discuss these seriatim.

A preliminary factual point however must be clarified. The Budget's contribution to the Central Plan under rural development shows an increase from Rs.8,589 crores (Revised Estimate) in 2004-05 to Rs.11,494 crores. But the actual figure for 2002-03 was Rs.11,939 crores and for 2003-04 Rs.11,369 crores. In short, the Budget support for rural development, which had gone down last year, is being raised back to the level that had prevailed in the preceding two years, admittedly in conditions of drought. This is not much to write home about.

As for outlays, we find that the total Central Plan outlay on the Department of Rural Development is supposed to increase from Rs.13,866 crores in 2004-05 (RE) to Rs.18,334 crores, and within this the total outlay on rural employment from Rs.6,408 crores to Rs.9,000 crores (which does not include, for unspecified reasons and unlike in earlier years, the foodgrain component). This, however, is composed of two elements: an increase of Rs.3,582 crores under the food-for-work programme (FFW) and a decrease of Rs.990 crores under other programmes such as the Sampoorna Grameen Rozgar Yojana (SGRY). Since the FFW covers only 150 districts, the conclusion is inescapable that the government is scaling down employment programmes in the remaining districts of the country, which is a disturbing retreat from universality to targeting at the district level.

Let us come back to our two questions. The answer to the first question, about the source of financial resources, is simple: the Budget manages to balance its figures through substantial "window dressing", both in the matter of the expected tax revenue and in the matter of the expected fiscal deficit.

WITH the reduction in the corporate tax rate, with the removal of a large number of service providers from the purview of the service tax, with the lightening of the income tax burden, with the reduction in customs duties on a large number of items, especially capital goods, and with significant concessions in the excise duties on several items, the Finance Minister's claim that his indirect tax proposals would be broadly revenue neutral and that his direct tax proposals would garner Rs.6,000 crores extra, appears untenable, notwithstanding the 50 paise cess on petrol and diesel, and the slightly heavier taxation on "health hazard" goods. But even if his claim is accepted, the tax revenue calculations still appear grossly unrealistic.

If we assume a generous 9 per cent growth in real terms of the non-agricultural sector during 2005-06, and a 6 per cent rate of inflation, the nominal growth rate of this sector comes to 15 per cent. At existing tax rates, the tax revenue cannot be expected to increase at a rate much higher than this. And if additional tax revenue mobilisation is a small Rs.6,000 crores, it follows that total tax revenue should also increase at around 15 per cent. Instead we find an expected tax revenue increase, compared to 2004-05 (RE), of 21 per cent, clearly an overestimate. This would not matter if the Finance Minister chooses not to be tied down by the FRBM, a silly piece of legislation catering to the caprices of international finance capital; but if he does, then the positive features of the Budget would be undermined.

The second area of "window-dressing" is with reference to the fiscal deficit. There is a substantial "off-loading" of borrowing from the Budget to off-Budget entities. At least three deserve mention. The first is State governments. The Budget documents show what at first glance appears a rather surprising reduction in total capital expenditure, and correspondingly in the Gross Budgetary Support for the Plan. Plan Expenditure, for instance, falls from Rs.1,45,590 crores last year to Rs.1,43,497 crores this year (BE to BE). The Finance Minister, however, claimed that the GBS (on a comparable definition to what was used earlier) would be Rs.1,72,500 crores for 2005-06. The reason for this discrepancy lies in the fact that following the Twelfth Finance Commission's report, State governments would be borrowing around Rs.29,000 crores for their Plans from the market. Earlier, the Centre would have borrowed this amount and handed it to the States, but now the States themselves would have to go the market.

This represents an offloading of the fiscal deficit from the Centre to the States. In addition, it is fraught with potentially serious consequences. States may not be able to get the loans on reasonable terms, especially in these financially "liberal" times (when even the captive market for government and government-approved securities provided by the Statutory Liquidity Ratio is being abandoned according to this year's Budget); some States may not be able to raise their loan requirements from the market at all. True, the Centre which earlier had the sole prerogative of market borrowing charged the States exorbitant rates on the loans it provided to them; but the solution to that lies in regulating the rate at which the Centre can lend to the States (pegging it, for instance, at certain fixed percentage points below the average nominal growth rate of the GDP) rather than having the States borrow directly from the market, which could even be a prelude to the fracturing of the nation's unity (if States started borrowing freely from international agencies).

The second instance of implicit off-loading of the fiscal deficit is with regard to the Infrastructure Development Fund, whose capital of Rs.10,000 crores, which is supposed to provide "bridge finance" for infrastructure projects that are remunerative economically but not financially, is not provided for in the Budget. Instead of borrowing directly, the government, in other words, is making an agency set up by itself do the borrowing. This borrowing, being off-Budget, is not shown as part of the fiscal deficit.

The third instance is what has already been referred to above, namely the absence of any reference to the food component of the employment programmes in the Budget documents. The 5 million tonnes which the Finance Minister has promised as the food component of the FFW and which does not figure in the Budget will obviously be loaned by the Food Corporation of India (FCI) to the FFW programme. A part of the fiscal deficit is thus shifted out of the Budget by making the FFW borrow from the FCI instead of getting funds from the government, which would have had to borrow for the purpose.

For these reasons the actual fiscal deficit generated by the budgetary provisions is much larger than what appears in the documents. One cannot fault this in principle. On the contrary, it only confirms the point that the FRBM Act, which forces the government to do such "off-loading" of the fiscal deficit away from the Budget to other government organisations, is a nuisance which even people like Chidambaram have come to realise.

But it is more than a nuisance. The practice of "off-loading", which it implicitly encourages, can have positively harmful implications. For instance, such "off-loading" may, given the general neo-liberal ethos, jeopardise the future of the agencies on to whose shoulders the deficit is being off-loaded: State governments, as already mentioned, might turn into proteges of agencies such as the Asian Development Bank (ADB) and the World Bank (which some of them are already in the process of becoming) under these circumstances. This could damage the integrity of the nation. Likewise, if the FCI's giving of loans to the FFW programme increases its own deficit (which is covered through the food subsidy), then in the name of cutting the food subsidy the same government might decide to wind up the FCI. In other words, enlarging the fiscal deficit whether directly through the Budget or through other government agencies is fine provided a consistent approach of defending the government agencies is simultaneously adopted. But, one cannot be sure of this.

Besides, while enlarging the fiscal deficit for incurring larger expenditure is perfectly legitimate in a demand-constrained system, there is little justification for doing so together with a reduction in corporate income taxation. The argument that some parity has to be established between personal income taxation and corporate income taxation has no basis whatsoever. Hence the argument that since the highest rate of personal income tax is 30 per cent, the rate of corporate income tax must also be reduced to 30 per cent from the current 35 per cent lacks substance.

Indeed, most of the tax concessions given in the Budget lack any justification. There is no reason why the scope of the service tax should be cut down from its existing level. There is no reason why import duties should be reduced on a variety of capital goods: while it would have a scarcely noticeable effect on the overall investment, it would act to the detriment of the domestic capital goods producers, causing a degree of de-industrialisation in this sector, which would also follow from the de-reservation of a number of items hitherto reserved for the small-scale sector.

Likewise, there is also no reason for reducing the excise duties on a variety of luxury goods like air-conditioners. And the reduction in import tariffs on a range of agricultural goods is precisely the opposite of what the government should be doing if it wished to undo the damage done to this sector by neo-liberalism. Even experts like M.S. Swaminathan have been arguing that agriculture cannot be treated like any other sector in the matter of protection, since the livelihood of millions of peasants and labourers, who have nowhere else to go, depends upon it. The Budget, alas, pays scant heed to such sage advice.

While these tax concessions are being given, the imposition of a cess of 50 paise per litre on petrol and diesel appears uncalled for, especially as it comes on top of price-hikes decreed very recently on these commodities. The relief that the Budget provides by way of reductions in import and excise duties on kerosene and LPG would be offset to an extent by this cess. In the case of petrol, the net revenue raising effect is much less than what appears at first sight since the government is a major consumer of the commodity. In the case of diesel, any price hike jacks up transport costs and has an across-the-board inflationary impact, which should have been avoided.

TWO suggestions thrown out in the Budget are a source of disquiet. The first relates to the banking sector, where the bounds on the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) are sought to be removed and the Reserve Bank of India (RBI) made free to prescribe such prudential norms as it deems fit. This entails giving greater autonomy to the RBI and making banks free in their portfolio choice, which would enable them to speculate more freely. Both these, like the earlier pronouncement regarding making the management of public sector banks more autonomous, are measures of financial liberalisation that would have adverse consequences for the economy. The Finance Minister, who talks of giving more credit to agriculture in one breath, cannot advocate financial liberalisation in the next without inviting the charge of not being serious about the former objective.

Moreover, nothing has been done in the Budget either to curb the operations of foreign institutional investors (FII) on the stock market, which even the RBI Governor in an unguarded moment had asked for, or to undo the anomaly caused last year by the rolling back of both the stock market transactions tax and the capital gains tax. To cap it all, he has suggested that trade in derivatives is not to be treated as speculative, when almost by definition it is. Even while doing precious little to curb financial speculation, and, if anything, adding to speculative tendencies in this sphere, the Budget makes ritual noises against black money. The 0.1 per cent tax on cash withdrawals from banks is neither appropriate nor significant for tackling black money.

The second disquieting suggestion relates to the entry of foreign direct investment (FDI) into mining and pension funds. As regards mining, the argument against FDI is obvious. Indeed, as Joan Robinson, the well-known Cambridge economist, had once remarked, of all the different areas of FDI involvement, the mining sector is the worst, since minerals are an exhaustible resource. The multinational corporations (MNCs) extract the mineral, ship the surplus back home, and leave when the mine gets exhausted. When that happens, the country is left high and dry, with no more mineral resource left. The case of Myanmar illustrates the point. At one time its oil wealth attracted much foreign investment (Burma-Shell), and it experienced an enormous boom for a brief period, when oil extraction was going on. But today, with its oil wealth exhausted, it is one of the 40 "least developed" countries in the world. There is absolutely no argument whatsoever for inducting MNCs into the mining sector.

In the case of pension funds, it is sometimes argued that FDI in this sector would fetch higher rates of return for pensioners and that any opposition to FDI in this sector is only ideological and hurts the interests of pensioners. Even if we take this argument in itself, that is, even if we leave aside the macro-economic implications of entrusting a part of the country's savings to a bunch of MNCs, it is not the case that pensioners would be better off if their funds are managed by MNCs. The reason is simple: in India the level of political empowerment of the people is far greater than the level of their effective legal empowerment. They can agitate against the government and force the latter to listen to them but, as the Bhopal gas tragedy victims' case shows, they cannot fight a successful legal battle against an MNC, certainly not within a limited period (as must be the case with pensioners). Pension funds, therefore, are best managed by the government and must not be entrusted to MNCs. Doing so is an act of dis-empowerment of pensioners, which no promise of higher returns can offset.

THIS brings us to our second conceptual question: what is one's perception of the Budget? The fact that such patently neo-liberal measures are being contemplated by a Finance Minister who has ostensibly shown concern for the poor, only demonstrates that this Budget is an attempt to please all, the MNCs, the corporate sector, the salariat and, to an extent, the poor and those who speak for them. Such a "please-all" Budget can only be based on a degree of arithmetical jugglery and hence can only be a transitory phenomenon. Or, putting it differently, this Budget does not mark the ushering in of a "growth-with-equity" trajectory, or of "liberalisation with a human face". The critics who argue that it is impossible to combine liberalisation with a human face because of its immanent logic, have not been "proved wrong" by this Budget, which rather represents a temporary tactical compromise, a tactical adjustment in the march along a neo-liberal path. But just as a tactical compromise does not represent a new equilibrium situation, this temporary adjustment should not be confused for a new trajectory of "liberalisation with a human face". This adjustment itself has been necessitated by the relentless pressure exerted on the "liberalisers" from several quarters, including, in particular, the Left. It is important that this pressure should continue and get intensified.