Straitjacketed by reform

A family of migrant workers - SANDEEP SAXENA

The Budget, which reflects the neo-liberal policies of the BJP-led government, neither gives a fillip to the sluggish industrial sector nor supports the drought-affected agricultural economy. This is bound to affect adversely all segments of society.

READ between the lines and Budget 2003-04 reveals the fact that economic liberalisation and reform, while providing greater flexibility to the private sector, has straitjacketed the government and led to "fiscal failure". This is visible on three different fronts. First, in the desperate moves to realise some of the fiscal policy goals that the International Monetary Fund (IMF) and the World Bank have set, such as a substantial reduction in budgetary subsidies on food and a containment of the fiscal deficit, despite the fact that theory and experience indicate that these are irrational. Second, the paucity of any effort to accelerate growth, despite the clear signs of sluggishness in the industrial sector for close to five years now and the debilitating impact of the drought of 2002-03 on a languishing agricultural sector. Third, the inability of the Finance Minister to take any major initiatives to win popular support for the BJP-led coalition, despite the imminent elections in a number of States and the general elections slated for the next year.

For a few years now it has been clear that the reform objective of reducing food subsidies has not been realised. This is not because of lack of policies of neo-liberal reforms in this sector. In fact, those policies sought to curtail food subsidies by targeting them at the Below the Poverty Line (BPL) and by periodically raising the issue prices of food sold through the Public Distribution System (PDS). Yet, subsidies have been rising rapidly. In 2002-03 too, while food subsidies were budgeted at Rs.21,200 crores, the revised figures point to an increase to Rs.24,200 crores, which is well above the Rs.17,499 crores for 2001-02.

The reasons for failure on this front are now well known. While food procurement has remained high, the increase in issue prices has reduced off-take from the PDS. This has resulted in massive stock accumulation with the Food Corporation of India (FCI), the carrying cost of which has to be covered by the government. As a result, the "subsidy" paid out has in substantial part gone to meet the stocking costs of the FCI rather than reaching the targeted BPL population, a huge proportion of which has yet to be issued the cards to avail itself of even the benefits it is entitled to. Neither targeting nor the hikes in issue prices have achieved their objective, revealing the flawed nature of this aspect of reform. Yet, any sensible recommendation to use the stocks to launch food-for-work programmes that can provide employment, build rural infrastructure and alleviate poverty is dismissed as being incompatible with the objectives of reform.

The experience with the effort to curtail the fiscal deficit is similar. With interest payments, subsidies and defence expenditure pre-empting a large share of the government's revenues, the effort to curtail expenditure in order to reduce the fiscal deficit has focussed on holding back social sector and capital expenditures. This has not helped to curtail the deficit because reform policies have eroded the revenues of the government. The adverse impact of reforms on revenue generation has occurred through two routes: reform has on average meant a reduction of a range of tax rates, except those that impact on mass consumption goods; and reform, by curtailing capital and social sector expenditures, has had a deflationary impact that slows growth and therefore indirectly depresses revenue generation as well.

The direct effect of neo-liberal reform through tax rate reductions has been quite visible. Periodic and sharp cuts in customs tariffs adopted as part of the trade liberalisation effort have substantially reduced revenues from customs duties. Direct tax concessions provided to the rich and the corporate sector as part of an effort to spur private savings and investment have eroded direct tax revenues, despite the increase in the number of direct taxpayers as result of efforts to widen the tax base. And more often than not, the rationalisation of excise duties undertaken in the name of reform has involved significant reductions in duties on durables and luxury goods.

These direct effects of the reform process have been aggravated by the deflationary effects of fiscal reforms, so that the ratio of tax to gross domestic product (GDP) has been witnessing a long-term decline from a level that is already low by international standards. The ratio of the Centre's gross tax revenues to GDP declined from 10.6 per cent in 1989-90 to 9 per cent in 2000-01, and further to 8.1 per cent in 2001-02. The ratio of its net tax revenues to GDP fell from 7.9 to 6.4 per cent and 5.8 per cent in those years. The effects are visible in 2002-03 also when, despite a recovery in revenue generation because of a pick-up in imports and the imposition of a surcharge on direct personal and corporate income taxes, actual revenue generation fell short of what was budgeted by close to Rs.15,000 crores.

The belief that these effects of reform can be temporarily tided over by garnering large receipts from disinvestment has also proved a mirage. Despite the acceleration of the privatisation effort in 2002-03, receipts from disinvestment amounted to just Rs.3,360 crores as compared with the budgeted Rs.12,000 crores. The sale of a small chunk of government equity at rock-bottom prices to private players, who are being handed over control over successful public sector units, has meant that privatisation has not helped shore up substantially the receipts side of the Budget.

In the net, the fiscal deficit in 2002-03 remained close to 5.9 per cent of GDP. That is, the irrational goal of the reformists to reduce the fiscal deficit in a period when unutilised capacity, large foodstocks and huge foreign exchange reserves call for an expansionary effort, has also not been realised. What is more, since this deficit is merely the excess of all expenditures over revenue receipts, and revenue generation has been sluggish, the expenditure associated with any given level of the deficit is that much smaller. If the tax-GDP ratio is lower than the potential, a given fiscal deficit to GDP ratio implies a lower expenditure to GDP ratio. That is, the "high" deficit does not imply a large fiscal stimulus.

These examples go to show that the fiscal reform strategy has failed to realise its own objectives, pointing to the flaws in that strategy. However, as the concessions on direct taxes, including the abolition of the long-term capital gains tax on investments in equity, the reductions in customs duties and the downward "rationalisation" of excise duties on luxuries such as automobiles and air-conditioners reveal, failure has not led to any rethinking of policy on the part of the BJP-led government.

The only initiative left with the government to resolve the "fiscal crisis" that reform generates is the concerted effort to reduce nominal interest rates by reducing rates paid to small savers and provident fund beneficiaries. This is expected to ensure a reduction in interest rates in financial markets. The real motivation for this policy is reflected in the desperation of the government to swap past high interest debt for new low interest loans and reduce its debt burden. It is not just that middle class savers are now being offered a much smaller return on their savings. Inasmuch as banks would see a reduction in their high interest earning investment portfolio, this would encourage them to reduce further the interest rate paid on deposits with them. That is, the banks and middle class savers who have invested in bank deposits and small savings schemes are being forced to bear the burden of the government's obsession with reducing its fiscal deficit.

The budgetary straitjacket that neo-liberal reform policies impose on the government is reflected not just in the failure to realise the fiscal objectives of reform itself, but also in the inability of the government to do very much to spur growth. Few would deny that from a growth point of view, an increase in investment in the economy holds the key. However, the hope that liberalisation per se would result in a surge in private investment that would more than neutralise the expected post-reform decline in government investment has been belied. Even the industry associations now accept that sluggish demand growth is constraining investment and that capital expenditures by the government are needed to shore up domestic demand directly and indirectly.

However, capital spending has been in long-term decline. Total capital expenditure, which stood at Rs.62,879 crores in 1998-99, fell sharply to Rs.48,975 crores in 1999-2000 and Rs.47,753 crores in 2000-01, and then rose to Rs.60,842 crores in 2001-02 and stands at Rs.62,365 crores according to the revised estimated for 2002-03. That is, capital expenditure in fiscal year 2002-03 is estimated to be lower than even the nominal value of such expenditures in 1998-99. Allow for inflation and it is clear that real budgetary capital expenditures of the state have fallen quite sharply over the last five years. Budget 2003-04 makes the promise of hiking this figure to Rs.72,568 crores. But we only need to note that even Budget 2002-03 had projected capital expenditures at Rs. 69,827 crores, though the actual realisation was more than 10 per cent less at Rs.62,635 crores. Capital spending by the government is an obvious casualty of reform, resulting in the sluggishness of growth in both agriculture and industry.

Finance Minister Jaswant Singh papers over this aspect of the fiscal situation, by announcing a grandiose "infrastructure thrust" in road, rail, shipping and air transport, involving investments of Rs.60,000 crores. But a close reading of the Budget suggests that this is to be made over time, with large contributions expected from the private sector and the actual allocation for this new "thrust" in 2003-04 is a meagre Rs.2,000 crores. Even that sum of money is likely to be obtained by cutting crucial investments in agriculture, rural development and employment generation, all of which have been experiencing a decline in allocations. Higher growth is unlikely to be an outcome of this Budget.

FINALLY, Budget 2003-04 was expected to be different and focus on rural India and the poor, because the government is faced with elections in a number of States as a run-up to the general elections next year. With agriculture having experienced the weakening effects of a drought in 2002-03, it was expected to focus on rehabilitating that sector. And with large foodstocks in the government's godowns and huge foreign exchange available with the Reserve Bank of India (RBI), the Finance Minister was expected to use the opportunity, by increasing spending on food-for-work programmes aimed at creating rural infrastructure, which could have had positive employment and poverty-reduction implications. In practice, Jaswant Singh has not met any of these expectations. From the point of view of the rural poor, he has gone only so far as to promise to enhance the Antyodaya Anna Yojna scheme, which provides food at especially low prices to BPL families, to cover an additional 50 lakh families. There are 530 lakh BPL families in rural India. Of these, currently, BPL cards have reportedly been issued to just 50 lakh families. Even if the Finance Minister keeps to his promise of extending the scheme to cover another 50 lakh families, the total coverage would be only around 100 lakh families, or less than one-fifth of India's really poor. This is at a time when food rots in the godowns of the FCI.

Besides this token gesture, the attention the Finance Minister's speech claims to pay to agriculture is a sham. Even as prices of a range of crops from tea and coffee to coconut and rubber crash, all the government has to offer is a Price Stabilisation Fund of Rs.500 crores, the modalities of which is nowhere spelt out. There is no emphasis on protecting the sector from the collapse of world prices. Nor is there talk of increasing investment in agriculture, other than the promise to "encourage" private banks to set up rural branches and provide credit to agriculturalists. Why these banks should oblige, especially when they now have been given the green signal to sell out to foreign banks that can hold 74 per cent of their equity is, of course, nowhere made clear.

In fact, the rural sector is being squeezed in many ways. Fertilizer prices are to be hiked by Rs.10-12 for a 50 kg bag. A cess of 50 paise a litre is to be imposed on diesel, in the name of constructing roads, which is bound to raise the costs of transportation and have a cascading effect. Further, an additional excise duty of Rs.1.50 paise a litre is to be imposed on light diesel oil used for generators and pump sets, which would add to the costs of the agriculturist. And to top it all, a duty of Rs.50 a metric tonne is being imposed on domestic and imported crude in the name of the National Calamity Contingency Fund that supposedly needs additional resources to deal with the consequences of drought. These petroleum-related imposts are being resorted to at a time when oil prices rule high internationally and in India. Thus, while the poor in the rural sector are to be given a token sop, huge burdens are being imposed on the whole of the agricultural sector and the working people.

Jaswant Singh tries to conceal "politically" these features of the Budget by focusing on his sops to the salaried middle class: the standard deduction for computing taxable income has been raised, the 5 per cent security-related surcharge on income tax imposed last year has been withdrawn for those earning less than Rs.8.5 lakh in a year, and tax deductions on account of housing loan payments and small savings have been retained and enhanced. But, simultaneously, much has been withdrawn. Indirect taxes on petroleum products, for example, would adversely impact on the middle classes as well. And, the reduction of interest rate paid on small savings and Provident Fund accounts would have adverse long-term consequences for their savings.

Who then is the real beneficiary? First comes the speculator in the stock market, who now is exempt from taxes on capital gains accruing from shares bought after April 1, 2003 and sold after more than a year. The second is industry, which not only gets a reduction in surcharge on corporate tax but has been rewarded with significant customs and excise duty concessions. Not surprisingly, representatives of the Confederation of Indian Industry have declared this the best Budget in 10 years. If the Budget is a "populist" Budget, reflecting the influence of impending elections, it is a new kind of populism. It is populism that favours the upper middle class and the rich. That is the limited room for manoeuvre that the new "liberal" economic regime affords the Finance Minister and the government. Given their own predilections they have cynically chosen to make do with that limited space.