Selling silver soon

Published : Jul 31, 2009 00:00 IST

ONE hundred and forty days after he presented the Interim Budget for 2009-10 as the Finance Minister of the old United Progressive Alliance (UPA) government, Pranab Mukherjee was back in action on July 6 presenting the Union Budget for 2009-10 as the Finance Minister of the new UPA government, no longer dependent on the Left parties for parliamentary survival. Speculative expectations around the Budget had been kindled by the Economic Survey 2008-09, which was tabled in Parliament a couple of days before the Budget presentation. The Survey had recommended a rapid return to fiscal rectitude, even advocating a new Fiscal Responsibility and Budget Management (FRBM) Act that would target a zero fiscal deficit. It had also suggested disinvestment of public sector undertakings (PSUs) to fetch a yearly revenue of Rs.25,000 crore in order to bring down the fiscal deficit. It had, besides, laid out a comprehensive agenda of financial liberalisation and deregulation of real sectors of the economy.

The Finance Ministers Budget speech and the proposals he listed did not strictly conform to the Survey script. This sent the stock market into a tailspin, and the Sensex lost over 900 points intra-day before recovering marginally. Commentators have argued that this reflected the Finance Ministers and the governments agenda of inclusive growth as against the hardcore neoliberal stance of the Survey. Such a reading is not only simplistic but also downright wrong.

Consider, first, the Budget proposals on revenue. Far from taking any action in support of his own argument on the need to eliminate tax exemptions and expand the tax base, the Finance Minister has given away tax revenue estimated at Rs.68,914 crore through concessions on both direct taxes and indirect taxes, though he has argued that his direct tax proposals are revenue neutral and his indirect tax proposals will fetch Rs.2,000 crore in a full year. The removal of 10 per cent surcharge on personal income tax, which benefits only those with an annual income exceeding Rs.10 lakh, is completely uncalled for. The continuance of measures of tax relief granted last year in the wake of the global financial and economic crisis imply a continued revenue loss in excess of Rs.4,00,000 crore per annum.

Having forgone revenue in this manner, the Finance Minister is naturally constrained in his expenditure proposals, given the presumed need to limit the extent of the fiscal deficit. Though the Budget is full of references to aam admi and inclusive growth, the actual increase in outlays on flagship schemes of inclusive growth are modest. The allocation for the National Rural Employment Guarantee Scheme (NREGS), which, along with the Farmers Debt Relief Scheme, is believed to have played an important role in enabling the Congress to improve its electoral tally in the elections to the Lok Sabha this year as against 2004, seems at first sight, to be very impressive. In fact, it is a modest increase over the Revised Estimates for 2008-09. If one recalls that the average number of days of employment provided to job applicants in 2008-09 was less than 50 days per rural household, there should at least have been a doubling of the allocations even at the old wage rate. Since the Finance Minister has announced a modest hike in the real wage to Rs.100 a day, the budgeted increase is woefully inadequate.

The same is true of the allocations for the Integrated Child Development Services (ICDS) scheme; it is far from sufficient to even begin to move toward the Supreme Court-mandated objective of universalisation with quality and equity. It is certainly true that in recent years the Central government has been enhancing allocations to education and health, including for schemes such as the National Rural Health Mission (NRHM) and the National Programme of Nutritious Support to Primary Education (NPNSPE), popularly known as the mid-day meals scheme. But the enhancements are from a very low base and well below the requirements. As a percentage of the countrys gross domestic product (GDP), the combined expenditure of the Centre and all the State governments on health and education have increased only marginally over a long period.

The Finance Minister said in his Budget speech that a part of the wealth of the nation in the form of the PSUs should rest in the hands of the people. This echoes the reference in the Presidents address to Parliament that the people of India have a right to own PSU shares, and is breathtaking in its attempt to be disingenuous. One had all along thought that PSUs belonged to the people. Given the fact that hardly 0.65 per cent of the population in India owns any kind of stockmarket equity, and that, of these, the overwhelming majority are retail investors holding a small number of shares, invoking peoples right to own PSU shares is a camouflage for selling PSUs to large companies, domestic and foreign.

Rhetoric apart, an argument often advanced for selling off PSU shares is that it helps meet the fiscal deficit. Currently, even this is not true since the proceeds from disinvestment go automatically into the National Investment Fund and do not enter the Budget numbers. In any event, this is a specious argument since selling PSU shares implies forgoing future returns from them with implications for deficits in the future.

More important, one must call into question the legitimacy of the concept of a well defined and a priori upper limit on the fiscal deficit, especially in a situation of significant unemployment of resources. There is no automatic link between the fiscal deficit and the rate of inflation, and the real argument seems to be that rating agencies will downgrade India if the fiscal deficit is seen to be high, leading in turn to an exit of foreign portfolio investment. But even if one were to make the highly dubious assumption that we desperately need portfolio capital inflows and therefore the fiscal deficit has to be capped, why is the route of so doing by raising resources from the well-to-do through reasonable taxation not considered? The answer seems to be an implicit presumption that this will have serious disincentive effects on investment by the well-to-do.

It is clear that the Finance Ministers Budget for 2009-10 accepts the core of neoliberal economics and is entirely consistent with the neoliberal agenda of the Survey. One wonders whether the tanking of the stock market indicates a bear cartel at work.

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