Sops for the elite

The NDA government's unprecedented election-eve fiscal measures, aimed at wooing the well-heeled, are criticised as violative of parliamentary norms and procedures.

THE National Democratic Alliance (NDA) government decisively moved the levers of economic policy at its command to further its electoral aspirations by announcing wide-ranging sops to the middle classes and to corporate India. Although the back-to-back announcements were obviously aimed at adding further gloss to the "India Shining" theme, the government has been criticised for pushing through fiscal measures that in the normal course would have been first subjected to scrutiny and approval by Parliament.

The first edition of the package, announced on January 8 by Union Finance Minister Jaswant Singh, was clearly aimed at the middle-class segment. It was mostly in the shape of indirect tax concessions. Although constitutional limitations impaired Jaswant Singh's ability to offer direct tax concessions through executive fiat, he more than made up by offering excise and import duty concessions on a range of products and services consumed by the middle classes. Also on offer were concessions aimed at corporate India.

This package was followed by another the following day, which was projected by the media as addressing the aspirations of rural India. These were more in the nature of a presentation of good intentions, by and large cosmetic in nature. The second edition of the package had more in store for the elite. In a measure that could be termed as creeping capital account convertibility of sorts, Jaswant Singh announced that Indians could henceforth transfer out of the country up to $25,000 annually. This effectively does away with controls on capital movement from India. Although the Minister also announced the launch of the new Dada-Dadi bonds targeted at the elderly, it is unlikely to cause much cheer among the segment that has been most affected by the collapse in the rates of interest on household savings instruments. Much of the package is meant to be distributed by the nationalised banks and financial institutions. Commentators have warned that past experience, borne out by unkept promises made by Finance Ministers in their Budget presentations, suggests that the announcements are more in adding to the feel good factor. For instance, previous announcements of schemes such as credit cards for farmers or crop insurance have hardly mattered to the Indian peasant.

Jaswant Singh's giveaways were a departure from usual election-eve sops that Indian politicians are known to make. On offer were not concessions on articles of mass consumption such as kerosene and sugar. Instead, Jaswant Singh's sops were clearly aimed at wooing the well-heeled. Customs and excise duties on cellular phones, computers, DVDs, cars (particularly the more expensive models such as sports utility vehicles) and air travel have been reduced. Peak rates of customs duties were cut from 25 to 20 per cent and special additional rates of customs duties, amounting to 4 per cent, were abolished. Moreover, customs duties on projects involving a minimum investment of Rs.5 crores were scaled down from 25 to 15 per cent.

The giveaways on account of lower customs duties are expected to cost the government Rs.8,200 crores in terms of lost revenues. A further loss of Rs.685 crores will arise on account of the lower excise duties. The abolition of the inland and foreign air travel taxes are expected to erode revenues to the extent of more than Rs.1,000 crores.

The media welcomed Jaswant Singh's "mini" Budget, which offered sweeping fiscal concessions to the middle class. Although the lowering of customs duties has been on the NDA government's agenda, particularly in terms of its commitments to the World Trade Organisation (WTO), the issue has always been contested keenly in the political arena.

Jaswant Singh's move is seen as aimed at adding lustre to the feel good factor, which has arisen out of a fortuitous confluence of circumstances. It is perhaps understandable that the normal monsoon in the current year after the drought of last year, the boom in the stock market, the unprecedented level of foreign exchange reserves amounting to over $100 billion and the latest estimates of national income suggesting an accelerating economy would have tempted the government to cash in on the feel good factor. But, in terms of scale, the sops not only are unprecedented but have been criticised for subverting parliamentary norms and procedures.

IT is not uncommon for political parties to unveil welfare measures even as they prepare to face the electorate. However, what has been done by the Bharatiya Janata Party-led government amounts to far beyond the usual. In effect, not only has the government effected a major rearrangement of the tax structure, but it has done it by executive fiat. The irony lies in the fact that Jaswant Singh announced the fiscal concessions weeks before Parliament was to be presented a vote-on-account in early February. There is already speculation, obviously by interests who ordinarily benefit from the tinkering of the tax structure, that more concessions will be announced then. By then the government would have transformed the "mini" Budget into practically a full-fledged Budget. However, a crucial element of the budget-crafting process would be missing when the vote-on-account is taken in Parliament. This year's budgetary exercise, which is basically an income and expenditure statement, would not include the estimates of revenue losses that the recently recalibrated tax rates imply. In effect, by choosing to bypass Parliament while announcing these concessions, the government has abdicated its fiscal responsibility. The losses on account of the giveaways are not insignificant; they amount to almost 0.5 per cent of India's gross domestic product (GDP).

Obviously, the context in which the measures were announced is a matter of controversy. Critics have said that the move is a cynical attempt to use one of the most powerful levers of state policy, that of finances, for electoral ends. The Sensex has already welcomed the announcements by reaching historic highs; the middle class appears to have welcomed them, and so has the corporate class. The applause from these constituencies would not in itself commend the logic of the moves. In fact, pandering to such narrow constituencies, particularly on election eve, would ordinarily have been described as "populism".

Jaswant Singh has said the government will not lose revenues. He has argued, much like many other Finance Ministers from across the world who believe in the unproven efficacy of the Laffer Curve, that dropping tax rates will lead to better compliance and buoyant revenues.

The fact that these announcements have come without any statement on the health of the Union government's finances has also attracted criticism. In an ideal world, any tax concession is obviously good. But in reality, governments face constraints, meaning that they have limited resources at their command. Giveaways are therefore always to be seen in the context of who the beneficiaries are, who else could have had them but did not get them, or in terms of who has been burdened and who has been relieved of the tax. Simply put, therefore, the absence of a financial statement is glaring because it fails to set out the context in which these sops were offered. Any fiscal regime is always contested because it leads to gains for some at the expense of others. For instance, the first edition of Jaswant Singh's package reduced import duties on power equipment. Obviously, power utilities, particularly the private power generating companies, would welcome the move, claiming that the move heralds good times for the development of a crucial infrastructural facility. However, the fact that this would place Indian power equipment manufacturers - the state-owned Bharat Heavy Electricals Ltd. (BHEL) being prominent among them - at a disadvantage marks the move as at least worthy of debate in Parliament. The significance of the package lies in that it has short-circuited the process of democratic scrutiny, which is also a process that allows the government's tax proposals to be contested in democratic space.

Needless to say, political parties have taken umbrage at the subversion of the democratic practice of scrutinising government finances. Former Union Finance Minister Manmohan Singh termed the move "unconstitutional" because it subverted parliamentary supervision of the allocation and disbursement of financial resources from the national exchequer.

The Polit Bureau of the Communist Party of India (Marxist) accused the government of "completely ignoring Parliament and violating budgetary procedures". It said that the government "has not placed before Parliament or the people the balance sheet of the overall finances of the government" and added that the "concessions are meant to keep the big business and corporate sector happy".

S.L. Shetty, director, Economic and Political Weekly Research Foundation, said that the nature and timing of the concessions were "improper, unethical and unconstitutional". He said that the new rates of duties ought to have been approved by Parliament, but if Parliament was to be dissolved soon, the newly formed government would have the legitimacy to announce fresh tax proposals. He said: "It is unprecedented... Never have I seen such massive steps being taken even as plans are being made for the next elections. In the past, governments have taken measures when the economic situation warranted it. There is no economic compulsion in the current situation to warrant the government parting with more than Rs.10,000 crores of revenue." He said that the concessions had been announced even as crucial areas such as health and education continued to remain under-funded. "The government is trying to hoodwink the public at large," he said.

The latest estimates of GDP also came handy to the BJP's electoral cause. Data released by the Central Statistical Organisation (CSO) indicate that the economy grew at a healthy rate of 8.4 per cent in the second quarter of the current year when compared to the second quarter of 2002-03. However, the optimism has to be tempered by several factors. For instance, the rate drops to a more moderate figure of 7 per cent if the growth rate over the more extended period of the first half of the year is considered.

Moreover, there is yet no cause for euphoria that the manufacturing sector is on a runway growth path (see tables). It is also evident that the real impetus to growth has come from the services sector. And, as practising economists have warned repeatedly, the data on services are to be taken with more than a pinch of salt. As far as the agricultural sector is concerned, the CSO is effectively dependent on the Union Ministry of Agriculture for its estimates of agricultural output. Shetty told Frontline that there had been occasions in the past when the Ministry "inflated or underplayed agricultural growth to suit its political purposes". On balance, it appears that vast segments of Indian industry remain mired in stagnation. In fact, industries producing articles of mass consumption have performed badly during the current year. For instance, the consumer non-durable segment of the manufacturing sector, which produces articles such as textiles that cater to the masses, actually decelerated during the first half of the current year in comparison to last year. It is also clear that crucial segments of the infrastructure sector, notably power generation, have performed poorly. Moreover, merchandise exports have also not increased at a pace that can be regarded as optimistic. In this context, it needs to be emphasised that the burgeoning reserves, implying the appreciation of the rupee, may hamper exports.

The significance of the recent concessions lies in the way they have redefined the notion of "populism". In recent times, particularly since the liberalisation process started, the term has, more often than not, gathered a pejorative ring around it. Thus, being a "populist" has somehow come to mean pandering to narrow sectarian interests.

It is interesting that the word "populist", in its pristine essence, defined its adherents as those who "represent the interests of ordinary people".

It follows that policy measures that would be in the interests of the largest number of people would not only be "populist", but difficult to counter rationally; in fact, they would be socially desirable. The election-eve package, by offering a slew of concessions to a narrow segment of society - the wealthy and the well-heeled - stands "populism" on its head.