A Gaddar Budget
The budget provides a grand sum of Rs. 3.18 for a dalit person per month for his welfare and upliftment but reduces more than Rs. 130 on a bottle of imported Whiskey by way of reduced custom tariff devoured by rich every day.
What would one call an act that instead of addressing the woes of your own people reflects eagerness to pave way for the very outsiders that heaped these woes? What is the good word that describes an action that utterly ignores the misery of your own kinfolk and fondly engages in a welcome of others who are suspected to have caused that misery? What would the people call those at the helms of affair, in whom they repose their faith for taking care of their safety and security, are found to have opened the gates wider for outsiders? Regrettably though, but one finds Yashvant Sinha's recent budget overwhelmingly doing exactly the same to the Indian people.
The key problems that the economy faced during the year are not hidden. Whether it is due to much talked about global recession or not but there has been a severe demand recession in our industrial sector, there is widespread distress among our farmers because of low and volatile output prices and rising input costs and the situation is becoming increasingly grimmer on account of the historical low rate of employment generation. None of these problems however find mention among the key problems noted by the government. For instance, in the economic survey 2001-02, presented on the eve of the budget, the government identifies three key problems; all related to the fiscal deficit: (i) the decline in the gross tax revenue of the central government, (ii) the nominal inflexibility of the administered interest rates on Government pension and provident funds, the real interest rate (nominal interest rate - rate of inflation) on which currently works out very high due to fall in inflation, and (iii) high fiscal deficit that puts upward pressure on market interest rates and international risk premium; and raises the cost of capital for all producers which in turn results into crowding out of private investment. The economic survey then goes on to propose solutions in terms of privatization of the public sector units, expenditure control, raising the defense expenditure, reduction in subsidies, downsizing Government, reforms in taxation in terms of reducing rates and broadening the tax base for direct taxes and rationalisation and simplification of the indirect taxes; lowering of the interest rates on small savings instruments and all that you normally find in the standard feed of the Brettonwood institutions.
Fiscal Deficit Fundamentalism
The fiscal deficit is the mantra given by these institutions and is being chanted by the government year after year right since it entered their trap in 1991. The fiscal deficit is computed as the excess of revenue expenditure, capital expenditure and net domestic lending over revenue receipts, and grants. Therefore, ordinarily controlling fiscal deficit should mean a virtue as the Hindi proverb- 'stretch your legs as much as your bed sheet is', would advise. The fiscal deficit can be controlled by manipulating any of the constituent variables. However, when the IMF and World Bank talks about it, it only means controlling of the expenditure and that too, the developmental expenditure as the other non-developmental expenditure for any government these days is largely uncontrollable. This is quite as per their neo-liberal theory which dictates that the government should not indulge in any economic activity and leave everything to private players in the free market.
While it may be a virtue to control the deficit at an individual or family level, it is not necessarily so for the business or the country. For, the process of budgeting in these cases is reverse. Whereas individuals plan their expenditure as per their income, the government can plan their income as per the expenditure it wants to make. Beyond its tax revenues, it can always borrow from the central bank (Reserve Bank of India) by expanding the money supply. Excess money supply could lead to inflation but again not necessarily so. If there is a commensurate increase in output, it should not give rise to inflation. It all depends on how the government spends this deficit. If the government's deficit spending is invested in sectors that increase the output in the economy, over the long run it will not be inflationary. On the other hand, if the deficit spending goes towards non-productive ends, it will increase money supply without increasing output and therefore will be inflationary. Thus, fiscal deficit is inherently neither good nor bad; it depends on how governments use it to boost the economy. What we see budget after budget however, is the parroting of the Brettonwood- stereotype by the government, sarkari economists and the people of ruling clique that the fiscal deficit is bad. This fundamentalism has severely curbed our public expenditure during the last reform- decade.
A Wasted Opportunity
Notwithstanding an apologetic tone adopted by certain people belonging to ruling class in condoning the Finance Minister's presenting a lackluster or 'a bits and pieces' budget in saying that in the prevailing general slow down he could not have done better, the fact remains that Mr. Yashvant Sinha has been singularly lucky not only this time but over the last two years in a row in having an extraordinarily congenial situation to enable him to give a much required boost to the economy. He has been persistently squandering it under the spell of borrowed economics from the IMF and the World Bank. The opportunity to boost internal demand has been simply unprecedented but he could not see it through the glasses of neo-liberal ideology. This opportunity manifested itself in the form of three things: 1. Huge stocks of food grain in the government godowns 2. Huge reserves of foreign exchange with the Reserve Bank of India, and 3. Low inflation.
Paradoxically today, despite the declining output of food grains, their stock in the government godowns is exceeding 60 million tonnes. The country has 324.15 lakh tonnes of wheat and 256.17 lakh tonnes of rice as on January, 2002. When the next bumper crop of wheat comes in April, the problem of plenty is going to worsen further. Neither the state nor the central agencies are prepared to handle and store these stocks. The Food Corporation of India is under increasing pressure to withdraw from the procurement process. The Foreign Exchange (FE) reserves in the RBI hovered over whooping $ 50 billion. The inflation rate has been around the lowest in recent times. This combination spelt a golden opportunity for the government to boost public expenditure without the danger of an inflationary trend that normally sets in due to increased demand for food and other commodities as a result of increased incomes in the hands of people. The food stocks could take care of the increased demand for food and the FE reserves could be used for importing other commodities to curb the price rise. Instead of spending large sums of money in maintaining these stocks of food grains and booking it to the inflated subsidy to the poor, the government could have used it for food-for-work programmes. As the experience shows, it has been a proven method to directly impact rural poverty. It would have also resulted in the creation of much needed rural infrastructure the lack of which has been the biggest constraint on the economic activity of our majority population. This route could have pulled up the below poverty line-poor above the poverty line and pushed them into the market for bolstering internal demand.
While the budget could have easily and substantially solved the first problem of demand recession by increasing public expenditure, it talked about expenditure management in generic terms and held the expenditure approximately at the same level as of last year. With its obsession to contain the fiscal deficit, the obvious constraint the government faced was the huge shortfall in tax revenue as experienced during the current year. Its magnitude was as large as 13 percent of the budget. The shortfall was across all the taxation heads but by far it was the largest at a whooping 21 percent was in the case of customs. The shortfall in tax revenue, as any high school student might say, is due either to reduction in volume or in tax rates or both. Indeed, it was caused by both; the recession affected volumes and the reduced tax rates as multiplier further aggravated tax collection. Both are attributable to the neoliberal policies of the Brettonwood institutions that the government has been faithfully following. As though carrying someone else's brief, the government is curiously oblivious of the domestic problems; it would not comprehend this simple fact and rather persist with the same policies with renewed zeal. Look at the pride with which the Finance Minister (FM) spoke about the road map to reduce the customs duties to 10 and 20 percent while effecting an all round reduction in them. The lower rates of custom duty and contracting demand on account of decreasing purchasing power is certainly going to land the government in a bigger mess in the coming year.
Mirage of Export Competitiveness
Rather than following the route of boosting internal demand, the government curiously appears to take the uncertain route of external trade, viz., increasing real net exports. Towards this end the budget significantly enhanced allocation for several export incentive schemes. Apart from the budgetary measures, the government has been dutifully following another well known cliché of currency devaluation for enhancing export competitiveness for quite some time. While the country's dollar reserve is crossing the record levels of $ 50 billion, the rupee is being depreciated artificially, ostensibly to boost exports. During the current year, the rupee is depreciated in real terms anywhere from 3 to 4 % without any let up in exports. The kind of economics the Brettonwood institutions preach their minions ignores the fact that currency depreciation may steal a temporary march over a rival economy in the international market but will soon invite retaliation and eventually lead to making everyone worse off than before. Actually, the currency depreciation raises the price of imports and results in imparting a cost-push inflationary thrust to the economy. The inflation directly engendered by exchange rate depreciation is through an import-cost-push, which reduces the share of wages by transferring purchasing power from the hands of the working masses to the hands of foreigners. In indirect terms, it impacts in many ways. For instance, it raises local currency value of the external debt and thereby the real cost of servicing the debt the burden of which necessarily falls on poor people.
The expansionary effect through the external trade can be better controlled by imposing higher tariffs on selective terms to curb imports and hence effectively increase real net exports. Even in the WTO regime, this route is available for us as for a wide range of goods the actual tariffs are far below the tariff bindings which are legitimately allowed under the WTO regime. But, our budget follows a totally opposite direction. The FM took pride in announcing that a road map was ready for the country to have only two custom duty rates, 20 % and 10 %, and that he was reducing the peak rate of 35 % to 30 % in the current budget. The reduction in peak tariff duty seems to have made it easier for individuals with a fetish for foreign goods. Food processing and agro based products, cosmetics and toiletries, cooking appliances, white goods such as refrigerators and dish washers, domestic appliances such as vacuum cleaners and food processors, colour televisions, VCR/ VCP/VCD, ACs, cigarettes, watches and clocks will attract customs duty at a lower 30% rate. The FM has even pitied the plight of rich drinkers of foreign liquors and reduced the custom duty on it from 210 % to 182 %. In light of the existing influx of foreign goods everywhere which has been threatening a wide array of domestic industry, further incentivisation of imports through reduction in custom tariff is going to aggravate the existing problem of demand recession and more importantly unemployment.
"Kisan Ki Azadi'or a Recipe of Barbadi
As regards the problem of farmers, viz., volatility of prices for their output and increasing costs of inputs, the budget has certainly added fuel to the fire. The policy of minimum support price for the farm produce had significantly insured our farmers against the volatility of prices but this policy is being increasingly questioned during the reform-period. The last year's central Budget had provided for a decentralised procurement system but it did not materialise due to the unpreparedness of all the states, deliberate or otherwise. The current budget proposes to amend the Agriculture Produce Marketing Act to enable farmers to sell directly to potential processors. The directional thrust of the budget is clear, which is to remove whatever protection the farmers have in the current system and subject them to a "free market". There is ample evidence to show what happens when farmers are left to the so called free market. In October 1998, when all the government procurement agencies refused to procure rice from peasants in Punjab, private traders had cornered the crop at throwaway prices, hoarded the stocks creating artificial scarcity and later sold the same at much higher prices. The world over, given the oligopsonic nature of the agriculture market, the farmers' woes are going be worsened for sure. As for the input costs, the FM has directly contributed by increasing the costs of the main input-fertilizers. A farmer will now have to pay Rs. 12 more than before for each bag of urea, Rs. 22 more for each bag of DAP and Rs. 10 for each bag of potash. The budget seeks to promote agricultural exports "for creating conditions for providing remunerative prices to farm produce". The budget seeks to boost agricultural exports by promoting Agri Export zones in different states professedly to get remunerative prices to farm produce. Given the general trend of falling prices of foodgrains in the international markets along with the heavy subsidies the farmers enjoy in the agri-produce exporting countries, the export competitiveness of our farmers will remain a veritable question. Currently, as a result of the failure of the wheat crop in USA, India's wheat exports have increased dramatically. This year over 5 million tones of wheat are already exported. While the government boasts that India has become the seventh country to export wheat, the fact remains that it is done at a heavy loss. For instance, in the current trade Cargill and Continental are buying wheat from India at $60 to $100 per tonne while they sell it at $230 to $ 240 per tonne in the international market, making a neat $130 to $170 per tonne while India is losing over $ 100 million in exports. Besides, with the falling production of foodgrains and paradoxically heavy stock piling at the government godowns, that indicates decreasing food intake by people, the export orientation will shift the focus of the rich surplus producing farmers to cash crops, as already seen in some areas, aggravating the food situation in the country. This move, contrary to the stated objective of the budget, is going to benefit only the United States Department of Agriculture which has been eyeing the Indian market for quite some time for exporting its foodgrains. 'Kisan ki Azadi' can only be a cruel joke if seen in light of the World Bank's explicit directions in 1991 to reorient India's agriculture towards the production of 'tradeables', exportable crops, in place of crops for peoples' own consumption and the government's blatant surrender to it!
No-Job Prospects for People
The unemployment problem is creating havoc in the country. The investment starved rural sector is virtually devoid of jobs as can be seen from the statistics of increasing agriculture labour. As suggested above, the existing food stocks could have provided the base for a massive food-for-work programme to create employment and build infrastructure. Instead, all that the FM has done is to provide a pitiful increase of Rs. 371 crore over last year's revised estimates. Instead of going for more public spending to revive growth, he has chosen to adopt further deflationary measures, such as cutting government employment by 12,200 posts and freezing future employment. The reforms of the government has rendered over 3 lakh small scale industrial units as sick and scores of people unemployed. Last year's budget had dereserved 14 items from the SSI list, this year it has dereserved 50 items which simply means the SSI has been taken out from protective shield, making it and its workers further vulnerable. The big companies have been increasingly restructuring, which is a euphemism to outright downsizing. The privatisation of PSUs is also contributing to huge job losses. The government has already decided to curtail the government employment by 2 percent annually. Labour law reforms proposed in the budget inter alia shall allow management of companies employing less than 1000 workers to close down the company or effect reduction in its employment by any other means without any prior permission. It also seeks to liberalize the provisions relating to casual employment including its regularization. All this is going to impact the poor people severely. Given the cumulative impact of all these measures, the reform is becoming utterly unsustainable but there is no trace of its cognizance in the government circle.
Thus the budget is totally oblivious of the real problems of the people in the country. Barring the cosmetic sprinkling of a few crores across various clauses in the name of the poor, it has materially put the interests of international investors and imperial capital ahead of the interests of the majority of its citizens. There is a plethora of empirical evidence to show that the IMF-World Bank ordained Reforms have caused havoc to peoples' lives in many ways in many countries. However, instead of taking cognisance of these facts, the government has indulged in distorting or even fabricating contra-evidence in favour of the Reforms as in the case of recent claims of decline in poverty with surreptitious methodological change. The world over these policies have left marks of devastation and lately many Latin American countries which have been veritable laboratories for them have taken a silent deviation adopting the politics of populism and authoritarianism. The government and its minions zealously attribute the failures to their lack of total compliance with neo-liberal ideological package and talk of launching second phase of Reforms. As evidenced through the budget, they are unable to move out of the liberalization cum privatization mould, to spend productively to revive the economy and generate more income and employment for people.
Facilities to Foreigners
The budget announced permission for portfolio investments by foreign institutional investors (FII) beyond the sectoral limits for foreign direct investment except in specified sectors. The FIIs will be free to invest in any company under the portfolio investment root beyond 24% of the paid up capital of companies with the approval of their general body of the share holders by a special resolution. The implication of this can be gauged from the recent dispute in the case of mega merger between BPL Communications and the Birla-Tata-AT&T combine which the American International Group with a mere 8.2 % stake in Tata Cellular could obstruct. The relaxation will not certainly lead to any mad rush by the FIIs to investment in Indian companies, but potentially it opens up an opportunity for foreigners to take control of our companies.
The budget commences capital account convertibility by offering full convertibility of deposits schemes for NRIs and allows them to freely repatriate all their current earnings such as rent, dividend, pension, interest etc. in foreign currency. The government is sanguine about its huge FE reserves but should there be any loss of confidence in the economy for whatever reason as it happened in 1991, half of that reserve- over $ 26 billions, being from NRIs, will fly off creating a crisis any time. The reason NRIs bring their money into the country lies in the better risk free interest rate they get in India. Once this condition changes they will take away their money to wherever they get better returns. The driving confidence in India's FE reserve is certainly misfounded if one understands the fact beneath the bland figures that much of it still falls in the category of hot monies and hence is not reliable. Capital convertibility even in the limited form that the budget announced certainly benefits the outsiders, but it certainly makes the Indian people more vulnerable.
The budget makes many maiden provisions under the capital account convertibility that in ultimate analysis may benefit outsiders more than the Indian people:
· The restriction on the FDI in NBFCs is done away with if they bring in a minimum of US $ 50 million.
· The 3 year profitability conditions is removed and Indian Companies may invest up to US $ 50 million on an annual basis abroad through the automatic route.
· Companies which have issued ADRs / GDRs may make foreign investments upto 100% of these proceeds.
· Block allocation in advance from RBI for foreign investments is available for such companies which have a proven track record and who wish to invest larger amounts.
· Companies which have issued ADRs / GDRs may acquire shares of foreign companies up to an amount of US $ 100 million or an amount equivalent to ten times of their exports in a year, whichever is higher.
· Converted local shares may be reconverted to ADR/GDR while being subject to sectoral caps, wherever applicable.
· Ban on registered partnership firms and companies providing professional services to make overseas investments to be removed.
· Indian employees who have the benefit of ESOP schemes in foreign owned companies are permitted to make foreign investments abroad upto US $ 20,000 annually instead of in a block of 5 years.
· Indian companies permitted to list in foreign stock exchanges by sponsoring ADR/GDR issues against block share holding.
In short, though the government has cautiously termed these measures as capital account liberalization, it has essentially opened the doors for capital account convertibility. Even the closed door policies for foreign exchange practiced so far could not prevent the ingenuity of our rich from enriching the coffers of foreign banks by billions of dollars the official permission to take away foreign exchange will firstly act as an amnesty for them to legitimise this stolen wealth of the country and secondly accelerate their leeching operations to further impoverish it. The FM acknowledges this possibility when he proposes to bring suitable legislation to curb the activities of money launderers, hawala operators etc. Indians do know how potent these legislations are!
The budget has given foreign banks an option to either operate as branches of their parent banks or to set up subsidiaries. It has slashed the tax rate for the foreign banks from 48 % to 42 %. By switching to a subsidiary route, foreign banks can enjoy still lesser tax rate, on par with domestic companies which is at 35 %. They will be able to acquire domestic banks and consolidate their position in the country. It is reflected in the sudden upsurge in the stock- prices of many private banks that are seen as potential targets for foreign banks. Basically, the budget proposal removes the distinction between the foreign and the domestic banks and makes the Banking Regulation Act 1949 equally applicable to all. After the Asian crisis, many foreign banks had asked the government to open the subsidiary route so that turmoil in these markets does not affect their global balance sheets. This budget gives them that.
Besides these direct measures opening the flood gates for the foreign capital, there are many indirect propositions in the budget that accrues benefits to the latter. For instance, the defence hysteria created by the government has resulted in escalating the defence outlay by 15 % over the last year's revised estimates to Rs. 65,000 crores, making it as big an item as the plan expenditure at 14 % of the total receipts. The government is spending Rs. 400 crores every month over the army mobilisation at the borders purely for its internal political intrigues. The security hysteria can effectively blind people who can then be asked to make any amount of sacrifices. The budget reflects this very strategy; not only it has hugely escalated the defence outlay, it has kept it open ended. This entire money shall be spent in importing high technology equipment for 'modernizing' our war machinery. Likewise, entire customs duty cut indirectly favours foreign capital mostly at the expense of the domestic industry.
Plight of People
It is not that its brunt will be borne by the domestic capital which in any case is content being the junior partner of the metropolitan capital. It really hits the working classes and the oppressed people. It may be a cliché to repeat that the budget brings bounty to the rich and blows to the poor, for never in this so called 'republic' has the budget been pro-people. This budget also scores over its predecessors in hitting the common man, especially the salaried individual, below the belt. The measures like security surcharge of 5 % on income tax on all categories of tax-payers, reduction/elimination of benefits available under Section 88 of the Income Tax Act, capping investments in RBI Relief Bonds to Rs 200,000 per annum, taxation of dividends at the hands of the individual rather than the corporate or the mutual fund; will mean a higher tax outgo and reduced rate of return for individuals. Secondly, increased prices of LPG and kerosene will result in higher household expenditure. The reduction in the interest rates on small savings has not only reduced the ability of the common man to save but has unsettled the plans of many ordinary people for ordinary living. The government has neither hesitated to breach the trust of such people who reposed in its long term instruments nor has it been mindful of the adverse impact that it would have on the economy. It has only been ecstatic at the compliance with the neo-liberal dictates of the Brettonwood institutions in providing cheap money, forgetting the historical fact that cheap money has never worked anywhere; only the forces of thrift and hard work can help the economy. The labour reforms that would legitimise the 'hire and fire' policy and total 'contractorisation', without any restriction, are already announced in the budget. It proposed that management of any enterprise employing up to 1000 people will be free to retrench its workers without any prior permission. The coverage of this proposition extends directly over 90 percent of enterprises. The budget likewise talks of accelerated pace of PSU-privatisation to finance its plans. Emboldened by overcoming initial resistance, it is out to sell out the entire family silver so to speak, at throwaway prices totally oblivious of their replacement values.
The budget does not do any good either to the economy or even to government accounts. The government accounts are getting more and more horrible with every passing year. For instance the total debt servicing (loan repayment plus interest) of the Centre annually is Rs.2,38,272 crore. In contrast, the total revenue receipts this year will be no more than Rs.2,10,000 crore, a spectre of the clear debt trap! The total internal debt of the government in 2001-02 stands at Rs.13,00,000 crore. This is almost 60 per cent of GDP, among the highest in the world. The revenue deficit (borrowings done to pay for salaries and other routine expenditure) is now close to 70 per cent of the total borrowings. Some years ago it was a mere 40 per cent of the total borrowings, which means less of borrowed money was being used to meet current expenditure. This truly reflects the deepening crises in the government's budget.
With all the people related minuses the budget clearly scores one plus - faithful compliance with the neo-liberal package in the interest of global capital, as though that were its only objective!
Date: March 3, 2002