Budget 2008-09: Relief Under
The most significant measure announced in the finance minister?s budget speech does not paradoxically figure in the budget at all. This is the debt waiver for all loans of farmers below 2 hectares owed to scheduled commercial banks, regional rural banks and cooperative credit institutions before March 31, 2007, which were overdue on December 31, 2007, and which remained unpaid on February 29, 2008. For other farmers, a 25 per cent write-off is offered for a one-time settlement. The estimated figure comes to Rs 50,000 crores of waiver, and Rs 10,000 crores of relief, totalling Rs 60,000 crores.
It may appear strange at first sight that this sum should not figure in the budget at all. But the reason is simple: it does not require any budgetary resources. All it needs is the substitution of government IOUs for agriculturists? debt in the banks? portfolios, which is a book transaction involving no actual transfer of resources, except interest payments on these IOUs when they become due (which will of course be only a fraction of the sum).
It is quite another matter of course that the government may pretend that such a simple operation is not possible, that some resources have actually got to be mobilised for the purpose, and that these resources can come only from the sale of public sector equity. That such a totally theoretically-unfounded argument may be put forward to push the privatisation agenda, an argument moreover that has the potential of mischievously pitting the peasantry against the public sector, is suggested by a post-budget interview by Manmohan Singh. Some of Chidambaram?s remarks about the sale of public sector equity point in a similar direction. But there is no connection whatsoever between debt relief to the peasantry and the sale of public sector equity. The latter is an independent measure on its own and has to be firmly opposed. Debt relief requires only a book transaction, as is implicitly admitted by the government itself when it has announced debt relief without explicitly provisioning for it. (True, even such a book transaction should have figured somewhere in the capital account of the budget, but its not doing so is just bad accounting not bad economics).
The question arises: if debt relief to the distressed peasantry is such an easy matter for the central government (not, incidentally for state governments, which have to pay for any such relief from their budgets, which is why comparing the scale of this central relief with that provided by, say, Kerala is misleading), then why was it not given earlier? Exasperation on this score however should not come in the way of welcoming this measure. True, the measure has serious limitations. It covers, first of all, only institutional debt and not what is owed to private moneylenders (which reportedly accounts for over two-thirds of total farm debt). Secondly, the uniform cut-off of two hectares actually discriminates against dryland, as against wetland, farmers since the plot sizes of dryland farmers are comparatively larger; indeed this uniform cut-off may even leave out large segments of the peasantry in crisis-hit regions like Vidarbha. Even so, this measure of relief for the distressed peasantry is a welcome one: better late than never.
The other measure of substantial relief is for income tax payers for whom the exemption limit has been raised from Rs 110,000 to Rs 150,000 per annum (with corresponding increases for women and senior citizens whose exemption limits are higher). This too is a positive step. The across-the board reduction in CENVAT from 16 to 14 per cent in response to the demand by CII, though sought to be justified in the name of stimulating demand, is likely to end up boosting profit margins. Much the same can be said about the range of excise duty concessions announced in the budget. These may not get passed on to the final consumers. And even in cases where they may, such as for instance small and hybrid cars or breakfast cereals, the beneficiaries cannot be counted among the aam admi, the only possible exception being certain life-saving drugs.
The particular tax measures are a mixed bag: while the increase in the short-term capital gains tax from 10 to 15 per cent is a welcome move, the continued reluctance to tax ?long term? capital gains deserves condemnation. The introduction of a commodity transactions tax in line with the securities transactions tax is welcome, but the grant of a five-year holiday from income tax to two, three and four star hotels, which are to be constructed and start functioning in the next five years in specified districts, represents a gratuitous loss of revenue. The shift from ad valorem to specific duties in the case of unbranded petrol and unbranded diesel is desirable in principle but has zero price impact.
On the whole the budget entails zero additional revenue mobilisation from direct taxes and a revenue loss of Rs 5900 crore from indirect taxes. The finance minister in short has simply sat back to collect what would spontaneously accrue to the exchequer, and, even out of this, given tax concessions worth Rs 5900 crore. In the absence of any additional resource mobilisation and under the self-imposed compulsion of the FRBM Act, government expenditure has been kept restricted; and with infrastructure claiming a large part of it, welfare and social expenditures have been kept on a particularly tight leash.
This assertion may appear odd at first sight since the finance minister went all out to give the contrary impression in his budget speech. But the actual budget figures tell a different story. The nominal expenditure on the National Rural Health Mission, a key programme of the central government, is budgeted at less than Rs 11,000 crore, an increase of 12 per cent over 2007-08 (RE) which is even less than the GDP growth rate. The ICDS is a programme that is run with grossly underpaid Anganwadi workers and helpers. The salaries of both these categories of workers have been raised in the budget, but even the new salaries are abysmally low. The Anganwadi workers are to get Rs 1500 per month which is still below the minimum wage; for Anganwadi helpers the salary has been raised to a mere Rs 750 per month. And yet the total increase in allocation under ICDS is a mere Rs 852 crore, which is certainly inadequate for universalising the ICDS as directed by the Supreme Court.
The expenditure on higher education is budgeted to increase from Rs 6397 crores in 2007-08 (RE) to Rs 10853 crores in 2008-09, which is a welcome increase. But the increase in elementary education is abysmal, from Rs 18440 crores to Rs 19778 crores, that is by 7.3 per cent. Considering the fact that the budget is based on the assumption of an inflation rate of 6.4 per cent, this entails virtual absolute stagnation in real terms. On crucial schemes like the Sarva Shiksha Abhiyan, the budgeted expenditure in fact represents an absolute decline in nominal terms. Since the revised estimates for 2007-08 already presume a 65:35 division between the Centre and the State governments, it would appear as if the Central government is actually insistent on cutting down the programme. The hope that the extension of the Mid-Day Meal scheme to upper primary classes will be accompanied by a general thrust to school education has been belied.
When the UPA government came to power, the Common Minimum Programme had promised that the outlay on education will be increased to 6 per cent of GDP. According to the latest Economic Survey, the outlay in 2006-07 (RE) was only 2.88 per cent; the budget estimates for 2007-08 entailed a fall to 2.84 per cent! Going by the provisions of the 2008-09 budget, the UPA government will end its five year term with an outlay on education that would not even be half of what the NCMP had promised.
Even on NREGS which is a flagship scheme of the government, the total outlay is budgeted to increase by a mere 20 per cent while the number of districts covered by the scheme is supposed to be doubled. The Finance Minister has of course said that expenditure will be increased in accordance with the demand for funds, but the signal given by the government is all wrong, and the phenomenon of ?waiting for funds? not uncommon. The government can get away with such implicit rationing of funds, because the people are still unaware of the fact that under the NREGA they enjoy a right to employment (or to an unemployment allowance in case they are not given employment).
The most glaring example of pruning relates to food subsidy. The figure for 2007-08 (RE) was Rs.31546 crores. The budget estimate for 2008-09 is Rs.32667 crores which hardly represents any increase even in nominal terms. The current inflation in India is driven by food articles, and insulating the people against food price increases through an expansion of the public distribution system and through a pegging of the ration price of food has to be the primary task before the government. Both these require an increase in the magnitude of food subsidy. The food subsidy therefore should have been much larger than last year, and yet we find an absolute stagnation. Clearly the government has no intentions of expanding the PDS; and clearly within the existing PDS the issue price will have to increase.
There is a view that since there were large scale imports last year which were extremely expensive but which will not be necessary in 2008-09 because of a bumper harvest, we can manage to hold the issue price, in the PDS as it currently exists, even without much increase in the food subsidy. This view is incorrect. Even assuming that the same amount of off-take takes place from the PDS in 2008-09 as occurred in 2007-08, and assuming nil imports in 2008-09, the implementation of the CACP recommendations with regard to the procurement prices will still entail an increase in the cost of foodgrains coming into the PDS. To keep the issue price steady, a substantial increase in food subsidy is necessary which the budget does not provide for. In short the budget does not address the fundamental problem of inflation as it confronts the poor.
There is a peculiar asymmetry here. The appreciation in the value of the rupee vis a vis the dollar, even if it were to continue, will have little impact by way of lowering food prices in 2008-09. This is because there will be no imports, and food prices will be determined within the domestic economy, largely by the procurement price which is slated to increase considerably ( for which there is of course a good reason, since agriculture has faced secularly declining terms of trade for quite some time). On the other hand, the appreciation in the value of the rupee, even if it did not continue but stopped at the existing level, will still mean declining employment in the non-agricultural sector since domestic producers will be out-competed; if the appreciation continued, then things would be worse. The economy in short is facing a crisis of stagflation, not necessarily in terms of the growth rate arithmetic, but in terms of a combination of both inflation and reduced employment simultaneously afflicting the economy.
The budget does not address itself to this issue at all. It neither provides for a cushion against inflation for the poor and the working population, nor pursues an expansionary fiscal policy which will boost demand and keep unemployment in check. The reason it does neither is its fiscal conservatism. While the tax revenue is expected to increase by 17.5 per cent over 2007-08 (RE) notwithstanding the tax concessions offered, the revenue expenditure net of interest payments is expected to increase by a mere 12.2 per cent and capital expenditure (after adjusting for the book transactions because of the share acquisition in SBI in 2007-08) by a mere 8.8 per cent. Overall expenditure in short has been drastically curtailed, with a view to reducing the fiscal deficit, which has been brought down to 2.5 per cent, even below the 3 per cent target under the FRBM Act. True, the Finance Minister may have deliberately kept the fiscal deficit below the FRBM target in order to give himself a cushion in view of the Sixth Central Pay Commission recommendations that are due by March 31, 2008. But if he wanted to spend more he could easily have taxed more and borrowed more. What prevented him was fiscal conservatism. It is amazing that even an election-eve cannot deflect the UPA government from fiscal conservatism.
What is striking about the budget is that the relief it provides will go to income- tax payers and a certain segment of farmers. While this is welcome, there is little in the budget for the poor. Since it is the poor, far more numerous than is officially admitted, who constitute the real aam admi in the country, the budget paradoxically has little to offer to the aam admi.