People's Democracy

THIS is no hyperbole: no single budget in recent times has announced as massive an assault on the existing institutions in defence of the working people of the country as the one presented by Yashwant Sinha on February 28. Two announcements in particular have far-reaching significance.

The first ensures a virtual winding up of the system of public procurement and distribution of foodgrains that has been in operation since the mid-sixties. Till now, the Food Corporation of India procured foodgrains at certain pre-determined prices, and it procured as much as the peasants were willing to sell. Its operation therefore insulated the peasantry from price-crashes. Now it will procure only "for maintaining food security reserves and for such state governments who will assign it this task on their behalf." In other words, it is not duty-bound to pick up whatever is offered by the peasants; its job no longer is to protect the peasantry from price-crashes. The state governments, if they so wish, can take up that task; the centre will have nothing to do with it.

The FCI, likewise, will have nothing to do with the distribution of foodgrains; obviously, if it does not procure, it cannot distribute. The centre will only hand over to the state governments an amount of money which covers the subsidy for the below-poverty-line (BPL) population, but it will no longer provide any subsidised foodgrains. In other words, the states not only would have to make their own arrangements for obtaining the physical quantities of foodgrains for the public distribution system (PDS), including even for the BPL population, but in addition they can no longer expect any subsidy on the foodgrains distributed to the non-BPL population. The non-BPL population is thus completely taken off the system of subsidised foodgrains; and the BPL population is not necessarily assured of the physical supply of foodgrains.

This is the end of the PDS. States like Kerala which had introduced a comprehensive PDS that was so impressive as to constitute a part of the now-famous "Kerala model" will henceforth find that they can meet neither the subsidy requirements of the non-BPL population nor even the physical needs, necessarily, of the BPL population (as they are food-deficit states). Since the official categorisation of the BPL population, as is well-known, does not cover the entire genuine BPL population, this basically means that, at one stroke, the government has removed both price-support for the peasantry and food-security for the poor consumers. The former will no longer be insulated against price-crashes, and the latter against price-explosions.

The budget does not even provide adequate support to the peasantry in the context of the current price-crash. True, the import duties on tea, coffee, coconut and copra have been raised, a fact made much of by the defenders of the budget. But the increases are far from adequate. The landed cost of copra, for example, even after paying the increased import duty, would be Rs 17,600 per tonne, while the present market price is Rs 21,500. Likewise, the landed cost of coconut oil, even after the import duty hike, would be less than the domestic price. The fact that the increases in import duties on these cash crops are much lower than permitted under the WTO tariff bindings makes the budget's parsimony even more intriguing.

The second announcement states that any industrial establishment employing less than 1000 workers can henceforth retrench these workers at will, without having to obtain prior approval of the appropriate government authority. Until now, according to Chapter V-B of the Industrial Disputes Act, it is only very small establishments employing less than 100 workers which did not need prior government approval; this limit is now raised to 1000. Since establishments employing up to 1000 workers constitute the bulk of the Indian industrial sector, this change amounts to a virtual carte blanche to industry to retrench workers at will. It constitutes a devastating blow against workers' rights.

This relaxation of retrenchment rules is accompanied by a whole array of measures that would actually accentuate recession. The process of government expenditure compression that has occurred in the economy of late, particularly in 2000-01 --- and that underlies inter alia the current industrial recession --- is to continue and become even more tight. The year 2000-01 witnessed a shortfall in total government expenditure relative to the budget estimates. The shortfall was particularly sharp in the budget support for the central plan, because of which the central plan outlay itself was 7.5 per cent lower than was estimated in the last year's budget. A whole range of sectors, agriculture, rural development, energy, social services, and industry and mines, witnessed declines in central plan outlay compared to the budget estimates.

What the current budget provides is an increase in the budgetary support for the central plan compared to the low revised figures for the last year. It does not provide a significant step-up compared to the last year's budget estimates. Not surprisingly, even the increase in the total central plan outlay is much less when compared to the last year's budget estimates than when compared to the revised estimates. In some sectors like agriculture and rural development, there is no increase at all between the budget estimates; in industry and mines there is even a decline. When we remember the fact that the last year's decline compared to the budget estimates was necessitated, inter alia, by a shortfall in tax revenue receipts, and that the same process of overestimating the revenue receipts has characterised the current budget as well, because of which a revenue shortfall is most likely to repeat itself in the current year as well, we can well expect a similar decline in the current year's plan outlays compared to the budgetary provisions. The current year too will then witness the same kind of expenditure compression as last year, with the same recessionary consequences that we have already seen last year.

These recessionary consequences will be further boosted by two other factors. One is the pattern of additional revenue mobilisation. The highest rate of revenue increase over last year's revised estimates is in union excise duties; the rate of increase in customs duties is much less, nearly half the figure for excise duties. This reliance on excise as opposed to customs duties is reflected in the fact that while the finance minister's proposals with regard to excise would garner an extra revenue of Rs 4,677 crore, his proposals on customs duties would entail a revenue loss of Rs 2,182 crore. Now, any shift away from customs to excise duties amounts to taxing the domestic producers more heavily than foreign producers. This would have a de-industrialising, and hence a recession-accentuating, effect on the economy.

The second factor is the burden imposed on the small-scale sector. The small-scale sector will be hit for at least two reasons: One, the dereservation of 14 items, including leather goods, toys and footwear. This would entail the encroachment by MNCs into areas hitherto reserved for small units, with implicitly de-industrialising consequences (owing to the higher import content on MNC products). Two, the withdrawal of excise duty exemption for the small-scale producers of cotton yarn. This would have adverse consequences not only for the producers of such yarn but also for its users, notably the garment manufacturers.

It is ironic, in view of the recessionary thrust of the budget, that Yashwant Sinha should claim for it a growth-orientation. The basic problem in the economy today is the deficiency of demand. A growth-oriented budget should have provided for a substantial increase in government expenditure, especially capital expenditure, as a means of injecting demand into the economy. This budget does nothing of the sort. In his eagerness to keep the level of the fiscal deficit low on the one hand and to avoid taxing the rich on the other (direct tax concessions in the budget entail a revenue loss of Rs 5,500 crore), the finance minister has compressed government expenditure, which makes for a recession-promoting rather than a growth-promoting budget.

Sinha's justification for being obsessed with the fiscal deficit (he has even placed before parliament a fiscal responsibility bill, putting a ceiling on the fiscal deficit) is fundamentally wrong. It states that the high real interest rates prevailing in the economy are caused by high fiscal deficits. Now, the country has been experiencing fiscal deficits for quite some time, much before the 1990s in fact, but the real interest rates moved steeply upwards only after the introduction of "liberalisation."

The reason is obvious: in a "liberalised regime" which institutionalises the freer flow of finance capital into and out of the economy, a higher real interest rate has to be offered as an inducement to rentiers, both domestic and foreign, not to take their capital out of the country, for, if they did, then this might develop into a veritable capital flight. To guard against such an eventuality, the monetary policy of the country willy-nilly has to be such that the real interest rate in the economy is sufficiently above what prevails abroad. "Liberalisation" therefore raises the real interest rate both in comparison with what prevailed earlier in the domestic economy and in comparison with what prevails in the metropolitan centres contemporaneously. It is not caused by the fiscal deficit, though it naturally aggravates the fiscal deficit, since debt-servicing by the government becomes more expensive. Sinha's argument mistakes the symptom for the cause, and prescribes as treatment the very factor that caused the disease in the first place, namely a further dose of "liberalisation" through a further "rolling back" of public investment and of the public sector. But such a "rolling back" can only make the demand constraint in the economy even tighter and hence contribute to a further aggravation of recession and unemployment.

The stipulation that employment in the government would be reduced annually by 2 per cent irrespective of social needs, and the freedom given to banks to undertake their own recruitment, which again would have a contractionary effect on employment even at the expense of the quality of service, underscore this phenomenon of "rolling back" and its consequences.

No amount of excise duty reductions on motor cars or soft drinks can offset the contractionary effects of "rolling back" public investment. Such reductions amount to no more than a transfer either to the manufacturers or to the affluent consumers of these commodities. The fact that the budget, while making such transfers, simultaneously raises the excise duties on a variety of essential items which hitherto attracted 8 per cent duty but would now attract 16 per cent, is indicative of its class-preference. It is the same class-preference that also accounts for the budget's parsimony towards old-age pensioners, of all people, whose pension amounts are to be linked henceforth to contributions made by them, even while direct tax concessions of Rs 5,500 crore are doled out to the affluent and the well-heeled. And it is the same class-preference that makes the government reduce interest rates on small savings and provident funds in the name of easing the fiscal crunch, even as it privatises lucrative public sector enterprises "for a song," with enormous adverse consequences for the future stream of government revenues.

The assault on the poor and the working people in this budget is a blatant manifestation of the government's class-prejudice. The deflation and "rolling back" of public expenditure in this budget is a blatant manifestation of its resolve that the interests of international finance have to be placed before those of the domestic economy. The privatisation of public sector units announced in this budget in the name of improving the government's fisc is a blatant piece of chicanery, since it is such privatisation of lucrative public units that actually bleeds the exchequer!