People's Democracy

THE central government Budget for 2002-03 has already been criticised by different sections of the population for the taxes it imposes, the concessions it withdraws, the giveaways it fails to deliver and for its overall lack of direction. But there are definite reasons for the government’s acts of commission and omission, which stem from the overall economic strategy and the political economy which has governed it in the past decade.

For once, this Budget has been greeted with disappointment by the corporate sector and the middle classes, quite apart from the adverse effects on poorer sections which have become a trademark of Yashwant Sinha’s budgets. The adverse response of industry and finance is therefore combined with resentment among sections adversely affected by the surcharge on income taxes, reduced tax concessions for savings, higher LPG and kerosene prices, hiked sugar prices, enhanced postal and rail tariffs and increased excise duties on items of mass consumption.

The finance minister’s track record, made it unlikely that measures in this Budget would take the obvious and necessary measures to revive the economy. Such measures would involve increasing expenditure on public investment, as well as a massive food for work programme to create employment and build infrastructure. Many economists have been arguing for such measures for some time, and recently even industrialists have pointed to the need for increasing public spending

to revive the economy.

While the finance minister has chosen to avoid such desirable measures, it has not presented any alternative design to help the economy out of its current stagnation. The Budget that has just been presented is quite remarkable in the complete lack of imagination and direction that it displays. There is nothing in the Budget to address the pressing problems of economic stagnation, industrial recession and rural distress. Capital spending will actually be reduced in real terms and employment schemes have been increased only by a tiny amount, which means next to nothing in the current context. More significantly, import tariffs have been lowered once again, even though the threat of cheaper imports has already contributed to the problems currently being faced by Indian producers. The decline in tariff on capital goods will hit hard an industry which is already in the throes of major recession.

The extent of mismanagement of the economy is particularly evident in the huge shortfall in tax collection over the previous year, which has been revealed by the finance minister. Total tax collection in 2001-02 was Rs 30,000 crore less than anticipated in last year’s Budget. Of this

shortfall, Rs 10,000 is the amount which would have been transferred to the state governments. This means that the state governments were effectively denied a large amount of revenue, which has added to their fiscal problems. It is amazing that the same central government which is directly responsible for the decline in revenues of the state governments, should dare to lecture the states about fiscal responsibility. In fact, a major chunk of statutory central transfers are now being linked to the willingness of the states to implement neo-liberal reform. After putting the states in a fiscal bind through its own policies, the BJP government is now using what are constitutionally warranted transfers to impose its own failed economic ideology on the state governments. This effort to impose deflationary and contractionary policies that are generating a crisis at the central level on state governments as well is a sure means of widening and intensifying the crisis facing the economy today.

The shortfall in gross tax revenues over the current year has occurred in all major taxes (corporation and income taxes and customs and excise duties). However, there were significant differences in the extent of the shortfall, which amounted to 9 per cent in the case of excise, 12 per cent in the case of income tax, 15 per cent in the case of corporation tax and a huge 21 per cent in the case of customs tariffs. As a result of the last of these, customs duties collected in 2001-02 were 9 per cent less than actual collections in 2001-02.

The shortfall in revenues has meant that the post-liberalisation trend of a decline and subsequent stagnation of the tax-GDP ratio has persisted. Combined with the government’s obsession to keep the deficit under control, irrespective of the supply situation in the economy, and despite the government’s accelerated effort to garner resources from disinvestments, this has substantially reduced its ability to stimulate the economy. In years of recession this contributes to a worsening of the fiscal position of the government.

In fact, the differentials in the extent of the revenue shortfall in the case of different taxes do suggest that the shortfalls in revenue generation in 2001-02 occurred because of a combination of reduced tax rates and the industrial recession. It is known that over the liberalisation years the area in which the most substantial reductions have been made in taxes is customs duties. It was presumed that these reductions would be accompanied by a burgeoning of trade, resulting in increased rather than decreased customs revenues. The huge shortfall in customs duty collections shows that duty reduction was not accompanied by an increase in trade volumes, as was expected. Since trade growth also slowed down for external reasons, tax collections collapsed.

In the coming year the government has decided to resort to a range of imposts which put together seems to have no driving perspective other than increasing revenues through any means possible. The government has budgeted for a Rs 39107 crore increase in tax revenues. Since revenues from Customs duties are expected to rise by just Rs 2000 crore from their depressed 2001-02 levels, the burden must be imposed through other means. The structure of that burden is disconcerting indeed. While corporation taxes are expected to contribute only an additional Rs 9,500 crore, taxes on income are budgeted to garner an additional Rs 8,000 crore and excise duties a huge Rs 17,000 crore.

But even this increased burden of taxation is unlikely to resolve the problem of revenue shortfall that the government confronted in 2001-02. Last year, the government expected to mobilise an additional Rs 38,000 crore by way of tax revenues in 2001-02 but actually garnered only an additional Rs 8,000 crore. Yet this time around, with nominal GDP growth expected to be even lower (at 10.7 per cent compared to 10.9 per cent in the current year), it has budgeted for an increase in revenues of Rs 39,107 crore. But this year’s tax shortfall was not just the effect of accumulated giveaways, it was also the result of the slump in demand and growth.

It is here that the fact that the government has missed an opportunity in 2001-02, and threatens to do so in 2002-03 as well, is of relevance. Budget 2002-03 exposes the complete paralysis in economic policy-making that characterises the BJP-led government. That paralysis stems from two sources, which together have trapped the government in a crisis of its own making. The first of these is the collapse in the revenue-generating capacity of the central government discussed above. The second, is the persistence of a high interest burden resulting from the decision taken as part of economic reform to borrow from the open market at higher rates of interest than charged by the Reserve Bank of India.

When combined with the goal of limiting the fiscal deficit, these trends have resulted in a loss in its room for manoeuvre. This has meant that despite the steep recession in the industrial sector, evidence of the persistence of a high incidence of poverty and the rising levels of unemployment and under-employment, the government has not been able to provide any thrust in the budget for restoration of growth and improvement in the welfare of the common people.

This paralysis is indeed shocking because economic circumstances are such that they provide the government with a major opportunity. Food stocks touched record levels of more than 60 million tonnes, foreign exchange reserves are comfortable and inflation rules at an all time low. These circumstances demand that the government should use the food stocks it has at hand to launch a massive food-for-work programme aimed at strengthening rural and urban infrastructure, with the complementary rupee resources required financed with an expanded deficit. This, given the easy supply situation would not result in inflation, but in an expansion of output and employment and a concomitant reduction in rural and urban poverty. Further, in as much as the recession is partly responsible for the collapse in revenue generation, as the finance minister himself admits, the recovery in growth would lead to an increase in revenues that would help sustain the investment thrust.

So far, effort along the food-for-work front has been meagre. The expenditure on rural employment was raised by Rs 1300 crore in 2001-02, by introducing a food component of just Rs 800 crore. And the budget figures for 2002-03 expect to raise these expenditures by just Rs 371 crore. That this is a minimal use of the foodstock should be clear from the fact that stocks with the government are valued in excess of Rs 50,000 crore. Meanwhile, the cost of carrying these stocks has increased the subsidy bill of the government substantially, from Rs 12125 crore in 2000-01 to Rs 17,612 crore in 2001-02 and a budgeted Rs 21,200 crore in 2002-03. The government could have saved much on these subsidies by diverting stocks to a food-for-work programme, which would have helped build rural infrastructure and spur growth.

But since it is paralysed by its internalisation of the obsession with the size of the fiscal deficit, the BJP-led government has chosen to forsake this opportunity. Instead, it appears to be using the fact of persistent large foodstocks to launch an attack on the farming community, by threatening to reduce and eventually eliminate the system of public food procurement and distribution.

Thus it is not just that the budget misses a major opportunity to spur growth in a slowing economy, but it imposes or seeks to impose new burdens on those most affected by the global and domestic slowdown.