People's Democracy

 BUDGET 2005-06: MARKING TIME

Prabhat Patnaik 

THE rhetoric of the 2005-06 budget certainly shows a welcome change from earlier. Previous budget speeches had been pre-occupied with showing the need for neo-liberal reforms and how the particular budget being presented was carrying forward that process. The 2005-06 budget by contrast talks of the rural sector, employment generation, the revival of the agricultural sector, infrastructure, public investment and social sector expenditure. And it also makes certain provisions in these directions. These to be sure are far short of what the Left had asked for in its Memorandum submitted to the finance minister, but there is no gainsaying that the Memorandum appears to have left an imprint on the budget.

At the same time however this budget does not provide an occasion for celebration. It does not mark any change of course away from neo-liberal reforms. On the contrary many of its suggestions like opening up the mining and pension sectors to direct foreign investment, encouraging crop diversification at the expense of foodgrain self-sufficiency, dismantling the existing foodgrain procurement mechanism in the name of “decentralising” it, the reductions in customs duties on a range of capital goods, not to mention the significant cut in corporate income tax rate from 35 to 30 per cent on domestic capitalists, are all measures prompted by the neo-liberal outlook which have serious adverse implications for the economy. And when one adds to this the pronouncements of the Economic Survey on capital account convertibility and on "labour market reforms" (which mean in effect the wholesale institutionalisation of the right to retrench), the recent pronouncements of the prime minister virtually endorsing the "India Shining" slogan of Mr Advani ("The sceptics of Reforms have been proven wrong"), and the announcement of 100 per cent permission for direct foreign investment in the construction sector through the "automatic route", it is clear that no change of course is being contemplated. Indeed let alone a change of course, we cannot even be sure that the promised relief to the poor, notwithstanding its comparative meagreness, would actually be implemented. This is because the budgetary arithmetic is quite clearly and quite seriously flawed.

ILLUSIONARY INCREASE IN RURAL DEVELOPMENT OUTLAY 

The first thing to note is that the budget's contribution to the Central Plan, which is supposed to go up in the aggregate from Rs 82529 crore in 2004-05 (RE) to Rs 110385 crore in 2005-06, shows an increase from Rs 8589 crore to Rs 11 494 crore under rural development (under which employment programmes fall). But the actual figure for 2002-03 was Rs 11939 crore and for 2003-04 Rs 11369 crore. In short, the budget support for rural development which had gone down last year is being raised back to the level that had prevailed in the preceding two years (which straddled a drought that forced even the NDA to enlarge employment programmes). The increase therefore is not much to write home about. True, the increases under social services which include education and health are more substantial, as is the overall increase, but the view that the budget constitutes a major step towards expanding rural employment is untenable.

Let us, for argument's sake however, forget about budget support as such. Let us just look at the total outlays. Here we find that the total Central Plan outlay on the Department of Rural Development is supposed to increase from Rs 13866 crore in 04-05 (RE) to Rs 18334 crore, and within this the total outlay on rural employment from Rs 6408 crore to Rs 9000 crore (The finance minister in his speech mentions a much larger figure but we shall come to that later). This however is composed of two elements: an increase of Rs 3582 crore under the Food-For-Work programme (FFW) and a decrease of Rs 990 crore under the Sampoorna Grameen Rozgar Yojana (SGRY). Since FFW covers only 150 districts, the conclusion is inescapable that the government is scaling down employment programmes in the remaining districts of the country to accommodate FFW, which is a disturbing retreat from universality to district-wise targeting.

The finance minister of course can cite one extenuating factor, namely that in the Expenditure Budget the foodgrain component is not included, unlike in earlier years, and if the foodgrain component is included then the FFW expenditure comes to Rs 11000 crore, the figure he gave in his speech (as opposed to Rs 5400 crore as given in the Expenditure Budget). But then it is not clear why the foodgrain component is excluded from the budget and what it means in terms of the real provision of foodgrains. In any case the argument about the implict narrowing of the Employment Programme through the backdoor introduction of district-wise targeting remains valid.

UNTENABLE PROPOSAL

What is immediately intriguing about the budget is the fact that the finance minister appears to have given out substantial tax concessions all around and yet managed to increase the Gross Budget Support for the Plan by 16.9 per cent over the previous year (BE to BE), and the Budget Support for the Central Plan by 25.6 per cent, even while ensuring a marginal reduction in the fiscal deficit to 4.3 per cent of the GDP. For a government that till the other day kept asking "Where is the money?" when any worthwhile proposal was mooted, including a universal EGA as promised in the CMP itself, this is a remarkable turnaround. Suddenly there seems to be an abundance of resources available for being doled out. How has the finance minister answered the question which he himself, not to mention the prime minister, has been in the habit of asking of late: “Where is the money?” The simple answer is: through substantial "window dressing", both in the matter of the expected tax revenue and in the matter of the expected fiscal deficit.

With the reduction in corporate tax rate, with the removal of a large number of service providers from the purview of the service tax, with the lightening of the income tax burden, with the reduction in customs duties on a large number of items, especially capital goods, and with significant concessions in the excise duties on several items, the finance minister's claim that his indirect tax proposals would be broadly revenue neutral and that his direct tax proposals would garner Rs 6000 crore extra appears entirely untenable, notwithstanding the 50 paise cess on petrol and diesel (on which more later) and the slightly heavier taxation on cigarettes, gutka etc. But let us take his word on this. Even then the tax revenue calculations appear grossly unrealistic.

Even if we assume a nine per cent growth in real terms of the non-agricultural sector during 2005-06, and a six per cent rate of inflation, the nominal growth rate of this sector comes to 15 per cent. At existing tax rates the total tax revenue cannot be expected to increase at a rate much higher than this. Since we are taking the finance minister's word that additional tax revenue mobilisation is a small Rs 6000 crore it follows that total tax revenue should increase at around 15 per cent. Instead we find an expected tax revenue increase, compared to 2004-05 (RE), of 21 per cent. This is a gross overestimate, much like what was made in the last year's budget, because of which last year's tax revenue receipts show a shortfall of Rs 11000 crore in the RE compared to the BE. A similar shortfall is bound to arise in the current year as well. When we add to this the fact that the finance minister's claim of revenue neutrality of his indirect proposals and of a small net gain from his direct tax proposals is quite untenable and that notable tax revenue losses are likely on both fronts, it is clear that the shortfall may be even larger.         

This would not matter so much if the government's hands were not tied by the Fiscal Responsibility and Budgetary Management Act, an utterly silly piece of legislation supported alike by the Congress and the BJP, according to which in the event of the fiscal deficit during any year exceeding a certain threshold the government is duty-bound to cut back expenditures. While the finance minister has liberated himself from its yoke when it comes to the overall fiscal deficit figure, as long as the Act is on the statute books he is bound by this "during-the-year" rule. Hence if tax revenues show greater sluggishness than anticipated in the budget, the expenditure targets would not be met, in which case even the budgeted increases on the social sector and rural development would not be realised.

OFF-LOADING FISCAL DEFICIT

The second area of 'window-dressing' is with reference to the fiscal deficit. There is a substantial "off-loading" of borrowing from the budget to off-budget entities. At least three deserve mention. The first is state governments. The Budget documents show what at first glance appears a rather surprising reduction in total capital expenditure, and correspondingly in the Gross Budgetary Support (GBS) for the Plan. Plan Expenditure for instance falls from Rs 145590 crore last year to Rs 143497 crore this year (BE to BE). The finance minister however claimed that the GBS (on a comparable definition to what was used earlier) would be Rs 172500 crore for 2005-06. The reason for this discrepancy lies in the fact that following the Twelfth Finance Commission's report, state governments would be borrowing around Rs 29000 crore for their Plans from the market. Earlier the centre would have borrowed this amount and handed it to the states, but now the states themselves would have to go the market.

This represents of course an off-loading of the fiscal deficit from the centre to the states. In addition it is fraught with potentially serious consequences. States may not be able to get the loans at reasonable terms, especially in these financially "liberal" times (when even the captive market for government and government-approved securities provided by the Statutory Liquidity Ratio is being abandoned according to this year's budget); some states may not be able to raise their loan requirements from the market at all. True, the Centre which earlier had the sole prerogative of market borrowing charged the States exorbitant rates on the loan proceeds it made available to them; but the solution to that lies in regulating the rate at which the centre can lend to the states (pegging it for instance at certain fixed percentage points below the average nominal growth rate of the GDP) rather than having the states borrow directly from the market which could even be a prelude to the fracturing of the nation's unity (if states started borrowing freely from international agencies).

The second instance of implicit off-loading of the fiscal deficit is with regard to the Infrastructure Development Fund, whose capital of Rs 10000 crore, which is supposed to provide "bridge finance" for infrastructure projects that are remunerative economically but not financially, is not provided for in the budget. Instead of borrowing directly the government in other words making an agency set up by itself do the borrowing. This borrowing, being off-budget, is not shown as part of the fiscal deficit.

The third instance is what has already been referred to above, namely the absence of any reference to the food component of the Employment Programmes in the budget documents. The five million tonnes which the finance minister has promised as the food component of the FFW and which does not figure in the budget will obviously be loaned by the FCI to the FFW programme. A part of the fiscal deficit in other words would have been shifted out of the budget. Putting it differently the actual fiscal deficit generated by the budgetary provisions is much larger than what appears in the documents.

REDUCTION IN CORPORATE TAX

One cannot fault this in principle. On the contrary it only confirms the point that the FRBM Act which forces the government to do such "off-loading" of the fiscal deficit away from the budget to other government organisations is an absurdity which even people like Chidambaram have come to realise. But in this particular case there are two concrete considerations that militate against this practice. The first is that such "off-loading" may, given the general neo-liberal ethos, jeopardise the future of the agencies on to whose shoulders the deficit is being off-loaded or have other harmful consequences. A reference has already been made to the possibility that off-loading the fiscal deficit onto the shoulders of the State governments could turn them into proteges of agencies like the ADB and the World Bank (which some of them are already in the process of becoming) with dangerous consequences for national integrity. Likewise if the FCI's giving loans to the FFW programme increases its deficit (which is covered through the food subsidy), then in the name of cutting the food subsidy the same government might decide one day to wind up the FCI. In other words, enlarging the fiscal deficit whether directly through the budget or through other government agencies is fine provided a consistent approach of defending the government agencies is simultaneously adopted. But, of this there is no sign.

Secondly, while enlarging the fiscal deficit for incurring larger expenditure is fine, there is no justification whatsoever for doing so together with a reduction in corporate income taxation. The argument that some parity has to be established between personal income taxation and corporate income taxation has no basis whatsoever. Hence the argument that since the highest rate of personal income tax is 30 per cent, the rate of corporate income tax must also be reduced to 30 per cent from the current 35 per cent lacks substance.

TAX CONCESSIONS LACK JUSTIFICATION

Indeed most of the tax concessions given in the budget lack any justification. There is no reason why the scope of the service tax should be cut down from its existing level. There is no reason why import duties should be reduced on a variety of capital goods: while it would have a scarcely noticeable effect on the overall investment, it would act to the detriment of the domestic capital goods producers, causing a degree of de-industrialisation in this sector. (Such de-industrialisation would also follow from the dereservation of a number of items hitherto reserved for the small-scale sector). Likewise, there is no reason for reducing the excise duties on a variety of luxury goods like air-conditioners. And the reduction in import tariffs on a range of agricultural goods is precisely the opposite of what the government should be doing if it wished to undo the damage done to this sector by neo-liberalism. Even experts like M S Swaminathan have been arguing that agriculture cannot be treated like any other sector in the matter of protection since the livelihood of millions of peasants and labourers who have nowhere else to go depends upon it. The budget alas pays scant heed to such sage advice.

While these tax concessions are being given, the imposition of a cess of 50 paise per litre on petrol and diesel can hardly be justified, especially as it comes on top of price-hikes decreed very recently on these commodities. Indeed whatever little relief that the people might have derived from the reductions in import and excise duties on kerosene and LPG would be offset to a significant extent by this cess. In the case of petrol the net revenue raising effect is much less than what appears at first sight since the government is a major consumer of the commodity. In the case of diesel, any price hike jacks up transport costs and has an across-the-board inflationary impact which would hurt the people.

FINANCIAL LIBERALISATION

Two suggestions thrown out in the budget are a source of disquiet. The first relates to the banking sector where the bounds on the Statutory Liquidity Ratio and the Cash Reserve Ratio are sought to be removed and the Reserve Bank is to be made free to prescribe such prudential norms as it deems fit. This entails giving greater autonomy to the RBI and making banks free in their portfolio choice which would enable them to speculate more freely. Both these, like the earlier pronouncement regarding making the management of public sector banks more autonomous, are measures of financial liberalisation which would have disastrous consequences for the economy. The fact that the finance minister who talks of giving more credit to agriculture in one breath, advocates financial liberalisation in the next, only shows the lack of seriousness with regard the first objective. Moreover, nothing has been done in the budget either to curb FII operations on the stock market which even the RBI governor in an unguarded moment had asked for, or even to undo the anomaly caused last year by Mr Chidambaram's rolling back of both the stock market transactions tax and the capital gains tax. And to cap it all he has even suggested that trade in derivatives is not to be treated as speculative, when almost by definition it is.

Even while doing precious little to curb financial speculation, and if anything adding to speculative tendencies in this sphere, the budget makes some ritual noises against black money: the 0.1 per cent tax on cash withdrawals from banks is neither appropriate nor significant for tackling black money.

UNDESIRABLE FDI

The second disquieting suggestion relates to the entry of foreign direct investment into mining and pension funds. As regards mining, the argument against FDI is obvious. Indeed, as Joan Robinson, the well-known Cambridge economist had once remarked, of all the different terrains of FDI involvement, the mining sector is the worst, since minerals are an exhaustible resource. The MNCs extract the mineral, ship the surplus back home, and leave when the mine gets exhausted. But when that happens, the country is left high and dry, with no more mineral resource left. The case of Myanmar illustrates the point. At one time its oil wealth attracted much foreign investment (Burma-Shell), and it experienced for a brief period an enormous boom, when oil extraction was going on. But today, with its oil wealth exhausted, it is one of the forty "least developed" countries in the world. There is absolutely no argument whatsoever for inducting MNCs into the mining sector.

In the case of pension funds, it is sometimes argued that FDI in this sector would fetch higher rates of return for the pensioners, so that any opposition to FDI in this sector is only ideological and hurts the interests of the pensioners. Even if we take this argument in itself, i.e. even if we leave aside the macro-economic implications of entrusting a part of the country's savings to a bunch of multinational corporations, it is not the case that the pensioners would be better off if their funds are managed by MNCs. The reason is simple: in India the level of political empowerment of the people is far greater than the level of their effective legal empowerment. They can agitate against the government and force the latter to listen to them, but, as the Bhopal Gas Tragedy victims' case shows, they cannot fight a successful legal battle against an MNC, certainly not within a limited period (as is necessary in the case of pensioners). Pension funds therefore are best managed by the government and must not be entrusted to MNCs. Doing so is an act of disempowerment of the pensioners, which no promise of higher returns can offset.

The fact that such patently neo-liberal measures are being contemplated by a finance minister who has ostensibly shown concern for the poor, only demonstrates that this budget is an attempt to please all, the MNCs, the corporate sector, the salariat and, to an extent, the poor and those who speak for them. Such a "please-all" budget can only be based on a degree of arithmetical jugglery and hence can only be a transitory phenomenon. Or putting it differently, this budget does not mark the ushering in of a "growth-with-equity" trajectory, or of "liberalisation with a human face", as some newspapers have claimed. It is impossible to combine liberalisation with a human face, because of the immanent logic of liberalisation. This budget rather represents marking time, a small tactical adjustment, in the form of a pause in the march along a neo-liberal path. But just as a tactical retreat does not represent an equilibrium situation, this pause should not be confused for a new trajectory of "liberalisation with a human face". This retreat has been necessitated by the relentless pressure of the Left. The Left has to continue exerting, and indeed intensifying, that pressure against the pursuit of the neo-liberal trajectory.