People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)

Vol. XXX

No. 10

March 05, 2006

The Budget And Neo-Liberalism  

Prabhat Patnaik


There was a time when the Union Budget was dominated by additional resource mobilisation measures. Even the structure of the budget document gave primacy to this issue. The document would give revenue estimates at the existing tax rates, which would be inadequate for meeting the proposed expenditure by the government; it would then outline its tax proposals for additional resource mobilisation and the fiscal deficit it proposed to have. The discussion on the budget would generally centre around the incidence of the additional resource mobilisation measures, the direction and magnitude of expenditures and the wisdom of the deficits.


Times are different now. In the 2006-07 budget there is hardly any net additional resource mobilisation worth the name, a meagre Rs 6000 crore. True, this meagre net addition consists of concessions to some and imposts on others, which, on the whole would have a regressive effect. For instance there is hardly any justification for lowering the excise duties on automobiles (and making each small car cheaper by as much as Rs 20,000) while the government is increasing the rate of service tax from 10 to 12 per cent with inflationary consequences for a wide range of social classes. Likewise making aerated drinks cheaper while increasing the cess on domestically produced petroleum crude, which will inevitably get passed on to consumers after a time lag and have significant direct and indirect (cost-push) effects even on the poor, can be scarcely defended.


But what is remarkable about the total picture is the minuscule net additional resource mobilisation. And yet gross tax revenue of the central government is supposed to increase by a whopping Rs 72,012 crore, or by 19.5 per cent over 2005-06 (RE). This is no flash in the pan: the rates of growth of gross tax revenue during the last four years, starting with 2002-03, have been, respectively, 15.6 per cent, 17.6 per cent, 19.9 per cent, and 21.4 per cent. And this has happened despite the fact that under the neo-liberal dispensation customs duties have been cut, excise duty increases have been consequently restrained, and tax concessions have been given to speculators and capitalists, both Indian and foreign, to improve the so-called “confidence of the investors” in the economy. Indeed for these reasons the tax-GDP ratio of the centre had declined in the nineties compared to what it had been in 1990-91. This decline however seems to have got reversed of late. The centre’s gross tax revenue-GDP ratio which stood at 9.2 per cent in 2003-04, increased to 9.8 in 2004-05, and 10.5 in 2005-06; it is supposed to reach 11.2 in the coming year. This has happened not because the finance ministers have gone in for any significant additional resource mobilisation but largely because revenues have simply fallen on their laps without their having to do anything, which has made the budget- making exercise so different from the old days. How has this reversal occurred?


The reason lies in the enormous increase in income inequalities that has occurred in the Indian economy during the neo-liberal years, increase that has actually been associated with an absolute immiserization of a vast segment of the population. Between 1993-04 and 2003-04 for instance the bottom 80 per cent of the rural population has witnessed an absolute decline in its per capita real expenditure. If this is the case when the real per capita income in the country as a whole has been rising at the rate of around 4 per cent per annum, then the extent of increase in income inequalities can be well-imagined. Putting it differently, there has been during the liberalization period a dramatic increase in the share of (pre-tax) surplus in (pre-tax) income in the Indian economy. Now, as long as the marginal rate of taxation on surplus is higher than the average tax-ratio for income as a whole, which is the case anyway, the rise in the share of surplus will automatically raise the tax-GDP ratio for any given set of tax rates, and yield revenues to the government without its having to make any special effort.


A point should be clarified here. To say that a unit addition to the surplus yields a larger tax revenue than a unit of income does on average, is not the same as saying that the rich pay a higher share of taxes out of their income than the poor. Consider the following example. Let income be 100 to start with, divided between 50 wage bill and 50 surplus. Suppose the tax burden on the wage bill is 10 (20 per cent) and on surplus 5 (10 per cent). Now if income rises to 120, with 50 wage bill and 70 surplus, and if at the margin 25 per cent of the surplus is taxed away at the going rates, then the tax revenue rises to 20 from 15 (5 extra tax coming out of the extra 20 of surplus), and the tax-income ratio to 16 2 / 3 per cent from 15 per cent. And yet even in the new situation wage earners pay 20 per cent of their income as tax compared to 14 2 / 7 per cent by surplus earners. All that matters is the ratio of taxation of surplus at the margin, compared to the average for all incomes. And the first of these is certainly higher than the second in India, as it is virtually everywhere. (The introduction of the service tax, even though it affects large segments of the people, has also contributed towards ensuring that taxation of surplus at the margin is higher than the average for income as a whole).


Prime Minister Manmohan Singh congratulated the revenue department for ensuring for the third consecutive year that the gross tax revenue increased at about 20 per cent per annum. But this increase has little to do with the revenue department, since the collection of arrears, where the government has made an effort, accounts for a small proportion of the revenue increase. In 2006-07 for instance when gross tax revenue is supposed to increase by 72012 crore, the contribution of arrears is only about 10000 cr. The real contribution comes from larger collections at existing tax rates and that is because of the rise in the share of surplus. It is this rise which is also responsible for the increase in the savings ratio in 2004-05 to 29.1 per cent, for which the finance minister ironically claimed credit! And it is this rise again which accounts for the fact that even without doing anything the government gets an increasing tax-GDP ratio.


In other words, the job of squeezing the people has already been done behind the scenes, b y processes not exclusively linked to the budget. The budget only gets a fraction of the loot even without doing anything particular, and claims credit for it. In a situation where the people are being drastically squeezed, the Finance Minister, if he was serious about the humane pronouncements of the NCMP, should have raised additional resources from the rich and spent these for the welfare of the poor. But he has not touched the rich. The revenue increase he expects comes largely at the existing tax rates without much effort on his part; and even out of this increase what goes to the poor is a woefully inadequate amount, which appears impressive in some areas only because of the arithmetical quirk that starting from a low base exaggerates per centage increases.


Just consider the situation he is in. He gets 72012 crore of additional gross tax revenue with little effort, of which 53066 comes to the centre. The net interest payments (that is payments minus receipts) which he has to make  increase by only 10 per cent, i.e. around 10,000 cr., thanks to a lowering of interest rates on government borrowings and an off-loading of borrowing obligations to the states. Defence expenditure, which normally takes another large chunk, increases by only 7 per cent, i.e. 6000 cr. He therefore is in an excellent position to give a big boost to capital and welfare expenditures by going in for additional resource mobilisation as was suggested in the Left proposals. Instead consider what he does.


On rural employment programmes the increase is only 10 per cent in nominal terms, from 11700 to 12870 cr. (excluding the NER component). While the National Rural Employment Guarantee Scheme comes into being, the Food-for-Work programme disappears, and the Sampoorna Grameen Rozgar Yojana experiences a drastic cut. A major purpose of NREG was to inject purchasing power into the hands of the rural poor, but if NREG only substitutes existing programmes then this purpose has been defeated. To be sure, there is a guarantee element in NREG but since it becomes effective all over the country only over a period of time, there is very little change in the de facto situation. Even in the matter of NREG therefore there is a reneging on the promise made in the NCMP.


On food subsidy the provision is 24200 cr., compared to 26200 cr. earmarked in last year’s budget and 23200 cr. spent according to RE for last year. There is in short hardly any increase at all. Now, food subsidy is nothing else but the operational loss of the FCI. The reason food subsidy had come down last year compared to the BE is because of the running down of stocks (which meant lower stock-holding costs for the FCI). These low stocks are in fact the reason cited by the government for going in for imports now. In the coming year the stocks are not going to remain as low as they recently have been. Pegging the food subsidy at last year’s level therefore presumes either that FCI operations will be scaled down, or that food prices will be raised (a move the government started but could not carry through because of opposition). At any rate no expansion in PDS is obviously being visualized. Now, if the government was serious about employment guarantee then it should have planned for an expansion in PDS: the additional purchasing power in the hands of the newly employed, after all, would be spent partly on food for which the PDS should be prepared. But the fact that no PDS expansion is visualized, together with the fact that no increased allocation for rural employment is made, suggests that the whole scheme, started with such fanfare, is being given a quiet burial.    


The increases in education and health are woefully inadequate. Whether it is ICDS or National Rural Health Mission, the absolute increases are paltry. Likewise in education where the increase in Central Plan Outlay amounts to about 4700 cr., an apparently impressive figure, the NCMP itself has a target of increase far in excess of it. If we take the eight flagship programmes the increase in allocation by 15088 cr. to 50015 cr. appears impressive but is actually deceptive. Apart from the fact that some of these schemes are funded by foreign agencies, like Sarva Shiksha Abhiyan by DFID,  the decrease in other expenditures for which these flagship schemes are substitutes must also be taken into account, as we have already seen in the case of the NREG. Indeed if we just replace the total amount to be spent on NREG by the additional amount provided for rural employment in our calculation of the provision for the “flagship programmes”, then the increase comes to only 3388 crores, which is less than a 10 per cent increase in nominal terms. The finance minister has been extremely disingenuous in conveying the impression that he has raised social sector outlays, as reflected in the “flagship programmes”, by 43.2 per cent.


Agriculture of course is an area largely meant for state government action, but even such steps as the centre could take have not been taken. The lowering of short term interest rate to 7 per cent is still nowhere near the 4 per cent rate suggested by the Swaminathan Commission. The refusal to raise the import duty on raw cotton despite even Congress chief ministers demanding it is indefensible. And not implementing the Swaminathan Commission’s recommendations with regard to the extension of crop insurance to all regions and crops, and the setting up of a Price Stabilisation Fund is inexplicable. What is more, even the initiative in lowering interest rate and extending credit would not serve the purpose unless the banking system comes directly into contact with the farmers, which banks are increasingly unwilling to do under the new dispensation. Rural branches are being closed down and many banks, the ICICI bank being a prominent example, are now openly operating through middlemen. Bank credit to agriculture in other words is now being channelled through a new class of middlemen who are no different from the moneylenders of yore. Unless banks are directed to open branches in rural areas and contact farmers directly the credit and interest rate provisions of the budget will only benefit the intermediary class of new moneylenders. Putting it differently, unlike in the Bank Nationalization era when the entire ethos was for banks to reach out to the villages, the current ethos is to withdraw from them. Apparently well-meaning measures in this neo-liberal ethos therefore have little impact in arresting the agrarian crisis.


If the budget has little to offer in crucial areas like agriculture and employment, it does carry liberalization forward in the financial sector. Allowing banks to offer government securities for sale and allowing FIIs to buy up government securities to a larger extent than hitherto is a way of putting lucrative assets in the hands of foreign speculators.  If this trend continues then a day will come when the state of public finances in the country will become dependent on the caprices of international speculators, since how much money the government can raise and at what rate will then be determined by the “state of the market”. Likewise allowing mutual funds to invest abroad is not only unwarranted in an economy which, according to the government itself, is short of resources (the argument for unrolling a red carpet for MNCs), but increases volatility.


Three other areas where the neo-liberal agenda has cast its sinister shadow are: first, the reduction in peak customs duty on non-agricultural products from 15 to 12.5 per cent which would affect small producers and cause job losses. Citing the East Asian example here is beside the point since those economies make extensive use of non-tariff barriers. Secondly, the de-reservation of 180 items would also have an adverse effect on the genuinely small producers and contribute to job losses. And finally, there is a cut in the grant component of the Normal Central Assistance Under Plan Grants and Loans to state governments. Against the budgetary provision of Rs.13541.28 cr. in 2005-06 as the grant component, the revised estimates already show a reduction, to 12044.23 cr. The budgetary provision this year has been further cut, to 10916.61 cr. It may be recalled that a part of the loan component of the Central assistance to states had been off-loaded from the budget last year, so that state governments had to fend for themselves in the market. With the cut in the grant component this year we have even greater pressure on the state governments to approach the financial market, or, worse still, to approach agencies like the World Bank and ADB, which, apart from increasing the stranglehold of these agencies on the Indian economy, would contribute to a fracturing of the nation, as states vie with one another to curry favour with them and to meet their “conditionalities”.

This budget has more than the usual quota of tall claims and deceptions. What stands out in particular is the gap between what could have been done and what has been.