People's Democracy

A Budget In Times Of Inflation

Prabhat Patnaik

AN unprecedented inflationary episode constitutes the context for the 2007-08 budget. It is unprecedented not just in the sense that the rate of price rise is higher than in the past several years, but also in the sense that the basic cause of this price rise is a shortage of essential commodities relative to demand. This inflation in other words is what is called “demand-pull” rather than “cost-push”. In the era of liberalisation, inflation generally tends to be “cost-push” rather than “demand-pull”, since the compression of public expenditure, arising from a combination of tax cuts for the rich and caps on fiscal deficits, which invariably accompanies neo-liberal economic policy, tends to keep demand restricted. The present episode therefore marks a departure. It has arisen because the compression of government expenditure, especially investment, also affects the supply side; together with reduced government support for the petty producers, it has so constrained the rate of growth of essential commodities, that, even with demand compression, there is still a situation of excess demand.

Since excess demand raises prices while the money wages/earnings of millions of working people remain fixed, such inflation necessarily raises the share of surplus in total output, at the expense of wages, salaries and the incomes of the self-employed. It yields, in short, a bonanza to the propertied rich. Even the English liberal economist J M Keynes had talked of the “booty” that such inflation placed in the lap of the capitalists. On the other hand it squeezes the real incomes of the toiling masses, forcing them to consume less, so that the excess demand can thereby be eliminated. This forced reduction of consumption on their part is called “forced savings”. These are squeezed out of them by “demand-pull” inflation. And the squeeze can sometimes be so severe that it gives rise to famine, as in 1943 in Bengal.

Any budget presented in the context of such inflation therefore must have at least two basic objectives: first, to alleviate the squeeze on the toiling people by curbing excess demand in some other way, such as rationing at fixed prices, or by redistributing the squeeze through a fiscal redistribution of purchasing power; and secondly, to take away the “booty” from the laps of the capitalists, so that they are prevented from getting fattened by peoples’ misery.

On both these counts, the 2007-08 budget is a failure. One would have expected in this budget an expansion of the public distribution system at “fair” prices to insulate the people from inflation. But that has not happened. On the contrary, the magnitude of food subsidy, which is an indicator of the scope of the PDS, is supposed to increase by only 6.2 per cent in nominal terms, which is even below the rate of inflation (suggesting if anything a shrinking of the PDS volume). Likewise one would have expected an increase in the scope of the various employment programmes which put purchasing power in the hands of the rural poor. What we have instead, on the contrary, is an increase in the nominal outlay for rural employment generation programmes by a paltry 3.5 per cent, well below the inflation rate of close to 7 per cent, which suggests reduced real outlay. The NREGS may have got extended to 330 districts from the original 200, but the outlay on it has increased from Rs 11,300 crore to Rs 12,000 crore, i.e. by 6.2 per cent, which means a reduction in real terms. This budget does nothing to alleviate the impact of inflation on the people; on the contrary it appears to reduce whatever succour the people were getting from the government.

PM’s CLAIMS & THE REALITY

Manmohan Singh, in an interview after the budget, underlined two features of it that he claimed were anti-inflationary: one, the array of customs and excise duty cuts; and two, the emphasis on agriculture which he argued was crucial for supply management. Let us take the second claim first. While the budget talks a lot about agriculture, it carefully avoids the core issue, namely the provision of price support to farmers at a remunerative level. All talk of improving yields, of watershed management, of offering bank credit, means little until the farmers find agriculture remunerative enough to make use of these opportunities. They have to be first made viable before they can turn their attention to upgrading their technology. But the finance minister does not say a word on it, even though he should have learnt in the aftermath of the prime minister’s “Vidarbha Package” that no amount of credit support or irrigation development plans can alleviate the agrarian crisis, or even end the tragic saga of suicides, unless remunerative prices are assured to the farmers.

As regards the first claim, the reduction in customs and excise duties effected in the budget contributes little towards bringing down the prices of essential commodities. The current inflation is caused mainly by a rise in the prices of the primary articles, rather than of manufactured goods. In fact the all-commodities price index on February 10, 2007, was 6.63 per cent above the level a year ago; the rates for manufactured goods and for primary articles were 6.43 per cent and 11.52 per cent respectively. Of course, some customs duty reductions, e.g. for edible oils, would act in an anti-inflationary direction, but, while doing so, they would also lower the prices for the farmers, and hence undermine the government’s medium term supply management strategy (Manmohan Singh’s first claim).

ILLICIT GAINS FROM INFLATION

Let us now examine the degree to which the budget takes away the “booty” from the laps of the capitalists. Since the surplus rises faster than GDP at current prices during inflation (because of the “booty”), taking away the “booty” would require that the tax revenue accruing from the surplus must rise even faster than the surplus itself. For instance if initially pre-tax surplus was 50 out of an income of 100 and tax on surplus was 10, then, if surplus rises to 65 out of an income of 120 (i.e. its share increases), then to keep the same ratio of post-tax surplus (i.e. 40 per cent of income) as before, the tax from surplus must rise to 17. Against a rise in surplus of 30 per cent in other words (from 50 to 65) we must have a rise in the tax on surplus by 70 per cent (from 10 to 17). Since income has risen by only 20 per cent, the tax on surplus must rise even faster relative to income. 

All this however is a far cry from Chidambaram’s budget. Let us just take one example, the corporate tax. The revenue from corporate tax is supposed to increase in 2007-08 by 15 per cent, over the revised estimates for 2006-07. Since the GDP in current prices is expected to rise by about 16 per cent, consisting of around 9 per cent growth in real GDP and around 7 per cent rise in prices, it follows that the share of corporate tax revenue in GDP is expected to decline. More generally, in a period of inflation, if the government wants to prevent illicit enrichment, i.e. take away the “booty”, then its tax revenue must show a significant rise relative to GDP. But Chidambaram’s budget does not do so. The rise in gross tax revenue in 2007-08 over 2006-07 (RE) is a mere 17 per cent, hardly any higher than the growth rate of GDP. And this includes the additional educational cess of 1 per cent (over and above the 2 per cent levied earlier), which is at a flat rate on all taxes and represents no taxation of surplus. It follows then that Chidambaram’s budget neither insulates the people against inflation, nor takes any meaningful steps for controlling it, nor even makes any attempt to tax away the illicit gains from inflation of those who make such gains. The only meaningful measure which it adopts against inflation is the ban on forward trading of wheat and rice. Forward trading was introduced out of a faith in free markets, out of a belief that the speculation that typically plagues free markets is no cause for concern, since it is price-stabilising rather than price-destabilising. While the loss of faith in free markets, revealed by the ban on forward trading, is welcome, the ban itself may not have much effect on the inflationary situation as a whole.

NOT ADDRESSING BASIC ISSUES

Chidambaram’s budget is really just a set of projections, rather than any meaningful intervention. Since the nominal GDP is expected to grow at around 16 per cent, almost all variables are also projected to grow at rates of 16 to 18 per cent. The gross tax revenue, we saw, is supposed to grow at 17 per cent. States’ share of taxes is supposed to grow at 18 per cent. The net tax revenue of the centre is supposed to grow at 16.7 per cent. The total non-plan expenditure is supposed to grow at 16 per cent. The total plan expenditure is supposed to grow at 18.7 per cent. The only exception is that total central assistance for states’ and union territories’ plans is supposed to grow at only 8.5 per cent, while budget support for the central plan is supposed to increase by 22.5 per cent. Chidambaram in other words has starved the states to increase the outlay for the central plan. His claim that the states “never had it so good” does not stand scrutiny. While total grants and loans to states has increased, the magnitude of increase is again only 17 per cent. Given the fact that the increase in plan assistance, which is a major component of it, is so niggardly, the states clearly have had a raw deal.

The much vaunted increase in social sector expenditure also turns out on closer examination to be less than comforting. There is no doubt a significant increase in the outlay on education, financed unfortunately by a cess that is necessarily regressive, but there is an actual curtailment in the allocation under Sarva Shiksha Abhiyan which cannot but cause serious concern. Likewise there is a noticeable increase in the outlay on health, but the nominal increase in ICDS is so paltry that let alone meet the Supreme Court directive to universalise it by 2008, there is hardly much real increase at all. And the social security expenditure on workers is stagnant even in nominal terms. On the whole what we have is a whole lot of minor tinkering around a set of projections which themselves show no real effort to address basic issues.

Through all this however the finance minister has quietly pursued his neo-liberal agenda of opening up the economy to the vortex of financial flows. He wants Indian firms to undertake capital expenditure abroad on the basis of borrowing from the RBI, and the scope of capital expenditure may well be enlarged to encompass take-over bids. Through measures such as these he is introducing capital account convertibility. Such introduction by stealth of capital account convertibility is one of the more insidious features of the budget.