People's Democracy

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


No. 10

March 11, 2007



A Budget For Stock Operators And Monopolists


Amiya Kumar Bagchi 


INDIA is fast becoming a highly polarised society, divided between those who have very well-paid jobs and those who have either no jobs at all or have very poor quality jobs, which does not allow them to live with any kind of dignity. The government of India in its latest Economic Survey 2006-07 trumpets the growth of employment since 2000. But unemployment, which is always underestimated, has also increased over the same period. Moreover, the real earnings of almost all sections of wage earners agricultural workers, women workers and casual workers of all kinds have fallen over the same period. Organised sector employment, which is the only kind of employment with some semblance to what the ILO calls 'decent work' continues to shrink and the casualisation of work, with no security of employment, very often at a lower wage than the official minimum wage and in unsafe and unsanitary work environment continues to expand all over India. 


The officially estimated high rates of growth of the Indian economy in 2005-06 and 2006-07 are largely made of high rates of growth of the service sector and more recently of manufacturing growth, with agriculture continuing to fluctuate around a stagnating trend. But they have contributed to high rates of growth of corporate profits, higher rates of saving resulting from an even more skewed distribution of income and for the first time under the neo-liberal regime to a moderate growth in direct tax collection. All these circumstances have offered an opportunity for thinking big about the future of the Indian people and especially about the younger generation of India. The 'demographic dividend' that everyone talks about is based on the fact that India has one of the highest rates of growth of working age population among the more populous countries of the world. These younger people want jobs, houses, education, vehicles to move about and, of course, adequate nutrition and health. But as the Economic Survey 2006-07 itself admits, India has a very high rate of malnutrition and high rates of illiteracy and infant mortality rates, and India's Human Development Index rank, in spite of the high growth rate of GDP has slipped from 124 in 2000 to 126 in 2006. In order to realise the democratic dividend, the government has to spend at least 3 per cent of GDP on health care and 6 per cent on education. In recent years, the Indian government has consistently fallen short of even half of these target figures. So the decision to increase expenditures on health and education to levels, which may reach just about half the official target figures, by no means indicates a radical departure.




On the other hand, the measures the government has taken to moderate the rate of inflation seem to be totally inadequate. The major contributors to the inflation of the wholesale price index are primary articles (34.90 per cent), fuel, power and lubricants (13.51 per cent) and manufactured articles (51.58 per cent). The direct steps Chidambaram, the finance minister, has taken to control inflation is to bring down the prices of diesel and petrol and to reduce import tariffs and excise duties on some specific items. The prices of manufactured products have contributed more than 50 per cent to the rise of the wholesale price index. Cement price has risen by 17.9 per cent over the last year. This is on top of a 13-14 per cent rise in cement price in the previous year. The finance minister has proposed a penal rate of excise duty on any manufacturer who charges more than Rs 190 per bag of 50 kgs of cement. But my suspicion is that consumers will not get the benefit of the reduction of duties, since manufacturers need not pass them on to the buyers. The basic reason for the acceleration in price rises of manufactured goods is the lack of any policy to check monopolistic pricing. If that is right, the producers of cement also may take the penal rate of duty in their stride by simply jacking up the mark-up. I had already pointed out this possibility in a TV debate broadcast on the day the budget was presented in the parliament. Today, that is, on March 2, 2007, I find on the front page of The Telegraph that the price of a 50-kg bag of has been jacked up from Rs 220-233 to Rs 232-245. This was happening even as Chidambaram was requesting leaders of Indian business to hold the price line. Why did he think that businessmen will heed his moral preaching at the cost of their bottom line? The government will not get anywhere without putting real teeth into competition policy and stopping the alarming growth of the power of a few business houses such as Reliance, Tata, or foreign monopolies such as Vodafone. 


The idea that a high rate of economic growth must be accompanied by a high rate of inflation is quite falsified by the experience of China, which has experienced much higher rates of GDP growth and much lower rates of price rise than India. One major factor behind that has been the intense competition between Chinese producers in the domestic market. 


When we turn to the prices of agricultural goods, the prospects are even more uncertain, to put it mildly. Because of the disastrous policy pursued by all governments since 1991, that of bringing down the stocks of grain in government, mainly, Food Corporation of India, godowns, their stock has fallen even below the level of 20 million tonnes considered to be optimal by the current policy-makers. Because also of the very inadequate investment in agriculture, it has become far more dependent on rains than it should have been. A bad shortfall in wheat production had to be met by importing 5.5 million tonnes on government account and 1 million tonnes on private account (Why did the private players have to be brought in, - a new idea of promoting competition by relying on profiteering grain merchants?). In the meantime, the price of wheat has gone up in the international market. Can India afford to be dependent on the international market for such an essential item of consumption? Among other things, even if there was no real shortage in international production, the information that India is going to be a big buyer in that market will at once push prices up, especially since the trade in grain is controlled by a handful of multinational firms, such as Cargill and Dreyfus. 




The impact of a rise in food prices is, of course, reflected more prominently in the consumer prices of workers and agricultural labourers than in the wholesale price index and cause greater distress. Given the fact that probably a half of the Indian population is undernourished there is no justification for confining the benefits of the public distribution system (PDS) only to the targeted poor. In any case, the official figures of poverty and its much-touted reduction have little rational basis. While the expansion of Integrated Child Development Services and mid-day meal programmes will address some of the problems of undernutrition (which damages not only physical but also cognitive development, thus condemning the poor to low-income niches for generation after generation), a near-universal PDS would have addressed these problems better and would also help keep inflation at bay, if the government raises more resources from a vastly enriched affluent section of society by introducing a little more progressiveness in the tax system and re-introducing the death duty and a long-term capital gains tax, whose abolition, according to a conservative but authoritative estimate (put forward by Amaresh Bagchi, the former Director of the National Institute of Public Finance and Policy and member of the Eleventh Finance Commission) is responsible for the loss of Rs 21,000 crore of tax revenue.


The increase in the exemption limit of women and senior citizens by Rs 10,000 crore is a rather derisory gesture given the fact that the values of the earlier exemption limits of Rs 1,35,000 and 1,85,000 respectively have been eroded by a little less than Rs 10,000 in the first case and by more than that sum in the second case and that they will also be subjected to the additional cess of 1 per cent for education. I am citing this example to show that when it comes to the not-so-wealthy or the poor, the finance minister can only think like a pettifogging bureaucrat, but when it comes to the benefits for Mutual Funds or other repositories of the really rich, he can think very generously indeed, while forgetting that many of those entities have deliberately been kept outside any regulatory surveillance.


The finance minister boasts of exceeding the target for farm credit. But how many of the poor and marginal framers, several thousands of whom have committed suicide since his last budget, have got anything from that expanded credit window? If he really meant to help them, he could have directed public sector banks (PSBs) to re-open many rural branches that have been closed since 1991 and could have directed the PSBs to give credit specifically to poor and marginal farmers. And if he wanted that everybody should be able to send her children to school, he could have set aside a substantial sum for allowing every landless peasant to own at least ten cents of land as his homestead. This would have given him or her the absolutely minimum security needed for him/her to act freely. The financialisation and securitisation of benefits targeted to the poor, which has been a hallmark of neo-liberal policy, will ensure that we will have misdirection and blocking of the benefits especially in a country so riven by differences in class, caste and community. 


The central budget cannot solve all problems. But it could have sent out much clearer signals that the government really means to make the most of the alleged demographic dividend by bringing up a well-nourished, well-educated and healthy younger generation. In the Panchayati Raj institutions, in the decentralisation embodied in the constitutional responsibility assigned to states for looking after agricultural infrastructure, health and education, there is the potential for realising that dream. 


The increase in Indian rates of saving could have been utilised to find both public resources and private incentives for sustaining the effort. But the finance minister seems still not to have grasped the crisis facing Indian agriculture, the standard of education, nutrition and health. He is happy to cover the large current account deficit by depending on inflow of foreign funds. But he has not grasped the potential of a total disarray if the Indian economy is allowed to become a plaything of the global stock markets. India now has a substantial deficit in the current account and that is being met by volatile capital inflows from abroad. With a raging inflation, with prospects of a recession in the US economy, the fair-weather friends of the stock market can simply move their funds abroad and we can have a crisis. The very rich may feel comfortable with that prospect because they can provide against that risk, but I don't think the ordinary man in the street or the woman in the cottage can.