People's Democracy

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


No. 8

March 01, 2009



Mini Stimulus Package:  Barking Up The Wrong Tree

WHILE replying to the discussion on the interim budget in the Lok Sabha, the officiating Finance minister announced yet another mini stimulus package. He did exactly the opposite of what he said while presenting the interim budget. On that occasion, he said that seeking a vote on account does not permit any changes in the tax rates, as these are substantive decisions that ought to come in a regular budget which only the new government, post-elections, is entitled to do.

At the end of the debate in the Lok Sabha, before the interim budget was adopted amid objections and walk out by the Left parties, the minister announced a 2 per cent cut in the CENVAT (excise duties) and a 2 per cent cut in service tax. It is estimated that this will cost the exchequer Rs 30,000 crores. Consequently, if the benefits of these cuts are passed on to the consumer, then the prices of a wide range of commodities should decline. The UPA government�s logic, it appears, is that this fall in prices, however marginal, should boost sales thereby providing a stimulus to the economy.

Once again, the government is `barking up the wrong tree�. These tax concessions may reduce prices but they do not, in any way, enhance the available disposable incomes in the hands of the people. Unless this increases, no amount of tax cuts and bailout packages for the corporate sector will help in reviving the economy. On the contrary, if the same Rs 30,000 crores were to be spent directly through public investment, in say, construction of rural roads, the employment that this could generate would enlarge domestic demand when people spend their salaries which, in turn, would stimulate the economy. True to their class nature, the UPA government targets relief for the corporates and not for the people. In the process, it continues to keep people with low levels of purchasing power. Until this changes, no amount of tax relief, interest rate cuts and bailout packages will stimulate the economy.

A classic example is the airline sector. The corporates have been given massive concessions including a steep reduction in the prices of aviation fuel, which now costs, ironically, less than the price of petrol and diesel for the common man. Despite all this, air passenger traffic has not improved and the corporates continue to make losses. Passenger traffic can only increase when people have the money to buy an air ticket. Unless this is ensured, no amount of concessions at the top will stimulate the economy. They may, however, beautify corporate balancesheets.

Further, the range of consumer durables whose prices may reduce as a result of these tax cuts are essentially consumed by India�s middle class. The disposable income in their hands has been severely squeezed with the global meltdown of the stock markets and significant cuts in their take-home pay packages. This is for those who are fortunate to have not lost their jobs. Under these conditions, to expect the middle class to increase its consumption or to try and entice them to buy goods that are now marginally cheaper is to live in a fool�s paradise.

As we have been arguing in these columns in the past, the only way to meet the devastating impact of the global capitalist recession is to significantly hike public investments which will provide large-scale employment, enlarge domestic demand and, at the same time, improve our woefully inadequate social and economic infrastructure. However, as noted above, being true to their own class interests, the Indian ruling classes seek to first protect the corporates.

In stark contrast, the CPI(M)-led Left governments in West Bengal and Kerala have announced stimulus packages aimed at increasing aggregate demand through increased government spending. This is the most affective way to combat the recessionary conditions rather than offer public money for bailout packages. The Kerala government has announced a package which is equal to 5 per cent of the state�s GDP. This goes into expenditures on public works, irrigation, water supply and housing schemes. This is nearly 10 times, in percentage terms, the fiscal stimulus packages announced by the central government which amounts to only 0.5 per cent of the GDP.

Similarly, the West Bengal Left Front government has announced a fiscal social welfare package of over Rs 5,106 crore, or, nearly 1.5 per cent of the state�s GDP. This includes increased spending on public works and housing schemes, while providing immediate relief to the toiling sections. This is done by providing rice at Rs 2 per kg for the entire BPL population, loans for self help groups and self employment schemes at a low interest rate of 4 per cent and various schemes for the farmers aimed at increasing productivity and providing crop insurance.

If within the severely restricted limited powers of the state governments this is possible, then surely, the central government could have employed a similar pro-people strategy. This is where the class difference lies. While the priorities of the ruling classes is to protect their interests first by putting profits before people, the priority of the CPI(M) and the Left is to put the interests of the people above everything else.

If this shift in the policy direction is to be ensured at the national level, then the anti-communal forces� political alternative to such UPA policies must be made victorious in the forthcoming general elections.