People's Democracy

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


No. 10

March 07, 2010



Prabhat Patnaik



WHAT is striking about the 2010-11 union budget is not just its class outlook, but the class strategy it displays. The doling out of direct tax concessions that would primarily benefit the upper salariat and the affluent yuppies, even as food and fertiliser subsidies are cut and petrol and diesel prices are jacked up, and that too in the midst of an inflationary upsurge in food prices the like of which the country has not seen since 1974-75, is a clear signal that the Manmohan Singh government is attempting to enlist the support of the affluent urban middle classes to advance its neo-liberal agenda, and has no qualms about squeezing the people under its juggernaut. Till now it had been “fettered” by its dependence upon the support of the Left; now it feels free to push the neo-liberal agenda, so dear to corporate and financial interests, and has worked out a class strategy for doing so.

There is an eerie resemblance here to the class strategy of Margaret Thatcher. She had viciously attacked the working class, smashed the trade unions, pushed up unemployment to over two million, and had steeply escalated income and wealth inequalities in Britain, even while wooing the yuppies, the affluent middle class, and the city slickers of London’s financial district. And she had done exactly what Pranab Mukherji has done: jacked up indirect taxes on the poor and the working people even in the midst of a raging inflation, while giving out direct tax concessions. Till now, neo-liberalism in India had been covered by a patina of concern for the aam aadmi. With this budget it has come of age; the patina is off.

The government of course pretends that this budget too is for the aam aadmi; but that only shows the richness of its sense of irony. To claim that persons earning lakhs of rupees per year, who are the beneficiaries of direct tax concessions, constitute the aam aadmi, while the fisherman who risks his life daily by venturing out to the sea for an annual income of less than Rs 20,000, and who will be hit hard by the diesel price hike, does not, is to display supreme irony.

There was a time when even as the government increased petrol prices, it would spare diesel prices, since diesel and kerosene prices were linked for technical reasons, and raising the former would necessarily raise the latter, to the detriment of the poor. But such reticence no longer prevails. Diesel prices have been raised and kerosene prices will follow, but the government does not care. Indeed, a whole lot of petro-product prices are going to be raised as a consequence of the increase in import duty, i.e. a new round of price increases on top of what Pranab Mukherji has announced is in the offing. And if the Kirit Parikh Committee’s absurd recommendations for linking domestic prices to world prices, absurd because that would mean importing the massive speculation-induced world oil price fluctuations into the domestic economy, and hence making the domestic price-level a yo-yo in the hands of international speculators, are accepted (they are being examined by yet another government committee), then the petro-product prices will be jacked up even further in the coming months.

Mukherji’s argument for raising the import duty on petroleum and the central excise duty on petrol and diesel is particularly specious. Since petrol prices had not been raised adequately even when world crude prices had crossed $130 per barrel, the government, he argues, has somehow earned the right to raise the prices now. The current price hike, he contends, is a reward for the government’s earlier abstinence, which is ridiculous since it is not as if petrol prices had been lowered earlier and are now being restored to pre-lowering levels. Besides, the biggest component of petrol and diesel prices in the country consists of government taxes; there is no logical compulsion therefore about raising taxes on this commodity.

Much has been written and said, rightly, about the “cascading effect” of the higher taxes on petrol and diesel, which would raise the prices of these commodities by close to Rs 3 per litre. What is striking about Mukherji’s budget however is the complete lack of concern not just about the inflationary implications of this particular move, but about inflation in general. Just the day before the presentation of the budget, parliament had discussed the price issue and several members had asked the government to use the PDS to combat inflation. Indeed this is so obvious a panacea that it should not need labouring. Since the food price rise, even by the government’s own admission, is because of supply shortages (even if these shortages are artificially compounded by hoarding and speculation), the immediate move must be to throw government-owned surplus foodgrain stocks (i.e. actual stocks minus the minimum buffer stocks), which currently exceed 27 million tones (as on January 2010), on the market. These stocks obviously cannot be thrown on the open market, since speculators would then buy up these stocks gleefully, as had happened in 1972-73, and hence blunt their anti-inflationary impact; they have to be released through the public distribution system. This is the only, immediate, and effective way of tackling food price inflation. But the government has no intention of doing this. The fact that the food subsidy in the budget is lower than for 2009-10 by over Rs.400 crores, suggests that the government intends neither to sell these stocks through the PDS, nor merely to hold on to them (for either of these options would have raised the food subsidy, the latter because of higher interest payments), but rather to do precisely what it should not do, namely to sell these stocks in the open market, which means that it is not over much concerned about inflation.

In fact Mukherji said as much in his post-budget TV interview. He made the point that his way of combating inflation was by augmenting supplies in the long-run, for which he claimed to have taken steps in the budget, such as earmarking Rs 300 crores for 60,000 “pulses and oilseeds villages”, and Rs 400 crores for extending the “Green Revolution” to the eastern region of the country. (These amounts of course are too trivial to make any difference, but let us ignore that for the moment). As for short-run measures, these according to him were unnecessary, since the inflation rate was coming down anyway!

The logical fallacy, indeed the chicanery, behind the argument about inflation coming down, is often not appreciated. Inflation, precisely when it hurts the people, is essentially a self-limiting phenomenon. Inflation can be categorised into two kinds: that caused by excess demand and that caused by “cost-push”. A cost-push inflation arises when some input cost (or excise duty as in the present case) rises, which is “passed on” in the form of higher prices; in response to this initial price rise, money wages rise, which in turn is passed on in the form of still higher prices, and so on. As long as each component of price keeps rising with the rise in the price, to ensure that its share in total value does not decline, the price rise continues ad infinitum. But if some cost element, typically the wage cost, does not rise in tandem with the price, then inflation eventually comes to a halt. But this also means that the real wage rate comes down because of a cost-push inflation, and this coming down is the reason for the end of cost-push inflation.

Much the same can be said of excess-demand-caused inflation. Such inflation gets eliminated when someone’s demand is curtailed, and typically that demand is curtailed where the money incomes of some buyers do not go up as prices rise, i.e. where the money incomes are not indexed to prices. This is typically true of the working people, especially of the vast mass of unorganised workers. Precisely because their incomes are not indexed to prices, inflation hurts them, and eventually comes to an end by squeezing them.

In Latin American countries where inflation rates in the past have quite often been quite phenomenal, the reason lies in the fact that wages in such cases have been indexed to prices. In India by contrast where wages are not indexed, inflation will necessarily always come down, but it will do so precisely by hurting the poor. The whole purpose of government action is to prevent the elimination of inflation through this odious mechanism by attempting its elimination in some other way, e.g. by dehoarding (which adds to supply), imports (which do the same), and using the PDS (which insulates the poor against a squeeze on their demand). But if none of these things is done, inflation will still come down, but by squeezing the consumption of the poor.

An example will make this last point clear. Let us start from a situation where the supply of foodgrains is, say, 100 units and equals the demand at a price of Rupee One per unit. The wage bill in the economy is Rs 80, all of which is spent on foodgrains. Now, suppose supply falls to 95, so that there is an excess demand of 5 units at the old price. The price will rise, i.e. inflation will set in. If all incomes are indexed to the price-level, then this excess demand will never get eliminated and hence inflation will continue ad infinitum. But if wages are not indexed but other incomes are, then inflation will come to an end when the price has climbed up to Rs. 16/15 (or Rs.1.07), for, at that price, the workers can buy only 75 units of foodgrains from their total wage bill of Rs.80, which means 5 units less than before; and this eliminates excess demand. So, inflation is self-limiting precisely because the poor get squeezed by it.

Hence, when Pranab Mukherji derives satisfaction from the fact that inflation is coming down, even without the government’s doing anything about it, that satisfaction is totally misplaced: inflation’s coming down in this way shows precisely that the people are being squeezed by it. Likewise, when Pranab Mukherji claims that the effect of petrol and diesel price increases “will get absorbed” over time, he omits to mention that this absorption can occur only by squeezing the poor (as in the above example of cost-push inflation). Inflation’s coming down does not mean that the world returns to its pristine state of happiness. This coming down itself, far from being a source of satisfaction, should rather be a cause for concern, because it is necessarily at the expense of the poor.

Coming to Mukherji’s “long term measures” for raising food supplies, what exactly these are becomes an intriguing question. The proposed expenditures on the “pulses and oilseeds villages” and the extension of the Green revolution are too trivial to matter. The reduction in fertiliser subsidy, which will raise fertiliser prices, will, if anything, have a negative effect on output. The thing he must be pinning hopes on therefore is the opening of retail trade, which allegedly will help in “bringing down the considerable difference between farm gate, wholesale and retail prices”. We are thus back to the Ambanis and Wall-Mart as the panacea for the agrarian crisis! And this view is attributed to the prime minister, who believes that opening up retail trade will increase competition! If the prime minister’s economics training does not equip him to see the fallacy of the argument that bringing in monopolists to drive out myriad petty traders will increase competition, then all he has to do is to ask the coffee producers of Kerala who get a pittance for their crop even when retail coffee prices are soaring. If he genuinely wants the gap between retail and farm-gate prices to close, why can he not ask the public sector to take on a larger role in the marketing of crops, as the various Commodity Boards used to do before neo-liberalism prevented them from doing so.

Farmers however are just an excuse. Just as the World Bank used to trot out different arguments at different times for promoting “economic liberalisation”, our government trots out different arguments at different times for opening up to the Ambanis and Wall-Mart. Sometimes it is the consumers’ interests, sometimes it is freedom of choice, and now it is the farmers’ interest.

Dreariness has its uses. Pranab Mukherji’s dreary speech camouflaged the major thrust that this budget has given to the neo-liberal agenda. (The dreariness, unfortunately for him, did not succeed in camouflaging the fuel price hike). Disinvestment is to proceed apace, and is a major contributor to the so-called “Miscellaneous Capital receipts” of Rs 40,000 crores, even though there is no theoretical argument for it. Disinvestment is theoretically no different from a fiscal deficit: the latter puts government bonds into non-government hands while the former puts government equity into non-government hands; they are only different forms of raising finance but with identical macroeconomic effects. A Financial Sector Legislative Reforms Commission is to be set up to “rewrite and clean up the financial sector laws to bring them in line with the requirements of the sector”. Since all government committees and Commissions are like slot machines where the government gets the recommendations it wants, this Commission is the route to financial sector liberalisation. And lest the government does not succeed in accomplishing its cherished liberalisation measures through this Commission, it has a second string to its bow: a Financial Stability and Development Council which is to be set up “to strengthen and institutionalise the mechanism for maintaining financial stability”. Add to all this the “opening up” of retail trade and the allocation of coal blocks for captive mining, and you find that in all the crucial sectors where the “reforms” had been thwarted, viz. public sector, financial liberalisation and retail trade, this budget has given a forward thrust to the neo-liberal agenda.

But then what about the “massive” increase in social sector and rural development outlays that the budget promises? This is a chimera. Central plan outlay on rural development (all comparisons are BE to BE) is slated to increase by a mere 6.6 percent over 2009-10, which means a real absolute decline; and MGNREGS outlay by a mere 2.5 percent. And as for Central plan outlay on social services, the increase provided under the plan is significantly counterbalanced by a decline in non-plan expenditure in this sector. If we take the sum of Central Plan outlay and non-plan expenditure on social services then the nominal increase in 2010-11 over 2009-10 is only 12.5 percent, which in real terms means very little.

All this is hardly surprising. After all, the total expenditure of the central government is expected to rise in nominal terms by a mere 8.6 percent, which means a stagnation in real terms. Within this overall stagnation, large apparent increases on specific items are more likely to be the results of statistical jugglery or reallocation rather than matters of any substance.

The pushing of the neo-liberal agenda requires inter alia a neutralisation of opposition from the state governments, and this can be ensured only if they are reduced to mendicant status. The 13th Finance Commission, unilaterally set up by the central government, has already done the needful in this regard: it has kept the total share of tax devolution from the centre to the states at 32 per cent (up marginally from the 30.5 per cent under the previous Commission) compared to the 50 per cent demanded by most state governments. And the central government can be relied upon to compress its loans and grants to states, to offset even such increases in revenue transfers that it is statutorily required to make. In the 2010-11 budget for instance while its statutory transfers increase by 26 per cent over the current year, its loans and advances rise by a mere 8.9 per cent. With such compression, one can be sure that the states will continue to retain their mendicant status.

Neo-liberalism is clearly on the offensive. But the Manmohan Singh government miscalculates by ignoring the fact that unlike in Thatcherite Britain, the affluent middle class it is wooing is a minuscule segment of society, while those squeezed by neo-liberalism, the workers, peasants, agricultural labourers, and petty producers, constitute its overwhelming majority.