People's Democracy

Editorial

Stop Subsidies for Rich; Increase Public Investments

AS we go to press, the tumbling Indian rupee plunged to a new historic low. Worse, it does not appear to stop falling. The pundits of neo-liberal economic reforms have gone to town proclaiming that the passage of the Food Security Bill by the Lok Sabha is the immediate cause for this dramatic collapse of the rupee. India Inc. and the pen-pushers of international finance capital’s agenda have declared that the passage of the Food Security legislation has “dealt a body blow to public finances”. Raising the Red Flag, the CII president has said, “Such a large outlay (food security) at this point in time would definitely have a negative impact on the fiscal deficit”. The anticipation of a higher fiscal deficit, we are told, has frightened international financial investors (FIIs) who are exiting Indian markets leading to the rupee’s fall. The Indian neo-liberal reformers overlook the fact that various currencies of developing countries have seen a sharp fall in their currencies due to international uncertainties (to which we shall return later). The Indian rupee has fallen by around 20 per cent since the beginning of this year. The South African Rand has done worse falling by nearly 23 per cent. Surely, this cannot be attributed to India’s Food Security Bill!

In their effort to protect their avenues for profit maximisation, India Inc. raises an inhuman war cry: `how dare the country wants to feed its hungry’. Even the meager allocation and the grossly inadequate entitlements provided by the current Food Security Bill are being seen as an affront to the predatory pursuit of profit. Meaningful food security for our people can only begin to be given when there is a universal coverage and every family is provided with at least a minimum 35 kg of foodgrains per month costing no more than Rs 2/kg. The current Bill falls far short of meeting this objective.

The current inadequate entitlements provided by this Bill will cost the exchequer an additional Rs 30,000 crores per annum. The budget has already earmarked Rs 10,000 crores under this head. Thus, the net additional amount would be around Rs 20,000 crores. This, India Inc. says, our economy cannot afford. A country that cannot afford to feed its hungry, surely, cannot afford to be the playground for its miniscule rich to continue to maximise profits.

There is, of course, no talk of the `incentives’ or thousands of crores of rupees worth of `stimulus packages’ given to India Inc. to promote growth. For the last three years, the annual budget papers provide a statement on the tax foregone by the central government. This is a whopping over Rs 5 lakh crores annually. Many raise questions that this entire amount cannot be recovered as a large part is locked up in litigation. Even generously granting their argument, direct tax concessions to the rich and the corporates is nearly a third of this total amount annually. `Incentives’ are nothing but subsidies to the corporates which ostensibly aim to promote growth. In spite of all these concessions, growth of the index of industrial production stood at minus 1.6 in May this year. It has fallen further since. Despite such grossly negative results, there is a complete silence on the issue of reducing, if not stopping, such subsidies for the rich.

However, there is a lot of sound and fury over the comparatively meager subsidies provided for the poor. Already the government is contemplating to hike the prices of petroleum products yet again in the name of containing the growing subsidy bill and, therefore, for containing the possibility of a further rise in the fiscal deficit. Such actions will totally negate whatever little benefits that the Food Security Bill will provide.

Further, this will be counter productive for growth. Such hikes in the background of high inflation and soaring prices of all essential commodities will only reduce the purchasing power of the people further, thereby further shrinking the aggregate domestic demand in our economy. This would lead, in turn, to a further contraction of the manufacturing sector and consequently reduce the overall GDP growth rate. Already it has been reported that the total consumption expenditure in the economy which was growing at a healthy rate of 8 per cent annually for the past few years has plunged to 4.4 per cent.

Corporate reports show that there is a significant slowdown in the sales of consumer durables and other goods from early 2012 to 2013. The combined net profit of 12 publicly traded consumer goods companies have shown a growth of 5 per cent in June this year compared to a 29.3 per cent growth last June. India’s largest listed consumer package goods firm, Hindustan Unilever, reported that “people are cutting down on spends”. Sales of motorcars fell by 6.7 per cent during the last fiscal year, the first decline in a decade. They have continued to decline by 10 per cent during April-June 2013 according to the Society of Indian Automobile Manufacturers. They expect the sales to fall between 5 to 12 per cent due to weak demand this fiscal. Likewise, the sales of all other consumer durables like washing machines, TVs, microwaves etc have fallen significantly.

The key reason for this is the shrinking of aggregate domestic demand in our economy. The direct consequence is that the rich and India Inc. even when they have substantial surpluses, they are refraining from investment in production because their output can neither be sold in the international market due to the global economic crisis nor in the Indian market due to the falling purchasing power amongst our people. For a year now, both the prime minister and the finance minister have failed to persuade the public sector companies who are sitting on a huge pile of cash reserves to invest.

Under these circumstances, the rich need avenues to park their surpluses. This they are doing by purchasing gold, real estate and foreign currencies. The price of gold hit a historic high of Rs 34,500 for 10 gms and continues to rise. The price of silver also soared to a six month high. It has already been reported that the real estate prices in India are growing the fastest in the world. The sharp fall of the rupee likewise is due to the sharp rise in the demand for the US dollar and other foreign currencies.

This, in addition to the volatility in the international financial markets who have been gripped by a sense of panic over the reported withdrawal of stimulus packages by the USA and the rising uncertainties over the price of oil in international markets in the background of the impending US-led military attack on Syria, has impacted on the Indian stock market and in the free fall of the rupee. These international uncertainties led to a strong exit by FIIs from the Indian markets which now stands at over $1 billion since August 19.

The answer to India’s problem does not lie in the cries for greater reforms. These are cries for making the miniscule `shining’ India shine more at the expense of the `suffering’ India. The luminosity of `shining’ India is directly proportional to the intensity of suffering of the `suffering’ India.

The answer lies in stopping the subsidies for the rich and using these resources for larger public investments to build our much needed infrastructure. This would generate a sharp increase in jobs. The consequent expenditures by the people would enlarge aggregate domestic demand providing the impetus for growth of manufacturing and industry.

(August 28, 2013)