The Economic Backdrop
Deeply integrated as we are with the global economy because of the ruling clique’s abject surrender to the policies of globalization, renewed global recession and financial crisis provide the crucial backdrop to this year’s budget. During his recent visit to Kolkata on the occasion of the 46th Convocation of Indian Statistical Institute, Nobel Laureate Joseph Stiglitz observed, “Now, with the Great Recession, the failures of the market – both in efficiency and equity – once again cannot be ignored. No democratic government, outside of war, has wasted resources on the scale of the devastation brought about by America’s financial sector….We should be clear: this is a failure of unfettered markets.” So he categorically warns India, “Let America’s experience be a warning. America is a rich country that can, perhaps, afford such waste. India is not.” He further asserted, “Too much of the world has been in pursuit of what I have called GDP fetishism...GDP could be going up, even though most individuals in society could be getting worst off – as has been happening in the US. GDP in the US before the crisis looked respectable, but it was not sustainable.”
India is suffering from exactly this “GDP fetishism”. The Indian rulers have refused to take any positive lessons from the global recession and have chosen to tread the beaten path of liberalization-privatization-globalization with a few so-called checks and balances thrown in. The maladies associated with this trajectory are all too visible in the Government’s pre-budget Economic Survey. Inflation (7%) is rising again despite 13 interest rate hikes by RBI since 2010. Employment growth in organized sector (1.9%) is lagging far behind the annual GDP growth rate (6.1%). There have been huge job losses during the year 2010-11 and most of them are in the unorganized sector. Fiscal deficit, projected to be 4.6% in the budget for 2011-12, has risen sharply to 5.9%. Agricultural Growth in 2011-12 has been estimated at 2.5% with agriculture’s share in GDP dropping to 13.9% only. There has been an absolute decline in the area under food crops cultivation endangering food security. The growth rate in the manufacturing sector has dropped down to 0.4%, which is the lowest in the last decade. There has been successive drop in the economic growth rate for last 7 consecutive quarters to reach 6.1%. The Economic Survey prediction that growth will pick up to 7.6% this fiscal and to 8.6% the following year sounds ridiculous in view of the growing gap between expectation and reality (last year, for example, the forecast was for a growth rate of 9%, way off from the latest estimate of 6.1%).
On the other hand, increasing emphasis on export-led growth has ultimately thrown the country’s Balance of Payment situation into a precarious state. The current account deficit and trade deficit have risen to 3.6% and 9.4% of GDP respectively. These huge deficits have made the Rupee very unstable: it has declined by 12.4% against the dollar between March 2011 and January 2012. The country finds itself almost on the verge of a veritable foreign exchange crisis. Our foreign exchange reserve has come down to $293 billion as against a foreign debt of $326 billion, much of which constitute External Commercial Borrowings (ECB) made by the private sector carrying sovereign guarantee by the government of India. Much of the depletion in forex reserve is attributable to RBI intervention in the forex market to stem the fall of Rupee.
Stiglitz warns us, “There is no clear roadmap for where India is going today. Fifty years from now, does it see itself much as it is today – a divided country, only with the rich much richer, the poor perhaps a little better than they are today? Does it see itself evolving like the US, where even the middle class has not been sharing in the gains of growth? Where the rich live in gated communities, waited upon by the vast majority of the poor, who earn in a lifetime but a fraction of what they receive in an hour?”
In fact this spectacle is very much reflected in some recent studies. The “Karvy Private Wealth” study reveals that the wealth of High Net-worth Individuals (HNIs, i.e. billionaires) is set to grow by a compound annual growth rate of 23% in the next four years and will touch $249 trillion. A 2010 study by International Food Research Institute suggests that in terms of “World Hunger Index”, the position of India stands at 67th among 84 developing countries. According to the “Malnutrition and Hunger (HUNGAMA)” Report of 2011, 42% of the Indian children are underweight with 50% having a weight of less than 2.5 Kg and among the mothers giving birth to underweight children, 45% cannot read. This picture depicts a clear divide in the Indian society, which is widening day by day with increasing doses of neo-liberal economic policies infused by the government.
Budget 2012-13 is no exception. It fails to address any of these maladies; and will only contribute to aggravate them.
Hike in Indirect Taxes and Cut in Subsidies to Fuel Inflation
When the country is reeling under nagging inflation for the last so many years, the budget chooses to fuel it further by introducing a down-the-line 2% hike in Central Excise on all products barring a few. Same has been the case with service tax, where the tax rate has been enhanced by 2% and all services except a small negative list have been brought under the tax net. Already there has been a steep hike in railway fares coupled with withdrawal of subsidy on fertilizers and coal. The Railway budget does not stop at that, but proposes to set up a “Traffic Regulatory Authority” (TRA) to link up railway fares with the price movement in fuels. Another round of fuel price hike is very much in the offing and if the TRA proposal is passed, from now on we will experience automatic fare hikes with every rise in fuel prices.
On the revenue side, we find recession taking its toll. The shortfall in revenue collection this fiscal is estimated at more than Rs.50,000 crore. The fiscal deficit was projected at 4.6% of GDP in last year’s budget. Now it is likely to shoot up to 5.9%. Judged from this performance, the 5.1% projection for the current year sounds too optimistic and is destined to fail. Last year there was a net reduction in Plan allocation by Rs.15,000 crore due to short collection. The same is likely to be repeated this year also. So the casualty will be social welfare and development. The Fiscal Responsibility and Budget Management (FRBM) Act 2003 mandated that the fiscal deficit must be brought down to 3% of GDP. But the reality is wide off the mark. So the FM has proposed to amend the FRBM Act itself and shift the deadline to 2014-15. For the present, this huge deficit to the tune of Rs.3,50,424 crore will have to be met either by borrowing from the market or by printing paper notes. Both of these will add to the inflationary spiral.
Last year, the government proposed to mop up Rs.40,000 crore from disinvestment. But it had to rest content with only Rs.14,000 crore. It also had to compel the LICI to buy the shares of ONGC through auction, ignoring its own restrictions in this regard, due to non-availability of any private buyer. Seemingly oblivious of this experience, the FM has again proposed to raise Rs.30,000 crore this year from disinvestment.
Excluding the poor
The simplest remedy chosen by the FM to contain the deficit was a steep cut in subsidies by 14% and a cap of 2% of GDP on the subsidy bill. This cap is targeted to be reduced to 1.7% in the next 3 years. The most alarming is the reduction in subsidies on diesel, cooking gas and kerosene, the aggregate of which is a whopping Rs.24,901 crore. There has been a marginal increase in subsidy on food by a meager Rs.2,177 crore. No extra provision has been made for the much trumpeted Food Security Bill which has been gathering dust in the parliament. This drastic cut in subsidies will only make these necessities of daily life dearer and condemn the poor into further deprivation. The reduction in subsidy on fertilizers is Rs.6,225 crore, which will render agriculture even more vulnerable.
According to Economic Survey 2011-12, coverage under MGNREGA during 2010-11 was only 47 persondays per household, as against 100 days supposed to be guaranteed under the Act. To make matters worse, allocation this year has been reduced by another Rs.10,000 crore from Rs.40,000 crore last year – a straightaway cut by 25%. The urban poor have once again been totally ignored.
No provision has been made for the Social Security Act for the unorganized sector workers also, reducing it to another mockery of legislation. The increase in allocation on other social welfare schemes like NRHM, ICDS, Mid-day Meal etc. has been minimal and cosmetic only. When the farmers are reeling under the fatal burden of high interest bearing private loans, the FM has only proposed an additional 3% interest subvention on prompt repayment of their institutional loans. Education has got only Rs.61,427 crore (about 0.8% of GDP) as against 3% promised earlier. NRHM gets an increase of Rs.2,707 crore only even as the ASHA workers feel deprived and find additional workload on them. Similarly, the Anganwadi workers also feel left out. Despite continued agrarian crisis manifested by stagnant production, increased cost of cultivation, non-remunerative prices in the market dominated by speculators and hoarders and consequential spate of farmer suicides, the total plan outlay in agricultural is a measly Rs.20,208 crore (increase of Rs.3,085 crore). Agricultural credit has been targeted to be raised from Rs.1,00,000 crore to Rs. 5,75,000 crore, but how far the banks and financial institutions would venture to finance agriculture in such a bleak scenario is a million dollar question.
Another Dose of Militarisation
Despite acute financial crunch and skyrocketing fiscal deficit, the FM has been profligate enough to substantially increase allocation on Defence by more than 17% to Rs.1,93,407 crore from last year’s Rs.1,64,415 crore (by nearly 30,000 crore compared to nearly 3000 crore for agriculture). Out of this outlay, over Rs.79,500 crore would be spent on procuring modern weapons systems and military hardware from foreign sources. The FM has assured that this allocation is based on the present needs and any further requirement for the ‘security’ of the country would be made. Several defence deals including one to procure 126 combat aircraft for the IAF are expected to be clinched this year. If we contrast this with the meager allocation on several flagship social welfare programmes, the essence of FM’s ‘hard decisions’ becomes obvious. Given the improved foreign relation with the neighbours, particularly Pakistan and China in recent times, such hike in defence outlay is certainly not warranted and affordable from the economic point of view.
Back on the Reforms Track
The government is in no mood to give up its commitment to supply side economics, which has unmistakably failed this country all along and also its principal protagonists – the US and the UK. No additional tax on the corporates has been announced. The personal income tax sop announced in this budget is highly skewed in favour of the people in the higher income bracket. While the people having income upto Rs.5 lakh would get a relief of only Rs.2,060, the same for people with income Rs.10 lakh and above would be Rs.22,660. The budget proposes to reduce the securities transaction tax and to remove restrictions on venture capital funds. The FM has also introduced the Rajiv Gandhi Equity Savings Scheme for investment of Rs.50,000 with tax benefit on 50% of such investment.
At present, FDI in single brand and in cash and carry wholesale trade is permitted to the extent of 100 per cent. The decision in respect of allowing FDI in multi-brand retail trade up to 51 per cent has been put on hold due to resistance from the UPA partner TMC in particular. However, the FM has asserted that efforts will continue to arrive at a broad based consensus in consultation with the State Governments. A comprehensive reforms package has been announced to prop up the sagging capital market. The government has received the recommendations of the Standing Committee on Finance on “The Pension Fund Regulatory and Development Authority Bill 2011”, “The Banking Laws (Amendment) Bill 2011” and “The Insurance Laws (Amendment) Bill 2008”, which are basically directed at privatizing pension, banking, insurance et al. The official amendments to these bills will be moved in this session of the Parliament. To take forward the process of financial sector legislative reforms, the Government proposes to move a host of new legislations in the present budget session itself. The FM proposes to increase investment in infrastructure through public private partnerships (PPP). During the Twelfth Plan period, infrastructure investment has been estimated to go up to Rs. 50 lakh crore and he expects that about half of this will come from the private sector. The FM has announced in the Economic Survey that Labour Reforms are very much on the cards. The Government has approved guidelines for establishing joint venture companies by defence Public Sector Undertakings in PPP mode. The FM has relaxed External Commercial Borrowing norms despite a tight foreign debt position. The civil aviation sector has been opened to foreign airlines and private airlines have been allowed to borrow foreign funds under the coverage of sovereign guarantee to the tune of 1 billion dollars. The aggregate revenue foregone on corporate and personal income tax is Rs.93612 crore and that on indirect taxes is Rs.4,35,820 crore
Lip Service on Black Money
Despite much furor about black money and corruption sweeping the country during the last year, the FM has not made any serious attempt to unearth black money stashed abroad. He has simply mentioned that a white paper on black money would be tabled in the parliament in this session. But that does not assure the country as to the sincerity of the government to address the issue in right earnest. The country is still in the dark about the fate of the information as regards black money stashed in the Swiss Banks and the LGT bank of Germany, known to be already in the possession of the government. It is true that the FM has brought a retrospective amendment w.e.f.1962 with regard to overseas transfer of capital assets situated in India to circumvent the recent Supreme Court judgment with regard to the Vodafone-Huchinson deal, which resulted in a loss to the tune of Rs.11,000 crore to the exchequer. However, it remains to be seen how similar other deals affected in the past are dealt with under the new amendment.
Contempt of Parliament on Aadhaar-UID
The Union Budget allocation of Rs. 14,232 crore for Aadhar-UID demonstrates a contempt of Parliament as it ignores the recommendations of the report of Parliamentary Standing Committee (PSC) on Finance on the National Identification Authority of India (NIDAI) Bill 2010. This was presented in Parliament on December 13, 2011, and had questioned the legality of collection of biometric data for Aadhaar and National Population Register (NPR) without legislative mandate.