Budget 2003-04:

The Mirage of Higher Growth

- Sakthi and Girish

The present budget shies away from attempting to do anything big – wise or otherwise. Attack on hunger is led by a meagre increase of Rs. 550 crore under the “Antyodaya Anna Yojana”. But thereafter Finance Minister (FM) Jaswant Singh loses way and proposes to make every Indian hale and hearty by covering her/him with health insurance, and to wipe out illiteracy by giving tax exemptions on educational spendings etc., both to be done bypassing states and involving private sector. There is a meek attempt on increasing growth by investments in infrastructure by piggybacking on private sector.

The budget has managed to increase fiscal deficit without actually increasing spending on anything worthwhile. Budget deficit is large even after massive underestimation of expenditure (estimated Rs. 12,000 crore to be paid to states for halving CST and replacing Local Sales Taxes with VAT system have not been provided, and similarly, Rs. 2,000 crore for investments in infrastructure have also not been provided). Hard options have been avoided to such an extent that this is probably the only budget that qualifies to be called “Election Budget”, with general elections still a good 18 months away. There is no intention of reaching the targeted 8% growth rate for Tenth Plan in the first year of plan itself.

Now let us have a look at the state of economy against which this budget has been set and the proposals in the budget.

Growth & Infrastructure

The growth rates achieved during 1990s are tapering off. The reforms by fiat have reached the limiting point -- there is little remaining to be decontrolled, delicensed, few taxes or duties to be reduced etc. Neglect of infrastructure – roads, ports, irrigation – during the last decade is now severe deterrent to growth. In the next stage, growth is expected by sale of national assets to private interests (so that they can use it “efficiently”) and through commercialisation community resources (water etc.).

The current slowdown is a direct result IMF/WB recipe. The fiscal compression – ‘tightening belts’ in simple terms – i.e., the demand deflationary policies of government are directly responsible for the impoverishment of masses and rising inequality. Fiscal compression means reducing capital and revenue expenditure. The direct impact of capital expenditure reduction strategy is slowdown in growth inducing sectors and job losses. For instance, one of the main reasons attributed for the slow growth in agriculture in the 1990s is fall in capital expenditure in agriculture.

The growth rate has been falling persistently over the last few years inspite of claims of the managers of the economy. A comparison of the growth rate of the economy in the 1990s with that of 1980s shows that it has only maintained its trend. Only service sector appears to be growing while agriculture and industry has been consistently showing downturn over the last few years. The claims of the govt. that it would achieve 6.5% growth in the current fiscal year are impossible to achieve. According to quick estimates of Central Statistical Organisation (CSO) it could only touch around 4.4 per cent (Business Standard, 8 February 2003).

The grand announcement of Rs. 60,000 crore investment in infrastructure (for 48 road projects, National Rail Vikas Yojana, 2 airports, 2 sea ports and 2 convention centers) is actually about Rs. 2,000 crore initial contribution from the government. This amount will be spent on “viability funding gap” basis – which means financing the shortfalls of investments made by private sector.

The budget talks about hiking the outlay on capital expenditure account, the percentage rise is expected to be 16 percent. While in the last year’s budget the budgeted estimate on capital expenditure account is 14 per cent. But a glance at the revised estimate shows that actually for the year ended the extent of increase is only 2.50 per cent. And if inflation is taken into account (roughly 3-5 percent) even this 2.50 per cent is wiped out. So, the government is hardly spending on any developmental activity.

Drought, Declining Farm Output and Suicides!

The problems of Agriculture sector have reached a crisis situation. High input costs, low realisations, lowering of yields from soil, faulty cropping pattern and, above all else, a complete standstill in land reforms have pushed farmers to the brink. There is unrest among farmers.

Agriculture was hit badly by drought this year. Farm output is likely to register a negative growth of 3.1 per cent. International farm prices have collapsed and are at rock bottom for a persistently long period. Indian farmers are already feeling the pinch: hundreds have committed suicide as they are not able to market their products domestically to pay back loans taken at usurious rates of interests. Rubbing salt to the injury comes the announcement about hike in fertiliser prices (which has now been taken back).

The way out of this logjam, according to this budget, is to have a second agricultural revolution. The second agricultural revolution should be based on “diversification, resonance with market forces and a swift adoption of sunrise technologies”. Needless to add, there is no way other than to further increase the risks for the farmers. Relying on farm exports, on a large scale, at this juncture is a cruel joke.


A few years ago they used to talk of revenue buoyancy coming out of lower rate of taxation. There was a scheme for converting black income into white (VDIS) with no questions asked – this too was in the name of revenue buoyancy.

However, tax revenue (net of states’ share) as percentage of GDP has been declining steadily from 7.6% in 1990-91 to 5.8% in 2001-02. Although the estimates for 2002-03 and 2003-04 show higher targets, but as one can see from earlier practice, the budgeted estimates were way below the revised estimates and still steeply lower when actuals are presented in a year’s time.

As States are being pressurised to introduce VAT (Value Added Tax), tax collections would only boomerang resulting in further reduction in the percentage of tax collections. This is already becoming an election issue with both major parties blaming one another for its introduction. VAT is one step forward for making India a single market. The idea is to align tax regime across states and have a unified rates across the states. This would make multinationals and big domestic corporates view India as one single market to dish out their goods.

Forex Reserves and Domestic Debt & Interest rate

India had a current account surplus for the first time in 24 years in 2001-02 and the foreign exchange reserves at $ 75.5 billion (in the third week of February ’03) are highest we have ever had. However, rather than rejoicing at the situation (as FM is doing) the RBI is worried about the composition and quality of these reserves. Most of the reserves are rupee deposits from NRIs who are playing on the interest rate differential in India and the US. The RBI continues to keep rupee from appreciating to make exports attractive. There is very little demand for expensive dollars in the economy (imports are relatively unattractive). The cost of holding dollars is rising with time as the true value of dollars is depreciating with US economy still in doldrums.

Internal debt has swollen to a great extent from Rs. 1,54,004 crores in 1990-91 to Rs. 10,21,739 crores, a growth of roughly more than 6 times in roughly a decade’s time. As per cent of GDP, public sector debt has skyrocketed from 56.50% in 1997 to 70.50% in financial year 2002. Only a spurt in ‘invisibles’ on external front and lowering of interest rates within the country has prevented another “debt trap”. The government has already reduced the rates in saving schemes. A burgeoning deficit and impending war on Iraq would make inflation a very real danger.

Defence and Social Sectors

The outlay on defence has seen enormous rise from Rs. 56,000 crore in 2002-03 to Rs. 65,300 crore, an increase of a whopping 16.60 percent while the increase in expenditure on social services is expected to be only 2.26 percent of non-plan expenditure. Nearly 2.5 percent of GDP is spent on defence services. The Central govt. spending accounts to a meager 0.30% of GDP on social services, which contains a host of services including education and health. Although social services (particulary, health and education) are State subjects, the combined expenditure of Center and States on two broad sectors like education and health as percent of GDP is just 3.1 percent and 1.4 percent respectively.


Employment growth has collapsed in the 1990s. In the organized sector, public sector employment which contributed around 70% in the total organized employment, has witnessed negative growth from 1.52% in 1990-91 to -0.91% in 2000-01. In view of this, total organized sector employment has decelerated from 1.44% to -0.61% for the same period. Even in the organized private sector, the growth has come down drastically. But the real concern is from overall decline in employment growth in the 1990s. While population growth has only marginally declined from 2.00 % in 1983 to 1.95% in 1999-00, employment growth (workforce) has witnessed enormous decline from 2.70% to 1.07%. And worst, if we consider rural India where agriculture is the main source of employment, the workforce growth has sharply declined from 2.40% to 0.67% per annum in the same period. In terms of absolute numbers also, in agriculture, employment (in millions) has stagnated at 190 million between 1993-94 and 1999-00.


The Finance Minister has chosen to pander to a vocal upper middle class and entrenched feudal setup at the cost of toiling masses; a predictable choice for this anti-people government.

Therefore disinvestment and privatisation targets have moved from loss making to profit making enterprises affecting large sections of working class. Service Tax provisions have been extended to include such small time jobs as private tutorials, internet cafes, barbers etc. Interest rates have been lowered in the face of rising inflation and rising crude oil prices. Capital expenditure is at a standstill.

At the same the Government has decided to put on backburner the proposal of its own committee (Kelkar committee) to bring agricultural income under income tax (hardly a couple of lakh rich farmers all over India would have been added to tax base).

Taxes have been waived for dividends. Long-term capital gains tax has been eliminated (mostly benefitting industrialists). For those who thrive on stock-market business, such an announcement is a windfall.

This is one of those rare ‘pro-poor’ budgets which has warmed the hearts of the upper middle class and industrialists alike. The “poor Indians” can now enjoy cheap A/Cs, imported liquor, high-end imported colour television, refrigerators, branded clothes, soft drinks, aftershaves, etc. q