Union Budget 2011-12: Missing Big Opportunities while Favouring Business

Union Budget 2011-12: Missing Big Opportunities while Favouring Business

Arun Kumar

CESP, SSS, JNU.

The Mainstream, March 5, 2011. Vol XLIX No 11.

The Union Budget has had a mixed response. It talks of giving some direct benefit to a large section of the pubic – unorganized sector, farmers, small scale industries, salaried tax payers, the elderly in society, businessmen and so on. Seventy per cent of the Finance Minster’s speech was Part A where he talked of general policies and what he would do for the various segments of the population. The tax proposals were in the remaining part of the speech where as they are in some sense the important aspect of the budget which tell us of where the resources are going to come for to implement what is being promised in the Part A. Considering all this, it would not be inappropriate to call the budget a please all budget. This is not unexpected given the current political circumstances of the government.

 I. The Importance of the Macro

The Union budget needs to be analysed at two levels. First, the broad macro thrust of the budget and secondly, the specific proposals. The former forms the sub-text of the latter. If the macro is not set right the specific proposals are not able to achieve what they are supposed to because various contradictions appear. They then become more of window dressing exercises or a smoke screen for giving concessions to vested interests.

The budget is crafted by a clever politician who understands that the credibility of his government is at a low point and is in need of a boost. For this reason he has not only not stepped hard on any toes but been gentle with everyone. For instance, he has talked of raising social sector expenditures by 17 per cent and increasing allocations to Agriculture. But the Central Plan allocations to Agriculture and Rural Development have not increased compared to the revised estimates of 2010-11 so greater emphasis to these sectors is not in sight.

This points to the trap that the budget faced. If it gave greater emphasis to what are critical areas then it would have to raise more  resources through taxation and that would have displeased businesses. For instance, the tax expenditures (The author has been pointing to this in his Budget articles in this journal in the last 5 years) to the tune of Rs.5.7 lakh crore are being given to the corporates and businesses. Last year this figure was close to Rs.5 lakh crore and in the year earlier Rs.4 lakh crore. This is being done quietly and bestowing large benefits to the business community and skewing income distribution in the country against the poor. A bold Finance Minister with a clear plan to address the various big problems of the country would have tackled this issue head on.

II. Inadequate Attention to Inflation Control and Food Security

The Budget speech talks big but this is not backed up by corresponding expenditures. If expenditures were higher then the deficits would have turned out to be higher which would have spoiled the image in international markets. Inadequate allocations to the pro poor schemes like, MGNREGA or Right to Food or to food subsidies stare everyone in the face. The reason is that the required resource raising exercise has not been pushed lest it displease any section of the population. In effect, opportunities presently available in the economy have been lost. With a good rate of growth, a lot of extra resources are being generated which could have helped mitigate poverty and reduce the rapidly growing inequities.

For this, control of inflation is important. 93 % of the work force is in the unorganized sector where there is little indexation of wages to inflation. These people lose real purchasing power in proportion to the rate of inflation and their loss becomes the gain of the employers and the business class. For instance, if the wages in MGNREGA have not risen in the last 5 years when food prices have risen sharply, their real wage has almost halved. Similar is the case with Anganwadi workers whose wages are now being doubled (1,500 to 3,000 and 750 to 1,500) after stagnating for a long time. They have been losing purchasing power over a long period of time and have been restored to where they stood earlier.

It is an unkind cut for the citizen, the FM claims that the rate of food inflation has been brought down from 20.2 per cent to 9.3 per cent. What he fails to mention is that this does not mean a decline in prices to earlier levels but that prices are rising less fast but rising nonetheless. On the high base of prices reached last year, they are continuing to go up and fairly rapidly if not as rapidly as last year. He also glosses over the fact that in the course of the last year prices went up almost as fast as last year so that the poor and the middle class have hardly had a respite since 2007.

In a fast growing economy who is the beneficiary of the extra resources being generated? Clearly with inflation taxing the poor and the middle classes they are hardly gaining in real income terms and the gains are accruing largely to the business community and the corporates who are declaring record profits in spite of the global crisis and the economic slow down earlier in 2007-09. They are gaining both through the white and the black economy. Even the well provided government servants who got a substantial raise in 2006 due to the Sixth Pay Commission are now feeling the pinch of inflation.

Since 65% of the expenditure of the poor is on food, controlling food inflation in the economy is critical to take care of the poor and to prevent inequities from worsening. This was possible in the present circumstances with high growth rate, if the political will existed. Food subsidy for the poor could be raised, procurement increased, public distribution expanded and import of goods where temporary shortages appear could be expanded. It is true that at times supplies in the international markets may be available only at a high price but then this would still help if there is the will to subsidize. After all, when we can export at a loss why can we not import and subsidize the citizens. This also implies that the nation has to take its food security seriously. The liberalizers who used to argue that all that is needed is foreign exchange and not food self sufficiency are being proved wrong. Their mistake is proving to be expensive for the country and especially the poor.

For strengthening food security it is essential that apart from the abovementioned short term measures long term measures are required to improve productivity through investments in irrigation, extension work, spread of literary and education and creation of rural infrastructure (like, electricity and roads). It may be said that with increased allocations for all these kinds of schemes, the government is moving in the correct direction. However, the inadequacy of allocation is illustrated by the case of pulses where an additional Rs.300 crore has been allotted to 60,000 villages that will focus on production of pulses. This amounts to Rs.50,000 per village and one wonders what kind of revolution in production of pulses can this create? The sum would not even be enough to dig a well in a semi-arid area. The scheme even if implemented will largely be a decorative one. Why not focus on 600 villages to begin with or allot Rs.3,000 crore?

The lesson is that given the backlog of infrastructure and the crisis in the lives of the citizens, a lot more was needed and this was possible given that the economy is generating enough resources to provide more for these schemes but the government, not wishing to upset the elite, is letting the opportunity slip by.

III. Inadequate Attention to International Uncertainties

Strengthening the economy at this juncture is important given the wide variety of international uncertainties facing the world. The world economy and especially the European economies are still in the throes of a crisis with strong possibilities of their growth rates plunging. We need only remember that in 2007, when the world economy was doing well the crisis emerged suddenly. The IMF and other agencies could not anticipate the global crisis and its extent. The growing crisis in the Middle East, the uncertainty on the energy front and a rapid rise in energy prices and food prices is sufficient to trigger a rapid decline in global growth rates. In such a situation, India needs to be prepared and not become complacent. Talk about our quick recovery and the second highest growth rate in the world should be tempered with caution. To ward off a possible crisis we need to put our growth on a more firm footing. This is possible while the growth is good but may not be feasible if difficulties arise.

This financial year has shown how volatile foreign capital flows can be. In the middle of the year, it was coming in rapidly to take advantage of the interest rate differentials. This was leading to excess liquidity and rapid rise in real estate and the stock markets. The situation has reversed with capital going out or coming in a trickle. Consequently, the stock markets have declined rapidly in the last few months. This kind of instability is not good for the investment climate in the country. In the budget speech, the FM has mentioned incentives to encourage foreign capital (FDI and FII) but this is not really needed.

India is not dependent for growth on foreign capital which constitutes only about 10% of total investments in the country. It is only an additionality. It can be substituted by internal capital formation if the government wishes to. The government needs to step up public investments and that would lead to further private investment. Government investment in infrastructure would also lead to removal of bottlenecks and speeding up of growth.

IV. Inadequate Steps to Stabilize the Economy

In the context of investments, government has been encouraging Public Private Partnership (PPP). The FM has lauded this scheme. The underlying assumption of this scheme is that the private sector can contribute to risk taking and finances while the government provides cheap infrastructure, like, land. Unfortunately, it is the government that is often taking the risk, providing cheap infrastructure and at times the finance also. Thus, PPP has often become a mechanism of subsidizing the private sector, like, in the case of private hospitals in Delhi who were given cheap land. In the case of 2G spectrum, the official line is that the low price of the spectrum through a (deliberately) faulty mechanism was to enable these services to be provided cheaply so as to enable the market to expand rapidly. It could have also been argued that by raising more funds from this auction, the pro poor schemes could have been better funded. What is the priority of the government?

The macro economic challenge facing the economy, identified by both the Economic Survey and the Budget speech, are the high rate of inflation, the large current account deficit and the high overall fiscal deficit. Why in spite of the high rate of growth and the additional resources generated does the economy face these problems?

The problems are a result of the development strategy based on `growth at any cost’. It is non-inclusive and highly polluting. To mitigate these problem the government artificially has to provide a safety net in society and also adopt measures to clean up air and water. The moot question is why first create problems and then try to take care of them through stepped up expenditures on social sectors and increased expenditures on environment and climate change. In this regard, the FM’s speech mentions forests and water.

There is clear hint of ad hocism. On the one hand, polluting industries are being increasingly allowed and on the other hand, allocations are made for environmental protection or cleaning up. This is highly wasteful for society. Recently, metal ores and mining of other minerals in forest areas has been selectively permitted, like, in the case of POSCO. That Bellary and large parts of Jharkhand, Chattisgarh and Orissa have big mining projects is now an old story. Crony capitalism of the Madhu Koda kind has been the norm in the last twenty years where natural resources are being privatized for a consideration. The poor forest dwellers and those dependent on the environment are marginal to this process.

Similarly, the encouragement being provided to the automobile sector (referred to by the FM in his speech) is leading to massive pollution and congestion in major urban centers. This has required grater allocations to the urban areas and to the neglect of the rural areas because the policy makers are partial to the former. This is leading to the vicious cycle of aggravating crisis both in the rural areas which lack investment and the urban areas that are burdened with having to provide big ticket investments. In spite of JNURM the situation is deteriorating in most urban centres (leaving out Delhi which saw massive infusion of funds for Commonwealth Games) and especially for the poor in the urban areas.

V. Rising Faith in Machines and Declining Faith in Men

The budget speech set the stage for big reforms in taxation by laying the ground for implementation of Goods and Services Tax (GST) and Direct Tax Code (DTC) in the coming years. This is a part of the attempt since 1991 to lower direct taxes and raise indirect taxes to benefit businesses and to shift national income in their favour. It is a part of the `growth at any cost’ strategy. Massive computerization is being favoured even though we know that in the past also this has led to problems. For instance, e-filing of tax returns is creating a problems for many. Data is being incorrectly entered and that has led to extra tax demands on the tax payer.

The implementation of the UID mission and allotment of Aadhaar numbers is being accelerated and subsidies may be targeted through this so that there maybe direct transfers for kerosene and fertilizers. There is touching faith in technology even though we have often failed in delivering to the poor in spite of all the reforms of delivery mechanisms. The importance of the human element is repeatedly ignored in our policies. We want to depoliticize rather than make the individual more politically conscious. Rather than build accountability of administrators they are to be replaced by machines. It is as if the human element behind the machines is unimportant. Have we not herd of computer frauds in banks and hacking and so on. In the corrupt environment that prevails in India this would happen even more so.

In this context, it is important to control the growing black economy (See this author’s articles on the subject in this journal in the last six months) which is visible in the growing scams coming to light with great regularity. The government has been trying to regain lost ground by repeatedly announcing that it is doing something to tackle this problem and also to bring back the funds earlier siphoned out of the economy.

The announcements have been in direct proportion to the public pressure and the growing number of exposes. The will to tackle it is missing. In the budget speech there is a section dealing with the black economy. New studies, signing of DTAA and so on are mentioned. But these do not add up to much if the political will is lacking. What is needed is action and not more studies. Further, if the black economy in the country is checked that would reduce the leakages abroad. The resolution of the problem then lies in the country. The ruling elite would have to tackle itself.

The importance of the human element is brought out in the case of the judiciary which has been allotted extra funds given the huge pendency of cases in courts and the travesty of justice that this leads to. There is a loss of faith in the justice system. Computerization in the judicial system has grown but the problem is the human element. The rising pendency is due to the practice of giving fresh dates to the litigants without forcing their lawyers to argue the case and come to a conclusion. At times the litigants may not show up for several dates and later claim extenuating circumstances and seek more time. There is undue leniency in giving fresh dates rather than proceed with the case. What should have been exceptional has become the norm so cases which should be decided in a short time drag on for years. More money and computerization cannot solve these kinds of problems. It is not the law or mechanization but the human element that is critical for implementation.

Has it been considered what the poor people who may not be able to keep the Aaadhar cards safely or whose cards get damaged will do? Even for the literate it is difficult to get duplicates issued and a lot of paper work is required which the poor and ill educated will not be able to handle. This has been the experience of the voter ID cards. In case of electricity metering in Delhi it is often difficult to get faulty computerized bills corrected. What would happen if the strong get the weak to sign away their cards (like, in rural banks the staff often corners the loans or gets big bribes)? Bio metric cards with various security features can be tricked or cards duplicated. In a vast country with massive corruption there would be any number of ways of vitiating the machines and the process.

In brief, there is a need to tackle the human element, reduce its alienation and raise its commitment to the nation and not to write it off and have a nation increasingly run by machines. Is that what democracy is all about?

VI. Conclusion

In brief, the Union Budget for 2011-12 has many initiatives but a large number of them are misplaced. Above all, the opportunities provided by the rapid economic growth are being allowed to dissipate due to the difficulties the government finds itself politically. It also shows that the business class is being shielded to continue the `growth at any cost’ strategy which has paid it handsome dividends. No wonder the stock markets have risen. But this is a short term strategy since the global and internal uncertainties continue to plague the nation and can led to a deeper crisis and a decline in the stock markets. We have the instance of lack of advance planning leading to the recent food and onion crisis. This is being done at the level of the macro economy as well.

Tackling even 20% of the black economy would give the nation enough resources to implement the rights to food, work and education in all seriousness. Unfortunately, the same lack of will which prevents the black economy from being seriously tackled comes in the way of considering these schemes as the most urgent task of the nation. The elite accept the uncivilized conditions in which a majority of our citizens live as a routine matter rather than a matter of shame. The unhygienic conditions at the CWG village shamed the ruling classes into protest and action but worse conditions for the poor do not move the same classes.

Finally, the present rulers are using every crisis and every problem to push for marketization (say in distribution in agriculture) and to give concessions to the corporate sector and businesses (rising tax expenditures) at the expense of the citizens. The government’s greater faith in machines than its people whom it is supposed to represent and work for which is marginalizing them further is undermining democracy.

arunkumar1000@hotmail.com.