Vote on Account: Neither Economically nor Politically What was Needed

Vote on Account: Neither Economically nor Politically What was Needed
Arun Kumar, CESP, SSS, JNU

MAINSTREAM, VOL LII NO 9, FEBRUARY 22, 2014

A vote on account is not expected to make any major announcement of policies since it is supposed to be a temporary measure to enable the government to continue its expenditures to maintain itself and the continuing programmes. It is expected that the new government that would take over in a few months from now would present the full Budget. In a way, the government that is on its way out should not tie the hands of the government that is expected to take over by announcing policies. But these are only conventions. Nothing prevents a government from presenting a full Budget. After all, a new government can again go in for a revised Budget if it so desires.

More importantly, in the vote of account for 2014-15 presented now, there are major policy announcements, like changes in excise duties, to boost the profitability of certain industries that are not doing so well and changes in the accounting procedures to show a much larger Central Assistance for State Plans and a reduced Central Plan Outlay. It has also announced ‘one-rank one-pay’ for the retired Army personnel and waiver of interest on loans to students. Thus, where the ruling party felt it could gain electorally by announcing schemes, it has done so. The question then is: why did it not go further on some crucial matters for the economy?

As the Finance Minister has spelt out, the economy has been slowing down for the last nine quarters. Further, the economy has shown a high degree of macro volatility since the Fiscal Deficit, Current Account Deficit in foreign trade and inflation have shown adverse trends in the recent past. In the last five years, the government has repeatedly said that soon the rate of inflation will decline and invariably that has not happened; it has remained persistently high with ups and downs.

The government’s claims for the next year are not anchored on the prospects of the economy. Its budgetary numbers are predicated on a growth in the nominal GDP of 13.4 per cent. Given the government’s claim that inflation is running at five per cent and the economy will grow at about six per cent, the GDP growth will at best be 11 per cent. Even this is unlikely since the principal problems in the economy are not being addressed. Thus, the budgetary calculus is likely to go wrong and the new government will have to bear the burden of correcting a deteriorating situation.

Inflation is measured by the Wholesale Price Index (WPI) which does not represent the true inflation in the economy since it does not give any weight to services. So, for instance, it does not reflect the rise in the cost of education or health. Even public institutions are charging higher prices to come closer to the market prices. This is on the plea that subsidy is undesirable for the Budget and economy. The public is confused and thinks that a fall in the rate of inflation means lower prices. This is not true since a decline in the rate of inflation only means a slowdown in the rate at which prices are rising. So as long as the inflation rate is positive prices continue to rise. With inflation, the public finds its purchasing power declining and its standard of living affected.

The Finance Minster proudly proclaimed that he is on the path of fiscal consolidation since he has kept the Fiscal Deficit for the current year (2013-14) below the target of 4.8 per cent. But how has he achieved it when tax revenues have fallen short by about Rs 77,000 crores (by 6.5 per cent) compared to the Budget estimates? There is a drastic cut in the Plan size (by Rs 80,000 crores). This is a trick the Finance Minister has been playing on the public consistently year after year. The fiscal deficit target is being achieved by compressing essential expenditures. This is like chopping one’s nose to cure one’s cold.

Thus, when the Budget is presented, to show the government’s seriousness about the Plan for public consumption, inflated figures of Central Plan allocations are presented before Parliament. But after a year, when the next Budget is presented, the actual figures show that much less than the budgeted amount is spent so that the Plan targets remain unfulfilled.

The shortfall for 2009-10 was Rs 41,009 crores, for 2010-11 Rs 60,168 crores for 2011-12 Rs 83,861 crores, and for 2012-13 Rs 1,53,033 crores. The shortfall of RE over BE for 2013-14 is already Rs 65,989 crores. Thus the total shortfall of the Central Plan expenditure over the five years amounts to more than Rs 4,04,000 crores. When Plan expenditures are cut, it implies a shortfall in public investment. No wonder there is shortage of infrastructure like power, water and railways. Further, this leads to a slowdown in the economic rate of growth as the demand falls short and bottlenecks appear. Additionally, it leads to unfinished projects since allocations for them are inadequate.
The country has witnessed a slowdown in exports while imports remain high. Energy and gold imports have contributed substantially to the high level of trade and Current Account deficits (CAD). High gold imports are a result of the demand in the economy due to the uncertainty and the desire of the savers under the circumstances to buy more gold as a hedge. Energy imports have been high since coal production has not kept pace given the uncertainties regarding coal mine allocations due to the corruption cases and environment considerations.
The result of a high CAD has been speculation on the value of the rupee and a decline in its value vis-a-vis the foreign currencies. It fell to a record low of Rs 68 to the dollar. The problem was compounded by the signals emanating from the Federal Reserve (the US Central Bank) regarding phasing out of the quantitative easing. This opened the possibility of drying up of easy liquidity available in the international financial markets in the last few years; this was driving foreign investments into the emerging markets. The slowdown in China and tepid recovery in the US and other advanced economies add to the uncertainty for the world economy. Thus, the external picture has been one of great uncertainty not only last year but over the last three years. This is likely to endure and it will continue to impact the CAD and value of the rupee.
The high CAD has also resulted in a rapid rise in the debt of the country and especially of the short run kind that causes greater instability. The foreign debt of the country is about $ 100 billion more than India’s foreign exchange reserves. That is the signal to inter-national speculators that there is a weakness to be exploited here. While the steps taken by the government and the Reserve Bank to check short-run speculation and reduce the inflow of gold have stabilised the rupee somewhat, these are not enough. Reports are that gold is being smuggled in at an increasing pace and this can again add to pressures on the BOP. So, the situation will remain precarious as long as India’s macro economy is not stabilised.
An important reason for the slowdown of the economy is the decline in the investment rate in the economy. It had peaked in 2007-08 and since then it has declined by about five per cent. An important reason for this decline is that investments in India have been based on crony capitalism and in the last four years with the exposes of various scams and cancellation of licences, businessmen face uncertainty. Further, the government’s decision-making has slowed down with the policy-makers (politicians and bureaucrats) delaying decisions. So, the model of crony capitalism has collapsed and no new one has emerged.
Corruption has also meant that the public has viewed the large investment decisions of the private sector with suspicion. People do not want to give up their land since they believe that natural resources are being looted by the businessmen along with the politicians at their expense. Thus, movements against displacement have become strong and projects have stalled both in the public and private sectors. We have had the examples of Singur, POSCO, Nandigram, Raigadh, Jaitapur, Greater NOIDA and so on. The courts have also viewed with suspicion the various land acquisition demands. Thus, investment by the private sector, both foreign and Indian, has slowed down. As already mentioned, the public investment has slowed down due to the cuts in the Central Plan size in the last five years.
At the root of the instability in the economy is the black economy and indiscriminate opening up leading to the BOP problems. The black economy results in higher costs and waste which causes prices to rise. It also leads to speculative activity and episodic price increases as in the case of onion prices last year. This is compounded by the connivance between the businessmen and policy-makers. The black economy results in shortfall in tax revenues and higher expenditures due to corruption so that the fiscal and revenue deficits are larger than they need be. Due to the flight of capital and under- and over-invoicing of trade and transfer pricing, the BOP turns adverse. Thus, the instability in the economy is a direct result of the black economy which results in the BOP problem, high Fiscal Deficit, higher inflation and a slowdown in investment both by the private and public sectors.
The indiscriminate opening up has led to the reduced policy-space for the government. The government has targeted the Fiscal Deficit as the main variable to operate on since the credit rating agencies look for it hawk-eyed. So, it has not minded the expenditure compression even if that has meant a slowing down of the economy and consequent bottlenecks and problems. It has been warned by analysts that private investment is unlikely to pick up much in the near future given the uncertainty of the coming elections and the likely prospects of a hung Parliament.
The FM’s claim that massive investment projects have been sanctioned does not amount to much in a period of the uncertainty since sanction does not mean the decision to invest. The only chance for the economy to come out of the slowdown was an increase in public investment. For this the black economy had to be effectively tackled. One does not have to close the economy to regain the policy-space but only tackle the black economy. However, the government has been reluctant to do so in the last five years and continues to be so.
The government had a chance in the vote on account to take adequate steps to tackle the macroeconomic imbalances. It has not thought it prudent to do so because these may be seen to be policy-decisions. However, since it has taken some policy-decisions as already pointed out, it should have taken the really critical decisions on stabilising the economy. Instead, the Finance Minister spent much energy on showcasing the UPA’s economic performance in the last 10 years and especially when he was the Finance Minister.
To conclude, the Finance Minister has claimed that of late the various deficits have moderated and so the UPA Government’s policies have been on track. But the experience of the last five years is that the government has not been able to deliver on its claims. It has repeatedly claimed in the last three years that the price rise would moderate and the rate of growth would pick up; but this has not happened. Consequently, the credibility of the government has been low and the public has voted against the Congress in the recent Assembly elections. If the government’s performance was indeed good, why would it lose so comprehensively? If one ponders over this, it is clear that the vote on account neither delivers politically what the Congress-I needed nor economically what the country requires at this juncture—a lose-lose situation for all.

arunkumar1000@hotmail.com

Interrogating the Anti-Corruption Platform

Interrogating the Anti-Corruption Platform

Arun Kumar

Sukhamoy Chakrvarty Chair Professor, CESP, JNU

Published The Hindu, February 6, 2014.

AAP has announced its intention to fight against corrupt leaders from all parties in the coming national elections. So, anti corruption seems to be its main plank for the coming elections since it has not yet announced anything else. Its success in the recent Delhi state elections was on a largely anti-corruption plank. Even the promises of cheaper/free water and electricity to the electorate were based on ending corruption in the provision of these services. Beyond these and a few other issues, the vision of AAP regarding India has yet to emerge. Given the pent up anger of the electorate with inflation and corruption, a limited agenda was enough in Delhi. Would a purely anti-corruption plank also work at the national level for the same reason?

Other political parties have been forced to adopt an anti-corruption stance. Clearly, AAP has succeeded in changing the political discourse in the country. The rapid adoption of the Lokpal bill, promise of passing the other pending anti-corruption bills and the buzz about selecting clean candidates points in that direction.  

Corruption has become a key issue since it results in daily hardships for the aam admi – whether regarding employment, prices, education, drinking water, electricity, dealing with police, bureaucracy, judiciary and so on. The nation faces crucial problems both at the macro and the micro economic levels. Tackling these problems requires addressing the wider economic, political, social and institutional context and not just corruption. Another impression being created is that problems can be resolved by bureaucratic or political fiat?

To tackle corruption, its cause needs to be correctly identified. The basis of corruption is the growing black economy propelled by widespread illegality in a variety of economic activities and the disruption of the democratic institutions. It has grown from 4-5% of GDP in 1955-56 to the present more than 50% of GDP and as an offshoot, corruption has become rampant. Given its all pervasive character, the black economy has become `systematic and systemic’ and that is why, it has widespread macroeconomic, social, political and institutional implications. These cannot be tackled only through checking corruption.

The macroeconomic aspects of the black economy result in wider inefficiencies of the system. It leads to poor quality of goods and services and higher costs. It causes wastage so as to create shortages so that higher profits can be generated through speculation. It reduces the rate of growth of the economy much below its potential, leading to missed development. `Expenditures do not lead to outcomes’ and targets are not fulfilled in say, education. It leads to flight of capital so that a poor country faces a shortage of capital.

In India, businesses have formed a nexus with the politicians and the executive to generate black incomes. This triad has turned politics on its head. It manipulates policies to suit the favoured businessmen who makes extra profits and share it with the other two. The gains of this small group are at the expense of all others and this aggravates disparities. Representation has lost much of its meaning since the elections have largely thrown up those who take the vote of the people but after winning work for the vested interests and against the interest of the people they represent. Even the leaders of the most deprived sections have quickly turned corrupt after coming to power. No wonder people lost hope in the system’s capacity to deliver to them and became more and more sectarian and divided along caste, community and regional lines. Today, hope has revived and people are looking for new clean leaders.

Corruption is associated with the public sector while the private sector is portrayed as its victim. So, less of government is suggested for reducing corruption. Businesses support such a policy since it gets them greater freedom in the market which translates into a higher degree of monopoly, capacity to fix prices and boost profits. The flip side of such a policy is that the aam admi has to depend more on the markets. While this may be welcomed by those who gain from the markets, it is detrimental for the poor who are marginal to it, like, the women, the dalits and the muslims.

The markets often cannot cater to the basic needs of the poor (not just those below the poverty line) because of their low incomes relative to the prices. Today, 23 years after the largely market based policies were introduced after 1991, the marginalized face shortage of work, low wages because of massive under employment, reduced subsidies resulting in higher prices and increasing cost of education and health. Further, advertising is resulting in changing tastes and demand for newer products thus causing the poverty line to rise. There is the paradox of increasing poverty in spite of rising incomes.

 In brief, a business led anti-corruption agenda would benefit the aam admi incidentally; to the extent of reduction of waste. But, because of tilt of policies towards businesses, they would lose much more and in the net would be worse off in spite of reduction in corruption. For example, today most government schools provide indifferent education. If an anti-corruption regime privatizes these schools which will charge higher fees, the poor would not be able to afford them and would be worse off. Even the somewhat better off `middle class’ would lose since it also has limited purchasing power and confronts a situation similar to the poor. The issues of the marginals may get marginalized.

Why are businessmen in India who have gained through crony capitalism and pro business policies interested in an anti-corruption plank? They want to safeguard the massive amount of capital they have accumulated in the last two decades. They have rapidly invested their surpluses into land (say, SEZs), other natural resources like, mines, forests and spectrum and so on.

Since 2010, exposes of big scams threatens these investments. Movements have sprung up against large projects from POSCO to Kutch and Koodankulam to Haryana. So, businesses want to legitimize their gains and launder their image by distancing themselves from those who have been caught in the scams. Further, they want efficient capitalism to multiply their capital rapidly. Hence a section of businessmen support the anti-corruption movement. They also see an opportunity in the present anti-corruption mood of the public to legitimise capitalism by diverting attention to corruption in government - they do not want reformed capitalism or a welfare state. But, can there be efficient capitalism without tackling the black economy of which businessmen are the dominant part? So, the fight against corruption alone can only be a limited one.

A pro-business anti-corruption programme can only have a short run perspective. Over time, as it leads to greater inequity, slow down in the economy and social discontent, the rulers would have to turn authoritarian to quell the rising social and political discontent. What is the alternative?

Tackling the black economy through a pro Aam Admi programme would make government functional rather than minimal. It would lead to a positive sum game and be neither pro nor anti business. It would lead to an appropriate mix of state and market led development which would cater to the marginalized sections of society without promoting sectarianism. Tackling the black economy would also help overcome the deep  macroeconomic imbalances - current account deficit, fiscal deficit, inflation, slow growth, stagnating industry and so on.

Flight of capital would decline turning the current account deficit into a surplus. The fiscal deficit would turn into a fiscal surplus generating enough resources in the budget for improving social and physical infrastructure - education, power and so on. It would lead to reduction in costs (as over invoicing declines) and fall in inflation. As more direct taxes are collected, less of indirect taxes would be required and this would lead to lower prices. Also, as the fiscal deficit falls, the government borrowing would fall thereby reducing its interest burden, the largest single item of expenditure. Finally, as policies begin to work, inequity declines and the investment productivity rises, the rate of growth of the economy would rise. Thus tackling the black economy would be a long term and equitable solution. To check the growing black economy requires political will to cut the triad make institutions functional and promote movements for greater democratization.

There are then two paths for checking corruption. A short run limited micro-economic and ahistorical plank which would be a zero sum game that would marginalize the poor. The other would be a democratic path and positive sum game along which the black economy would be tackled and many of India’s macro and micro economic problems would be resolved.

arunkumar1000@hotmail.com