Union Budget 2012-13: Missing a Vision

Union Budget 2012-13: Missing a Vision

Arun Kumar

CESP, SSS, JNU.

Mainstream, March 24, 2012.

I.          Introduction: The Context of `Reform’

The IMF Managing Director commented days after the presentation of the Union Budget 2012-13 that India should have the `appetite for change’. Apparently she implied that the Finance Minister should have pushed forward the necessary reforms in policies. She further added that there was need for `leadership and consensus’ and this implies a disappointment with the budget as it was presented. Two points arise. What does she mean by reform and whether she is aware of the political compulsions within which the budget was framed? No matter what a stream of thinking may say about separating economics from politics, the two are deeply inter-twined.

What is the reform that the IMF MD wants? As the head of the international institution which has been pushing the interest of global capital, it is clear she is speaking for that interest alone to the exclusion of all others. It is not that businesses have not retained the concessions they have obtained in the past, like, the tax expenditures of over Rs.5 lakh crore or many new ones like, sops to investments and especially foreign investment. Perhaps, contrary to the expectations of the reformers that they would get major new concessions the budget contains threats to their capacity to generate black incomes, like, measures to close loopholes in tax laws and some with retrospective effect. The IMF represents a powerful vested interest in our policy making.

Since 1991 when the New Economic Policies (NEP) were introduced `reform’ has stood for pro business polices – thus, it is a politically loaded term in a deeply divided society. Due to the pressure from international institutions like, the IMF and the World Bank (and their local business allies) `reform’ has globally come to stand for pro-business market based policies. This has become the universal meaning of the term instead of the dictionary meaning `change for the better’. Thus, politics and economics in times of `reform’ are deeply intertwined and not separate from each other as often claimed.

II.        The Crisis Ridden Context of the Union Budget

The budget was presented in the midst of a crisis for the ruling UPA government. The poor performance in the recently concluded State elections, especially in Uttar Pradesh, had demoralised the ruling Congress party. The Railway budget presented two days earlier had resulted in a political storm in the UPA with the TMC demanding the resignation of the Railway Minister, its own party man, for proposing across the board passenger fare hike. It was expected that Shri Pranab Mukherjee, the Finance Minister and the most experienced Minister in the government would manage matters in such a way that the Congress party’s declining fortunes would stabilize somewhat if not begin to look up. It was expected that there would be deft political management.

On the economic front, the FM was faced with a slowing economy and a persisting global crisis.  Since the two factors are inter-linked, the national economic challenge is getting more intractable. Due to opening up of the economy since 1991, all major markets in India are impacted by global events. Over these matters the national government has little control so the economy is buffeted. This has been the case with commodity prices, like, petroleum products and food, the financial markets which have witnessed wild fluctuations and foreign trade which has seen adverse movements.

The situation is worsened by the internal challenge which is being posed by the `reforms’ based on the philosophy of `growth at any cost’ resulting in deteriorating conditions for the workers and the environment which in turn adversely impacts the workers. This policy has resulted in growing inequity resulting in rising social tension across the nation. It led to a decline in the growth of demand in the economy and to the slow down in the industrial sector witnessed in the last year.

In the name of encouraging private businesses, `reforms’ have allowed a permissive environment that has led to a rapidly growing black economy and to increased corruption. The consequence has again been adverse for the workers and income distribution. It led to crony capitalism getting entrenched in society. Important decisions have been taken on the basis of contacts. As the public finally reacted to it and movements erupted since 2010, the government’s credibility has been challenged and it became crisis ridden. This has slowed down investment decisions and has become another cause for the slowdown in the economy.

The challenges for the economy are many and the Union Budget as the largest economic event of the year was expected to take care of some of them. For instance, the PM himself has said that it is a crying shame that there is massive malnourishment in the country. Per capita consumption of foodgrains has declined sharply since 1991. The quality of education and health, where available to the poor, is indifferent at best. Governance is weak due to the black economy and consequent policy failure. It is not that the nation lacks the resources for development but the growing black economy which has become more than 50% of GDP results in the inability of the government to access them and the private sector fritters them away.

Last year, the global economic crisis worsened after a brief pause in 2010. This time it is not emanating from the world of finance as in 2007 and 2008 but from political factors in USA and the Euro zone. Hence it is deeper than the crisis starting 2007-08. The nation needs to take advance steps to protect itself from the ill effects of the likely global crisis in the coming years. For this it must defend its markets to protect the poor and boost the economy. This cannot be done by opening the markets more as the `reformers’ (including the (IMF MD) would want the policy makers to do. That would only lead to demand leaking out with little benefit to India. Like, in 2008, expenditures must be increased in rural areas and on those items which do not lead to demand for foreign goods – increase expenditures on the poor. The Budget just presented does not quite do that and in fact expenditures on such an important scheme like, MGNREGS is being slashed from Rs.40,000 crore to Rs.33,000 crore even though the FM liberally praises the scheme in para 108 of his speech.

           

III.       Some Budgetary Proposals

The Union Budget for 2012-13 plans for an expenditure of Rs.14,90,925 crore or about 15% of GDP with an expected GDP of Rs.101,59,884 crore. These are huge sums of money and can finance a very large number of schemes for all sections of population. Thus, even if the overall direction of the budget may not be clear or even in the wrong direction, the Finance Minister can claim to have done a lot.

Under `Inclusion’, the Finance Minister has announced increased allocations for SC and ST sub plans of about 18%. For Food Security, there is a 58% increase on Integrated Child Development Services (ICDS). Mid day meals provision has been increased by 15%. Allocation for rural drinking water and sanitation has been increased by 27%. Pradhan Mantri Gram Sadak Yojana (PMGSY) has been allotted 20% more. Backward Regions Grant Fund scheme has been given about 22% more. Budget for Sarva Shiksha Abhiyan (SSA) has been increased by 21.7%. Rashtriya Madhyamik Shiksha Abhiyan (RMSA) is allotted nearly 29% more. For National Rural Health Mission (NRHM) allocation has been raised by 15%.

In addition one may list a few of the schemes that will in some way or the other benefit the marginalized sections: creation of mega handloom clusters, technical support to handloom weavers, market access to Micro and Small Enterprises, Multi-sectoral Nutrition Augmentation Programme, Scheme for Empowerment of Adolescent Girls, SABLA, Rajiv Gandhi Panchayat Sashaktikaran Abhiyan (RGPSA), Rural Infrastructure Development Fund, National Urban Health Mission, Pradhan Mantri Swasthya Suraksha Yojana (PMSSY), Swarnjayanti Gram Swarozgar Yojana (SGS), National Rural Livelihood Mission (NRLM), Mahila Kisan Sashaktikaran Pariyojana, Women’s SHG’s Development Fund, Bharat Livelihoods Foundation of India, Prime Minister’s Employment Generation Programme (PMEGP), National Skill Development Fund (NSDF), Indira Gandhi National Widow Pension Scheme and Indira Gandhi National Disability Pension Scheme, National Family Benefit scheme and a co-contributory scheme SWAVALAMBAN.

While the FM talks a lot about rural development and according it priority the Central Plan figures do not bear this out. In 2011-12, expenditures on this head are less than budgeted by 13%. Further, the amount budgeted for 2012-13 is less than what was spent in 2010-11, in spite of the high rate of inflation. Agriculture and Allied activities are expected to increase by 18% but in 2011-12 less was spent than in 2010-11. How can one have faith that this pattern would not be repeated? It also brings into question the government’s good intentions regarding the rural sector and agriculture.

While the FM’s speech devotes a major portion to these items of concern to the marginalized, in terms of total allocations they are small. A bulk of the expenditures will be on Revenue Account (Rs.12,86,109 crore) and that too on non-Plan (Rs.8,65,596 crore) and a large part of the latter is pre committed for interest payment (Rs.3,19,759 crore). The three big items of non-Plan Revenue Account add up to 72% - these are Interest payment, Defence and Subsidies. Further, establishment expenses are estimated to be about Rs.1,15,352 crore and most of it is on non-Plan account. With this added, 85.33% of the amount is committed and not available for development. Given that Defence is a holy cow and subsidies a consequence of poverty and other policy mistakes which force subsidies to be given, the over all leeway for the government to spend on essential schemes listed above is rather less.

 Establishment expenses are for the running of ministries and departments and there will be an estimated 34,11,340 employees in 2012-13, an increase of 64,667 employees over 2011-12. Of the total employment, Railways account for 38.9%, the Police for 29.8%, the Home Ministry as a whole (including Police) for 30.55%, Ministry of communication for 13.93% and Ministry of Finance for 5.42%. All of them together account for 88.83% of the total employment in the Central government establishment.

Even though the total expenditures were more than the budgeted amount by about 5%, there was a 2.5% shortfall in capital expenditures in 2011-12 compared to what was budgeted and the amount spent was almost the same as in 2010-11. The Plan expenditure was less by about Rs.15,000 crore (3.5%). This is not unexpected since it happens many a times that the Plan expenditures are less than what was shown in the budget. The Central Plan outlay was less by Rs.34,000 crore or about 6%. If this target had been met, the deficits would have been much higher. Similarly, if the expenditures on rural development and MGNREGS had been as planned, the deficit would have been even higher. The point is that it is the non-Plan revenue account expenditures that have gone up beyond what was budgeted.

In 2012-13, the Expenditures are slated to go up by 13%. But the Capital Account expenditures are budgeted to go up by almost 30% and Plan expenditures by 22.2%.  Plan expenditure is budgeted at 34.9% and Capital expenditures at 13.75% of the total expenditure. These are up substantially but given the past experience it is likely that these targets may not be met since the government will be under pressure to show a lower deficit in the budget to meet its fiscal deficit target.

IV.       Budgetary Arithmetic in Doubt

Revenue receipts of the government have turned out to be less in 2011-12 because the tax collections are less and so are the disinvestments. As pointed out above, since the expenditures are more while the receipts are less, the Revenue and the Fiscal deficits have turned out to be much more (4.4% and 5.9%) than targeted (3.4% and 4.6%). Accordingly, borrowings have risen sharply by 26.4%. This will lead to a sharp rise in the interest burden next year. But this is not adequately reflected in the next year’s interest payment figures.

This raises the question of whether the FM has given a realistic budget or is there likely to be slippage? Revenue receipts are taken to rise by about 22%. An optimistic figure is assumed so that the Revenue and the Fiscal deficits can be shown to be less than this year.

The Services Tax and the Union Excise duties have been increased to meet this increased target even though it is known that this will be inflationary. Further, this will lead to a lowering of demand and that will lower the growth rate of the economy. This has not been factored in while assuming a higher growth rate of the economy for the coming year. If the growth rate turns out to be less (as was the case for the current year, 2011-12) then the entire calculation of revenue will not be correct and the deficit can turn out to be larger.

Further, if inflation rate increases, it will be difficult to cut subsidies and DA payment to government servants and pensioner will be higher. The government has instead assumed a sharp drop in subsidies by 12%. The Government is also cutting back on MGNREGS. If these expectations are not fulfilled then there will be a higher deficit.

The Finance Minister bases his budgetary calculations on the basis of the projections of growth of the economy. So if the growth turns out to be less as it did in 2011-12, the budget also does not fulfil its targets. The FM has expressed the hope that things would improve in 2012-13 but the basis of this optimism is not clear. In his speech, he has stated,

“I expect India’s GDP growth in 2012-13 to be 7.6 per cent, +/- 0.25 per cent. I expect average inflation to be lower next year. I also expect the current account deficit to be smaller, aided by improvement in domestic financial savings”.

            In his speech last year also he expressed similar sentiments but they have been belied,

“ … the Indian economy is expected to grow at 9 per cent with an outside band of +/- 0.25 per cent in 2011-12. I expect the average inflation to be lower next year and the current account deficit smaller and better managed with higher domestic savings rate and stable capital flows”.

The growth rate of the economy was expected to increase from 8.4% in 2010-11 to 9 % in 2011-12 but the actual growth rate may be less than 6.9%. Thus, the underlying assumptions in drafting the budget turned out to be incorrect. As pointed out above, revenues have been lower while expenditures have been higher or not spent on certain key schemes and therefore, deficits are higher than budgeted.

V.            Need for Basic Change in the Philosophy of Development

While one way of looking at the large number of schemes for the marginalized sections of society, listed above, is that the government is concerned about the lot of the poor. But the constant increase in the number of schemes and the allocations to them would suggest that the government is not successful in achieving its objective of improving the lot of the marginalized. This can be because the schemes may be inadequate to the task or that there is some fundamental flaw in the government’s basic policies. Both factors appear to be true.

Allocations are indeed inadequate for the task at hand. The problem is compounded by the black economy, so that funds do not reach the ground and of the amount that reaches the ground a part is wasted and/or siphoned out. Thus, there is large scale policy failure especially for the marginalized sections whose voice is weak.

The second aspect is equally crucial. There is a basic flaw in the government’s policy framework which is based on `growth at any cost’ with little concern for distribution and the environment. Fundamental problems are emanating from this philosophy so that the various schemes continuing and the new ones being launched are mere palliatives. Further, as the new schemes are launched the focus shifts from some of the earlier ones and they tend to languish without serving much of the purpose.

Take for instance, MGNREGS scheme the funding for which is sought to be cut on the ground that the money allotted is not being fully spent. The scheme has come in for fulsome praise from the FM in para 108 and yet it is sought to be curtailed. Rather than identify the reasons for the shortfall and make it more effective and expand it, the opposite is being done, reflecting a casual approach.

The increase in the number of schemes and additional allocations for them result in the expansion of bureaucracy. Given the state of our bureaucracy, this results in greater amount of corruption and waste of funds. Thus, the dilemma is that the marginalized need the schemes but in the long run it does not solve the problem and perpetuates them. The `reformers’ are all too happy to use the argument of corruption and ineffectiveness to get the expenditures on the marginalized sections curtailed. This enables them to get more for themselves.

The reformers see the problems as emanating only from supply side. They believe that the market will solve all problems. They do not see that the marginalized are even more marginal in the market and need state intervention. The reformers have less faith in human beings and more in automation and machines. So, the Adhar card for which a lot allocation is being made is expected to solve problems of delivery through direct cash transfers which will eliminate the human being from transactions. While these kinds of technological fixes can solve some of the problems they can also create new ones.

For instance, with ATMs while delays maybe eliminated crime of a different kind has come. Salary payment directly into the employees bank account has eliminated a kind of corruption that used to flourish but black income generation has only increased since new forms of it have emerged. What also needs to be remembered is that there is always a human element behind all technology and that can foul up its use in unanticipated ways.

VI.       Conclusion

The analysis in this piece points to many positive aspects of the budget just presented by the FM. There are the various schemes to tackle the rapidly growing black economy. There is the promise of a white paper on the black economy and so on. However, the positives are overwhelmed by the overall lack of a direction, especially for the marginalized. This is a result of a lack of a long term vision amongst policy makers and to the manipulation of the budgetary arithmetic to suit the needs of the business community.

Education presents a concrete example of a lack of clear long term vision fouling up increased allocations. Problems in education are not only persisting but are getting aggravated. While there is numerical expansion, quality is being compromised. Many even doubt that there is numerical expansion since data is not very reliable. Children in fifth standard do not even have the skills of what a first standard child should theoretically have. Further, even though there has been a rapid expansion of institutions of excellence, like, the IITs, IIMs and Central Universities, standards are on the decline.

Institutions are not just buildings but people running them. These elite institutions had been facing shortage of good faculty and this has increased as more or less the same number of capable faculty members are now spread across many more institutions. Thus, standards are on the decline in the existing good institutions which are sought to be replicated. There is no quick fix to having more of higher education but the policy makers think that there is one. They are resorting to standardization in all forms of ways without understanding that standards cannot be achieved via standardization. The two are often the anti-thesis of each other.

To be fair to the FM, this lack of a long term vision is not a recent phenomenon but a long term one. The problem has perhaps been further aggravated because the government has been a crisis ridden one and has not had the time to think through what it wishes to do. It seems to not even be able to cater to its political interest. By presenting an inflationary budget it is not making itself popular while it needs to regain its appeal with the public. Whatever the implications of the budget for the ruling party, for the nation this is tragic since there is a need for a government that can face the multifaceted challenges confronting the country.

arunkumar1000@hotmail.com.