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.
