Presentation of a budget is generally assumed to be indicative of the financial statement that a government makes. But what is often lost sight of is that the budget is more a political statement than a financial one. It clearly exposes the socio-economic policy orientation of the government. The class orientation of this government was made very clear by the Finance Minister in his speech when he argued,
The Union Budget cannot be a mere statement of Government accounts. It has to reflect the Government’s vision and signal the policies to come in future. With development and economic reforms, the focus of economic activity has shifted towards the non-governmental actors, bringing into sharper focus the role of Government as anenabler. An enabling Government does not try to deliver directly to the citizens everything that they need. Instead it creates an enabling ethos so that individual enterprise and creativity can flourish. (Emphasis added)
Unlike the earlier stint of the UPA government, this term has rid them of the ‘baggage’ of carrying the left on whose critical support they were sustaining their government in the last term. We need to remind ourselves of the euphoria that was generated among the big corporate houses and the apex industrial institutions like the FICCI, CII and ASSOCHAM after the victory of the UPA in the last general elections. Vijay Mallya represented this opinion very clearly when he said “[t]he UPA need not worry about hotchpotch partners. The Congress can clearly pursue its policies without the need to convince the Left”. Echoing similar opinion, Prime Minister’s economic advisory council chairman, Suresh Tendulkar said, “Economic reforms would certainly be on top of the agenda of the government”. The second union budget of this government plays to this gallery in its bid to woo the neo-rich sections of the Indian population. This budget is no different in essence from the ‘India Shining’ politics of the NDA except for a facade of a ‘human face’.
The essence of this budget is conveyed in Pranab Mukherjee’s statement when he said that the government instead of being the provider in the economy should be an ‘enabler’ for individual enterprises (read, big corporations). What this essentially means is further withdrawal of the government from the economic activity except from the sphere of military expenditure. It is surprising that during an economic downturn, our Finance Minister has argued for ‘fiscal consolidation’, which means decreasing fiscal deficit. What is required is an increase in the government expenditure which would add to the demand, and thereby, in employment and total output of the economy. His position is a clear reflection of the class bias that the UPA government has. The financial and corporate interests always want the government’s role in the economy to be passive and to keep the fiscal deficit low. This bias becomes even clearer if we look at the way in which it has been sought to be lowered. He has proposed to increase the indirect taxes, which increases the price of common goods, to mobilize revenue without increasing the expenditure in similar proportion. On top of that, he has proposed tax sops to the neo-rich sections of the Indian population, which means that the burden on indirect tax revenue would ipso facto be higher to compensate for the decline in direct tax revenue. This budget is a clear indicator of the pro-rich and anti-poor political strategy of this government.
This paper will analyse the basic tenets of this budget by placing it in a broader economic perspective. It is divided in four sections. Section one deals with the issue of fiscal deficit. The second section deals with the revenue aspect of the budget and the third section with the expenditure side of it. The last section attempts to draw some conclusions from this budget and where the government is headed in its second term.
Fiscal Prudence: The Humbug of Finance
The treasure view: It has now become a mantra for the powers that be to declare that government should minimize the expenditure that is not financed by its tax revenue, i.e. balance its budget. This view is an old one going back to the famous treasury view which was held during the Great Depression of the 1930s by the then governments in the advanced capitalist countries. To put this argument in a nutshell, let us see what the treasury of the British government during those times had to offer (1),
Any increase in government spending necessarily crowds out an equal amount of private spending or investment, and thus has no net impact on economic activity.
It is surprising that despite a cogent rebuttal of this argument by Keynes, an English economist and Kalecki, a Marxist economist, it remains alive and, worse still, dominates the policy making. It seems as if Keynesian revolution did not take place in the history! Before we present a critique of this view, let us present the arguments put forth in favour of such a policy. This argument has three aspects.
First, it is argued that a high fiscal deficit means low private investment, which is the driving force in the economy. Proponents argue that if the government garners a higher share of savings of the economy, less would be left to finance private investment. Therefore, according to this view, the very purpose of increasing growth through fiscal deficit gets defeated.
Second, it is argued that a high fiscal deficit means a higher indebtedness of the government in the future which puts financial burdens on the exchequer. Even if government expenditure boosts demand in the economy, interest payments for past borrowings do not contribute to this process.
Third, a high fiscal deficit means pushing the economy beyond its limits which eventually results in inflation. They argue that a higher fiscal deficit financed by government borrowing from the RBI means an increase in the money stock which would result in inflation since the supply of goods remains the same.
Why is this view wrong? Let us examine each of these points to show why they are wrong. First, the view that government expenditure ‘crowds out’ private investment because it depletes the pool of savings assumes that the pool itself is a given. Whereas any increase in activity in the economy ipso facto generates savings. This can happen in two different ways. First, an increase in government expenditure could generate higher real output (and possibly higher employment) if the economy is not functioning at its full capacity. This increase in output, and thereby of income of workers and capitalists together, generates higher savings than earlier. Second, even if the economy is working at full capacity, it would generate savings by squeezing the share of wages of workers through inflation in prices even as the money wages remain constant. Thus, there is no economic logic for why the ‘pool’ of savings would remain constant.
Second, an increasing share of interest payment out of the fiscal deficit is only possible if the rates of interest are rising. The treasury view assumes again that since the government is increasing the demand of credit, its price (interest rates) is bound to shoot up. The truth, however, is that the interest rates are not decided in the economy through equalisation of demand and supply of credit. It is instead fixed exogenously by the central bank, i.e., RBI in our case. Now, if the interest payments increase at a higher rate than the fiscal deficit, it is because the RBI keeps increasing the interest rate and not the other way round. This increase in interest rate in itself is a result of the process of liberalisation of the Indian economy which requires wooing international finance capital to come and invest in the Indian stock markets.
Third, fiscal deficit is not necessarily inflationary. First, as explained above, if a larger amount of goods can be produced, especially when the economy has idle capital and unemployed labour, the increased amount of money stock chases an increased amount of good. Hence, it would not result in inflation in the economy. Second, if the economy is running at its limit (resources are fully employed), it is not just the fiscal deficit but any expansionary activity, including private investment, becomes inflationary. So, there is no reason why fiscal deficit should be made out to be a villain. In fact, under capitalism, this is the only stable source of providing some respite to the common people facing the brunt of the pro-rich economic policies.
Most importantly, when an economy faces a downturn, any attempt to balance the budget or to put the fiscal deficit within a certain limit puts the burden of adjustment primarily on the working class. A declining economic activity means declining tax revenue for the government because both wages and profits go down. In such a situation, a commensurate downward revision of the government expenditure closes up even the limited opportunities of getting alternative work for the poor and the unemployed. Thus, there is a strong class bias in favour of the rentiers and capitalists in such a policy framework.
After placing the issue of fiscal deficit in a theoretical perspective, let us now concentrate on the specific proposals in this regard in the current budget. This is what Pranab Mukherjee had to say in his budget speech on ‘fiscal prudence’,
I am happy to report that in keeping with my commitment, I have been able to present the Budget for 2010-11 with a fiscal deficit of 5.5 per cent. In the Medium Term Fiscal Policy Statement being presented to the House today, along with other Budget documents, the rolling targets for fiscal deficit are pegged at 4.8 per cent and 4.1 per cent for 2011-12 and 2012-13, respectively… The improvement in our economic performance encourages a course of fiscal correction even as the global situation warrants caution. [emphasis added]
It is interesting to note that he says that although the global situation warrants caution, which means stimulus packages should not be withdrawn abroad, India should do just the opposite. Contrary to his claim, this is not the time to claim any consistent improvement in India’s economic performance since the economic crisis broke out. In fact, growth figure for the last quarter shows a decline in the GDP growth rate (see fig. 1 below).
What remains to be seen is whether the government strictly follows these targets. In case it does, it will be disastrous for the economy in general and the poor in particular. This would be particularly so because government expenditure would have to be scaled down in the event the revenue estimates are not realised. This is a very likely possibility given the nature of tax proposals the current budget proposes.
Pranab Mukherjee’s roadmap for achieving this target comprises of the following strategies:
Increasing tax revenue through higher indirect taxes even as sops are doled out to the upper middle class and the rich through tax concessions or revisions.
Decreasing crucial expenditure or at best increasing it marginally in the social sectors to ‘rationalise’ the fiscal policy.
Let us now examine these two aspects in some detail.
Resource Mobilisation: A Pro-rich, Anti-poor strategy
Taxes are of two kinds: direct and indirect. While direct taxes are levied on the income of the individuals and business enterprises, indirect taxes are levied on individual commodities. Direct taxes are also used to counter the rising income inequalities resulting from the spontaneous functioning of a capitalist system. This can be done through progressive taxation for higher income groups and using this fund to provide relief to the poor. Indirect taxes on common commodities on the other hand do exactly the opposite. It takes the same tax from the poor as well as the rich. This would obviously affect the poor more because their tax payment as a proportion of their income in this case is much higher than the rich.
Excise Duty on Petrol and Petroleum Products: In the name of curtailing fiscal deficit, the government has proposed to increase the tax revenue through greater incidence of indirect taxes. The specific proposal is to restore the basic duty of 5 per cent on crude petroleum; 7.5 per cent on diesel and petrol and 10 per cent on other refined products. The budget also proposes to enhance the Central Excise duty on petrol and diesel by Re.1 per litre each. For all non-petroleum products, the proposal is to enhance the standard rate on them from 8 per cent to 10 per centad valorem.
The effect of fuel price inflation on the overall inflation (2) can be understood from figure 2, which measures the contribution of three categories of goods i.e. primary articles (PA), fuel, power, light and lubricants (FPL&L) and manufactured products (MP). It can be seen that the contribution of fuels etc. to the overall inflation has been rising steadily since 1999-2000. It should be clear, therefore, that any further increase in inflation of this category would have a cascading effect on the overall inflation.
There are specific reasons for why we are stressing on the fuel prices. First, apart from having a direct impact, fuel price inflation influences the other categories of goods dramatically. The best example of this is the food items. Any increase in the fuel prices means an increase in the transportation cost, which has a direct impact on the final prices at which we buy these goods. Since this spill over effect is strong, any increase in fuel prices should not be taken at its face value alone. Second, there is an asymmetry involved with fuel price movements. While the international price hikes in oil have a direct impact on the domestic prices, any reversal internationally does not get translated into decline in domestic prices. This has become especially true because of our integration with the international economy.
After having presented the data on inflation and its various components, let us now explore the implications of such a process on the economy in general and the poor in particular. In a capitalist economy, the adjustment between theex ante aggregate demand and ex post supply (GDP) takes place through two routes: quantity adjustment and price adjustment. This distinction is central to understanding the effect of inflation in an economy. While the process of quantity adjustment could possibly open up opportunities for the working class and the petty producers through increase in employment, price adjustment squeezes their real income to make this adjustment work. Let us see how this takes place.
We have explained above how an increase in fiscal deficit effects an increase in the GDP. Let us now generalise this process where any one or all of the components of the aggregate demand can increase. Aggregate demand has five components: workers’ consumption, capitalists’ consumption, capitalists’ investment, government expenditure and net exports. An ex ante increase in any/all of these leads to an increase in the GDP ex post. There are two ways in which this can happen. First, it can happen through an increase in the physical quantity of output which is equivalent to the quantum of increase in demand. This also has a possibility of increasing employment unless this increase is equally compensated by an increase in labour productivity.
Second, it can happen through price adjustment. Since our focus at present is on this process, let us explore this possibility in some detail. For simplicity, we assume away the government sector and the foreign demand and concentrate on the demand of the workers and the capitalists. Suppose there is only one good, corn. Its nominal value is Rs 100 where the price is Rs 10 and the real output is 10 units. Nominal wage bill of the workers is Rs 40, which leaves Rs 60 as the nominal profits. We assume that workers consume all their wages whereas capitalists consume only a part of their profits, say half of it. For the given prices, workers have a claim over 4 units of output whereas capitalist over 6 units (3 as consumption and 3 as investment).
For some reason the capitalists, instead of investing Rs 30, want to invest Rs 40 by taking a loan. This extra demand for investment could be met by an increase in output of corn but if it is not possible, then the increased demand would be met by an increase in prices of the 10 units of corn. The price would have to increase to Rs 11 to accommodate the nominal increase in investment demand. If the workers are unable to increase their nominal wages, say because of presence of a large reserve army of labour or absence of unions, their purchasing power (real wages) would ipso facto decline. Instead of having a claim over 4 units of corn, now they have a claim over only 3.6 units (40/11) whereas the capitalists’ share increases to 6.4 units (70/11). Therefore, any price inflation, without a commensurate increase in nominal wages, inevitably leads to a redistribution of real income and output in favour of the capitalists.
We could fit this simple model to the current situation in our economy. The assumption that the workers (3) have not been able to maintain their real share in output can be easily validated by data. If we take the manufacturing sector alone, which has the most organised labour force, the share of wages in net value added has been declining steadily. This decline is even more drastic if we look at wages as a ratio of profits (see fig. 3). This is especially so in the neoliberal era. One could imagine that if this is the condition of the most organised labour force of our country, the share of income of the unorganised and the poor in general would be even worse. In such a situation, an inflationary budget such as this is going to be a drastic squeeze on the livelihood of the majority of the Indian population. It is important to note that the inflation resulting from the budget proposals would be self-inflicted in the sense that this could have been controlled but was consciously decided not to. It is here that the class orientation of the present dispensation at the centre comes out starkly and so unabashedly.
Direct Tax Concessions: It would be interesting to contrast the proposal on indirect taxes with that on the direct taxes. The finance minister declared that the tax sops through relaxations in direct taxes would lead to a revenue loss of Rs 25,000 crores this year. One of the most important factors is the proposal of ‘broadening’ the tax slabs.
One can notice that all those whose income is more than Rs 3 lakhs per annum stand to gain from this announcement (see table 1). Let us take the example of a person who earns Rs 10 lakhs and see how his tax payment would change. Earlier he was paying 10, 20 and 30 per cent for the portions 1.6–3 lakhs, 3–5 lakhs and remaining 5 lakhs of his income respectively, which means a total of Rs 2.05 lakhs (approx 20 percent of his total income). Now, he would pay 10, 20 and 30 per cent for the portions 1.6–5 lakhs, 5–8 lakhs and remaining 2 lakhs of his income respectively, which means 1.55 lakhs (approx 15 percent of his total income). Similarly, all those people whose income is greater than 3 lakhs gain from these new slabs and as we have shown the gain is substantial. Instead of paying 20 per cent as taxes, a person with an income of 10 lakhs pays only 15 per cent of his total income. Therefore, this is effectively transferring income into the hands of the upper middle class and the rich even as higher taxes in the form of indirect taxes are levied on the working class and the poor.
There is an important factor that we would like to bring in while discussing distribution of income between different classes in India. There is an interesting study by Banerjee and Piketty (2005) on growing income inequality in India (see fig. 4). It can be seen that after a continuous decline in income share of the top 1 per cent between 1950-1982, there has been a dramatic reversal since the early 1980s. The authors draw a significant conclusion as to why this was the case,
[T]he shares of the top 0.01 percent, 0.1 percent, and 1 percent in total income shrank substantially from the 1950s to the early to mid-1980s but then rose again, so that today these shares are only slightly below what they were in the 1920s and 1930s. This U-shaped pattern is broadly consistent with the evolution of economic policy in India: From the 1950s to the early to mid-1980s was a period of “socialist” policies in India, whereas the subsequent period, starting with the rise of Rajiv Gandhi, saw a gradual shift toward more probusiness policies. Although the initial share of the top income group was small, the fact that the rich were getting richer had a nontrivial impact on the overall income distribution. [emphasis added]
It is to be noted that their analysis only covers the period till 2000, the first part of the post-reform period. However, the successive NDA and UPA governments have adopted even more pro-rich policies so this trend would have continued till present times. It is alarming to see that in such a situation the government has openly adopted an inequality-enhancing budget. So much for Manmohan Singh’s ‘globalisation with a human face’!
Disinvestment of PSEs: Another alarming announcement made in this budget is the decision to revert back to the path of disinvestment of Public Sector Enterprises (PSEs). It will be clear in a moment why we have used the phrase revert back. While talking about revenue mobilisation through disinvestment, Pranab Mukherjee said that they expect to generate Rs 40,000 crores in the coming year from disinvestment as against Rs 25,000 in 2009-10. In his own words,
While presenting the Budget for 2009-10, I invited people to participate in Government’s disinvestment programme to share in the wealth and prosperity of the Central Public Sector Undertakings. … The proceeds will be utilised to meet the capital expenditure requirements of social sector schemes for creating new assets.
Listing of Central Public Sector Undertakings improves corporate governance, besidesunlocking the value for all stakeholders—the government, the company and the shareholders. [emphasis added]
It is startling to see that the finance minister is leaving no stones unturned to woo the corporate sector to ‘share in the wealth’ of the PSEs. The class bias in this statement becomes starker if we notice the word that he used for the corporate sector, which is ‘people’. He has made it clear that people for him (and his colleagues) stands for the rich corporate houses and not the ‘aam admi’ that the UPA keeps referring to. This policy statement is to be seen in sharp contrast to their previous tenure when the Left parties had kept up the pressure to stall the disinvestment plans of the government. While in the first three years of the previous tenure of the UPA, it could disinvest worth Rs 4424, 1581 and 534 crores, it has already mobilised 20,000 crores for the present fiscal year and proposes to mobilise 40,000 crores for the next.
The justification for disinvestment given by the finance minister is that the proceeds would be utilised to meet the expenditures in the social sectors. The vacuity of this statement can be established from this year’s glaring disparity between the resource mobilisation from disinvestment and the expenditure proposals on the social sectors, an issue that we turn to in the next section.
Government Expenditure: Too Less to Have an Impact
On the expenditure side, this budget is a damp squib. Despite making tall claims about an ‘inclusive budget’, the increase in total expenditure is grossly inadequate. This is in line with the fiscal consolidation policy of the finance minister. Let us evaluate the budget proposals for some of the important sectors.
Agriculture: It is alarming to see that despite a negative growth rate in agriculture registered in 2009-10, the share of allocation on agriculture and allied activities of the total budget expenditure has gone down from 10.77 per cent in 2009-10 (Revised estimates) to 9.75 per cent this year. This complete lack of prioritisation and gross neglect of the agricultural sector especially at a time when it is witnessing one of the worst crises since independence speaks volumes about the real motive of this government. It should be kept in mind that the agricultural sector employs 56 per cent of India’s population today. At a time of dwindling income in the agricultural sector, instead of providing monetary relief to the farmers, the government has decided to decrease the allocation on fertiliser subsidies, thereby, increasing their misery through cost inflation. There has been an absolute decline in fertiliser subsidy from Rs 73660 crores in 2008-09 to Rs 52980 crores in 2009-10 and Rs 49981 crores in the current proposal.
Rural Development: If we take rural development as a whole, the picture remains the same. This budget allocates lesser share of the total plan on rural development as compared to the previous years. This share has been decreasing from 21 per cent to 16.79 per cent to 16 per cent in 2008-09, 2009-10, 2010-11 respectively. The allocation on Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which is the flagship programme of the government, has gone up by only 2.5 percent from Rs. 39,100 crore in 2009-10 (RE) to Rs. 40,100 in 2010-11 (BE).
Food Security and Nutrition: As per government’s own reports (4), 77 percent people of our country, i.e. 83.6 crore people, spend less than Rs.20 per head per day and live in poverty and hardship. Moreover, different national and international reports have shown that around 50 per cent children are undernourished and more than 75 per cent women are anaemic in rural India. There has been a continuous decline in the per capita net availability of food grains since the early 1990s. In such a situation, the requirement was to increase the food subsidy as a step towards universalisation of the Public Distribution System (PDS). However, the government has decided to decrease even that in the name of fiscal prudence.
Health: The combined expenditure of Centre and States on Health, as a proportion of GDP, has increased marginally from around 1.02 percent in 2008-09 to 1.06 percent in 2009-10. This should be seen in sharp contrast to the election promise of the Congress government of raising total public spending on health in the country to 2 to 3 percent of GDP. Despite the increase in incidence of TB, Malaria and other communicable diseases, there is actually a decline in the allocation of resources on national disease control programme. There is also a decline in allocation to the premier institutes of medical education like PGIMER, Chandigarh. Allocation on National Rural Health Mission (NRHM) has been increased to Rs. 15,514 crores in 2010-11 from Rs. 14,002 crores in 2009-10. There was a large scope of increasing this expenditure if the government was serious about health coverage, especially to the poor and the disadvantaged sections of our society.
Therefore, it is more than clear that at a time in which the government could have played the role of boosting the demand and output as also help generate employment, it has focussed on the policy of controlling expenditure. Government expenditure does not only provide impetus to grow in an unemployment-ridden economy, it also has the potential to partially counterbalance the income and wealth inequalities generated as a result of the spontaneous functioning of capitalism.
Conclusion
This is probably one of the few budgets in recent years which clearly expose the class bias and strategy of the government. There is not even pretence of a ‘human face’ as the UPA government announces the economic policy that they would follow for their present term. At a time in which the working people of our country are getting doubly squeezed due to spiralling inflation and loss of jobs as a result of the global crisis, it is outrageous that the government has not only turned a blind eye to them but has burdened them further. This budget quite clearly is going to aggravate income and wealth inequality while bringing hardship to the aam admi of our country. The question, however, is whether the aam admi would be able to gather enough strength to give a fitting rebuff to these anti-people policies of the UPA government.
Rohit teaches Economics at the Indian Institute of Technology (IIT) Delhi.
(2) The overall inflation in India is measured by an index called Weighted Price Index (WPI) which calculates the weighted inflation of all the commodities, where the weights are their quantitative contribution to the GDP.
(3) By workers, we do not only mean the working class but the working population, which would include the agricultural workers, petty producers etc.
(4) Arjun Sengupta Committee was set up by the UPA government to look into the condition of the unorganised workers.
References:
Banerjee, Abhijit and Thomas Piketty (2005): Top Indian Incomes, 1922-2000. The World Bank Economic Review, 19(1): 1–20
CBGA Report: Union Budget 2010-11, Which Way Now? Response to the Union Budget, Centre for Budget and Governance Accountability
Patnaik, Prabhat (2000): The Humbug of Finance. Frontline, 4 February
Radical Notes
Budget 2010-2011: An Exclusivist Agenda of the UPA
Rohit
Presentation of a budget is generally assumed to be indicative of the financial statement that a government makes. But what is often lost sight of is that the budget is more a political statement than a financial one. It clearly exposes the socio-economic policy orientation of the government. The class orientation of this government was made very clear by the Finance Minister in his speech when he argued,
Unlike the earlier stint of the UPA government, this term has rid them of the ‘baggage’ of carrying the left on whose critical support they were sustaining their government in the last term. We need to remind ourselves of the euphoria that was generated among the big corporate houses and the apex industrial institutions like the FICCI, CII and ASSOCHAM after the victory of the UPA in the last general elections. Vijay Mallya represented this opinion very clearly when he said “[t]he UPA need not worry about hotchpotch partners. The Congress can clearly pursue its policies without the need to convince the Left”. Echoing similar opinion, Prime Minister’s economic advisory council chairman, Suresh Tendulkar said, “Economic reforms would certainly be on top of the agenda of the government”. The second union budget of this government plays to this gallery in its bid to woo the neo-rich sections of the Indian population. This budget is no different in essence from the ‘India Shining’ politics of the NDA except for a facade of a ‘human face’.
The essence of this budget is conveyed in Pranab Mukherjee’s statement when he said that the government instead of being the provider in the economy should be an ‘enabler’ for individual enterprises (read, big corporations). What this essentially means is further withdrawal of the government from the economic activity except from the sphere of military expenditure. It is surprising that during an economic downturn, our Finance Minister has argued for ‘fiscal consolidation’, which means decreasing fiscal deficit. What is required is an increase in the government expenditure which would add to the demand, and thereby, in employment and total output of the economy. His position is a clear reflection of the class bias that the UPA government has. The financial and corporate interests always want the government’s role in the economy to be passive and to keep the fiscal deficit low. This bias becomes even clearer if we look at the way in which it has been sought to be lowered. He has proposed to increase the indirect taxes, which increases the price of common goods, to mobilize revenue without increasing the expenditure in similar proportion. On top of that, he has proposed tax sops to the neo-rich sections of the Indian population, which means that the burden on indirect tax revenue would ipso facto be higher to compensate for the decline in direct tax revenue. This budget is a clear indicator of the pro-rich and anti-poor political strategy of this government.
This paper will analyse the basic tenets of this budget by placing it in a broader economic perspective. It is divided in four sections. Section one deals with the issue of fiscal deficit. The second section deals with the revenue aspect of the budget and the third section with the expenditure side of it. The last section attempts to draw some conclusions from this budget and where the government is headed in its second term.
Fiscal Prudence: The Humbug of Finance
The treasure view: It has now become a mantra for the powers that be to declare that government should minimize the expenditure that is not financed by its tax revenue, i.e. balance its budget. This view is an old one going back to the famous treasury view which was held during the Great Depression of the 1930s by the then governments in the advanced capitalist countries. To put this argument in a nutshell, let us see what the treasury of the British government during those times had to offer (1),
It is surprising that despite a cogent rebuttal of this argument by Keynes, an English economist and Kalecki, a Marxist economist, it remains alive and, worse still, dominates the policy making. It seems as if Keynesian revolution did not take place in the history! Before we present a critique of this view, let us present the arguments put forth in favour of such a policy. This argument has three aspects.
First, it is argued that a high fiscal deficit means low private investment, which is the driving force in the economy. Proponents argue that if the government garners a higher share of savings of the economy, less would be left to finance private investment. Therefore, according to this view, the very purpose of increasing growth through fiscal deficit gets defeated.
Second, it is argued that a high fiscal deficit means a higher indebtedness of the government in the future which puts financial burdens on the exchequer. Even if government expenditure boosts demand in the economy, interest payments for past borrowings do not contribute to this process.
Third, a high fiscal deficit means pushing the economy beyond its limits which eventually results in inflation. They argue that a higher fiscal deficit financed by government borrowing from the RBI means an increase in the money stock which would result in inflation since the supply of goods remains the same.
Why is this view wrong? Let us examine each of these points to show why they are wrong. First, the view that government expenditure ‘crowds out’ private investment because it depletes the pool of savings assumes that the pool itself is a given. Whereas any increase in activity in the economy ipso facto generates savings. This can happen in two different ways. First, an increase in government expenditure could generate higher real output (and possibly higher employment) if the economy is not functioning at its full capacity. This increase in output, and thereby of income of workers and capitalists together, generates higher savings than earlier. Second, even if the economy is working at full capacity, it would generate savings by squeezing the share of wages of workers through inflation in prices even as the money wages remain constant. Thus, there is no economic logic for why the ‘pool’ of savings would remain constant.
Second, an increasing share of interest payment out of the fiscal deficit is only possible if the rates of interest are rising. The treasury view assumes again that since the government is increasing the demand of credit, its price (interest rates) is bound to shoot up. The truth, however, is that the interest rates are not decided in the economy through equalisation of demand and supply of credit. It is instead fixed exogenously by the central bank, i.e., RBI in our case. Now, if the interest payments increase at a higher rate than the fiscal deficit, it is because the RBI keeps increasing the interest rate and not the other way round. This increase in interest rate in itself is a result of the process of liberalisation of the Indian economy which requires wooing international finance capital to come and invest in the Indian stock markets.
Third, fiscal deficit is not necessarily inflationary. First, as explained above, if a larger amount of goods can be produced, especially when the economy has idle capital and unemployed labour, the increased amount of money stock chases an increased amount of good. Hence, it would not result in inflation in the economy. Second, if the economy is running at its limit (resources are fully employed), it is not just the fiscal deficit but any expansionary activity, including private investment, becomes inflationary. So, there is no reason why fiscal deficit should be made out to be a villain. In fact, under capitalism, this is the only stable source of providing some respite to the common people facing the brunt of the pro-rich economic policies.
Most importantly, when an economy faces a downturn, any attempt to balance the budget or to put the fiscal deficit within a certain limit puts the burden of adjustment primarily on the working class. A declining economic activity means declining tax revenue for the government because both wages and profits go down. In such a situation, a commensurate downward revision of the government expenditure closes up even the limited opportunities of getting alternative work for the poor and the unemployed. Thus, there is a strong class bias in favour of the rentiers and capitalists in such a policy framework.
After placing the issue of fiscal deficit in a theoretical perspective, let us now concentrate on the specific proposals in this regard in the current budget. This is what Pranab Mukherjee had to say in his budget speech on ‘fiscal prudence’,
It is interesting to note that he says that although the global situation warrants caution, which means stimulus packages should not be withdrawn abroad, India should do just the opposite. Contrary to his claim, this is not the time to claim any consistent improvement in India’s economic performance since the economic crisis broke out. In fact, growth figure for the last quarter shows a decline in the GDP growth rate (see fig. 1 below).
What remains to be seen is whether the government strictly follows these targets. In case it does, it will be disastrous for the economy in general and the poor in particular. This would be particularly so because government expenditure would have to be scaled down in the event the revenue estimates are not realised. This is a very likely possibility given the nature of tax proposals the current budget proposes.
Pranab Mukherjee’s roadmap for achieving this target comprises of the following strategies:
Let us now examine these two aspects in some detail.
Resource Mobilisation: A Pro-rich, Anti-poor strategy
Taxes are of two kinds: direct and indirect. While direct taxes are levied on the income of the individuals and business enterprises, indirect taxes are levied on individual commodities. Direct taxes are also used to counter the rising income inequalities resulting from the spontaneous functioning of a capitalist system. This can be done through progressive taxation for higher income groups and using this fund to provide relief to the poor. Indirect taxes on common commodities on the other hand do exactly the opposite. It takes the same tax from the poor as well as the rich. This would obviously affect the poor more because their tax payment as a proportion of their income in this case is much higher than the rich.
Excise Duty on Petrol and Petroleum Products: In the name of curtailing fiscal deficit, the government has proposed to increase the tax revenue through greater incidence of indirect taxes. The specific proposal is to restore the basic duty of 5 per cent on crude petroleum; 7.5 per cent on diesel and petrol and 10 per cent on other refined products. The budget also proposes to enhance the Central Excise duty on petrol and diesel by Re.1 per litre each. For all non-petroleum products, the proposal is to enhance the standard rate on them from 8 per cent to 10 per centad valorem.
The effect of fuel price inflation on the overall inflation (2) can be understood from figure 2, which measures the contribution of three categories of goods i.e. primary articles (PA), fuel, power, light and lubricants (FPL&L) and manufactured products (MP). It can be seen that the contribution of fuels etc. to the overall inflation has been rising steadily since 1999-2000. It should be clear, therefore, that any further increase in inflation of this category would have a cascading effect on the overall inflation.
There are specific reasons for why we are stressing on the fuel prices. First, apart from having a direct impact, fuel price inflation influences the other categories of goods dramatically. The best example of this is the food items. Any increase in the fuel prices means an increase in the transportation cost, which has a direct impact on the final prices at which we buy these goods. Since this spill over effect is strong, any increase in fuel prices should not be taken at its face value alone. Second, there is an asymmetry involved with fuel price movements. While the international price hikes in oil have a direct impact on the domestic prices, any reversal internationally does not get translated into decline in domestic prices. This has become especially true because of our integration with the international economy.
After having presented the data on inflation and its various components, let us now explore the implications of such a process on the economy in general and the poor in particular. In a capitalist economy, the adjustment between theex ante aggregate demand and ex post supply (GDP) takes place through two routes: quantity adjustment and price adjustment. This distinction is central to understanding the effect of inflation in an economy. While the process of quantity adjustment could possibly open up opportunities for the working class and the petty producers through increase in employment, price adjustment squeezes their real income to make this adjustment work. Let us see how this takes place.
We have explained above how an increase in fiscal deficit effects an increase in the GDP. Let us now generalise this process where any one or all of the components of the aggregate demand can increase. Aggregate demand has five components: workers’ consumption, capitalists’ consumption, capitalists’ investment, government expenditure and net exports. An ex ante increase in any/all of these leads to an increase in the GDP ex post. There are two ways in which this can happen. First, it can happen through an increase in the physical quantity of output which is equivalent to the quantum of increase in demand. This also has a possibility of increasing employment unless this increase is equally compensated by an increase in labour productivity.
Second, it can happen through price adjustment. Since our focus at present is on this process, let us explore this possibility in some detail. For simplicity, we assume away the government sector and the foreign demand and concentrate on the demand of the workers and the capitalists. Suppose there is only one good, corn. Its nominal value is Rs 100 where the price is Rs 10 and the real output is 10 units. Nominal wage bill of the workers is Rs 40, which leaves Rs 60 as the nominal profits. We assume that workers consume all their wages whereas capitalists consume only a part of their profits, say half of it. For the given prices, workers have a claim over 4 units of output whereas capitalist over 6 units (3 as consumption and 3 as investment).
For some reason the capitalists, instead of investing Rs 30, want to invest Rs 40 by taking a loan. This extra demand for investment could be met by an increase in output of corn but if it is not possible, then the increased demand would be met by an increase in prices of the 10 units of corn. The price would have to increase to Rs 11 to accommodate the nominal increase in investment demand. If the workers are unable to increase their nominal wages, say because of presence of a large reserve army of labour or absence of unions, their purchasing power (real wages) would ipso facto decline. Instead of having a claim over 4 units of corn, now they have a claim over only 3.6 units (40/11) whereas the capitalists’ share increases to 6.4 units (70/11). Therefore, any price inflation, without a commensurate increase in nominal wages, inevitably leads to a redistribution of real income and output in favour of the capitalists.
We could fit this simple model to the current situation in our economy. The assumption that the workers (3) have not been able to maintain their real share in output can be easily validated by data. If we take the manufacturing sector alone, which has the most organised labour force, the share of wages in net value added has been declining steadily. This decline is even more drastic if we look at wages as a ratio of profits (see fig. 3). This is especially so in the neoliberal era. One could imagine that if this is the condition of the most organised labour force of our country, the share of income of the unorganised and the poor in general would be even worse. In such a situation, an inflationary budget such as this is going to be a drastic squeeze on the livelihood of the majority of the Indian population. It is important to note that the inflation resulting from the budget proposals would be self-inflicted in the sense that this could have been controlled but was consciously decided not to. It is here that the class orientation of the present dispensation at the centre comes out starkly and so unabashedly.
Direct Tax Concessions: It would be interesting to contrast the proposal on indirect taxes with that on the direct taxes. The finance minister declared that the tax sops through relaxations in direct taxes would lead to a revenue loss of Rs 25,000 crores this year. One of the most important factors is the proposal of ‘broadening’ the tax slabs.
One can notice that all those whose income is more than Rs 3 lakhs per annum stand to gain from this announcement (see table 1). Let us take the example of a person who earns Rs 10 lakhs and see how his tax payment would change. Earlier he was paying 10, 20 and 30 per cent for the portions 1.6–3 lakhs, 3–5 lakhs and remaining 5 lakhs of his income respectively, which means a total of Rs 2.05 lakhs (approx 20 percent of his total income). Now, he would pay 10, 20 and 30 per cent for the portions 1.6–5 lakhs, 5–8 lakhs and remaining 2 lakhs of his income respectively, which means 1.55 lakhs (approx 15 percent of his total income). Similarly, all those people whose income is greater than 3 lakhs gain from these new slabs and as we have shown the gain is substantial. Instead of paying 20 per cent as taxes, a person with an income of 10 lakhs pays only 15 per cent of his total income. Therefore, this is effectively transferring income into the hands of the upper middle class and the rich even as higher taxes in the form of indirect taxes are levied on the working class and the poor.
There is an important factor that we would like to bring in while discussing distribution of income between different classes in India. There is an interesting study by Banerjee and Piketty (2005) on growing income inequality in India (see fig. 4). It can be seen that after a continuous decline in income share of the top 1 per cent between 1950-1982, there has been a dramatic reversal since the early 1980s. The authors draw a significant conclusion as to why this was the case,
It is to be noted that their analysis only covers the period till 2000, the first part of the post-reform period. However, the successive NDA and UPA governments have adopted even more pro-rich policies so this trend would have continued till present times. It is alarming to see that in such a situation the government has openly adopted an inequality-enhancing budget. So much for Manmohan Singh’s ‘globalisation with a human face’!
Disinvestment of PSEs: Another alarming announcement made in this budget is the decision to revert back to the path of disinvestment of Public Sector Enterprises (PSEs). It will be clear in a moment why we have used the phrase revert back. While talking about revenue mobilisation through disinvestment, Pranab Mukherjee said that they expect to generate Rs 40,000 crores in the coming year from disinvestment as against Rs 25,000 in 2009-10. In his own words,
It is startling to see that the finance minister is leaving no stones unturned to woo the corporate sector to ‘share in the wealth’ of the PSEs. The class bias in this statement becomes starker if we notice the word that he used for the corporate sector, which is ‘people’. He has made it clear that people for him (and his colleagues) stands for the rich corporate houses and not the ‘aam admi’ that the UPA keeps referring to. This policy statement is to be seen in sharp contrast to their previous tenure when the Left parties had kept up the pressure to stall the disinvestment plans of the government. While in the first three years of the previous tenure of the UPA, it could disinvest worth Rs 4424, 1581 and 534 crores, it has already mobilised 20,000 crores for the present fiscal year and proposes to mobilise 40,000 crores for the next.
The justification for disinvestment given by the finance minister is that the proceeds would be utilised to meet the expenditures in the social sectors. The vacuity of this statement can be established from this year’s glaring disparity between the resource mobilisation from disinvestment and the expenditure proposals on the social sectors, an issue that we turn to in the next section.
Government Expenditure: Too Less to Have an Impact
On the expenditure side, this budget is a damp squib. Despite making tall claims about an ‘inclusive budget’, the increase in total expenditure is grossly inadequate. This is in line with the fiscal consolidation policy of the finance minister. Let us evaluate the budget proposals for some of the important sectors.
Therefore, it is more than clear that at a time in which the government could have played the role of boosting the demand and output as also help generate employment, it has focussed on the policy of controlling expenditure. Government expenditure does not only provide impetus to grow in an unemployment-ridden economy, it also has the potential to partially counterbalance the income and wealth inequalities generated as a result of the spontaneous functioning of capitalism.
Conclusion
This is probably one of the few budgets in recent years which clearly expose the class bias and strategy of the government. There is not even pretence of a ‘human face’ as the UPA government announces the economic policy that they would follow for their present term. At a time in which the working people of our country are getting doubly squeezed due to spiralling inflation and loss of jobs as a result of the global crisis, it is outrageous that the government has not only turned a blind eye to them but has burdened them further. This budget quite clearly is going to aggravate income and wealth inequality while bringing hardship to the aam admi of our country. The question, however, is whether the aam admi would be able to gather enough strength to give a fitting rebuff to these anti-people policies of the UPA government.
Rohit teaches Economics at the Indian Institute of Technology (IIT) Delhi.
Notes:
(1) Taken from http://en.wikipedia.org/wiki/Treasury_view
(2) The overall inflation in India is measured by an index called Weighted Price Index (WPI) which calculates the weighted inflation of all the commodities, where the weights are their quantitative contribution to the GDP.
(3) By workers, we do not only mean the working class but the working population, which would include the agricultural workers, petty producers etc.
(4) Arjun Sengupta Committee was set up by the UPA government to look into the condition of the unorganised workers.
References:
Banerjee, Abhijit and Thomas Piketty (2005): Top Indian Incomes, 1922-2000. The World Bank Economic Review, 19(1): 1–20
CBGA Report: Union Budget 2010-11, Which Way Now? Response to the Union Budget, Centre for Budget and Governance Accountability
Patnaik, Prabhat (2000): The Humbug of Finance. Frontline, 4 February
Union Budget 2010-11: Available at http://indiabudget.nic.in/ub2010-11/ubmain.htm
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