The Budget and the Indian Economy

Mar 7th 2011, Jayati Ghosh
There is a resurgence of economic triumphalism among Indian elites, who have been celebrating how the Indian economy withstood the global crisis to maintain respectable rates of output growth. Despite price rises, consumer demand is buoyant, especially for goods and services consumed by the rising middle classes. The housing market is experiencing yet another boom, fed by increasingly dubious lending patterns of the major banks. Services, especially the ''modern'' services, continue to flourish despite all the recent evidence of widespread scams. So most private investors, both local and foreign, are bullish about future prospects.

But the story is rather different if you step out of the confines of this small minority. There are no significant improvements in the indicators that matter for most people, like stable employment, better livelihoods, reduced hunger and more basic human development. Large parts of the country continued to languish in generally dreadful conditions. India continues to have the largest number of hungry people in the world, and our nutrition and education indicators are down there with Sub Saharan Africa. Because economic growth has not generated enough productive jobs, the bulk of the work force is in very fragile and precarious forms of self-employment. Wages have barely risen as profits have exploded, jobs are hard to come by and people are being displaced for projects that bring no improvement to their own lives. All this leads to a growing number of disaffected youth whose frustrations make them more prone to violent or socially undesirable behaviour.

The commonality across these two very different worlds is concern with inflation (especially food inflation), which has emerged as the biggest immediate economic problem in the country today. For most people in the country, the other big concern is productive and gainful employment. So what are the messages in the Union Budget about the government’s intentions to address these issues?

The dramatic increase in all the stock markets indices, once investors had absorbed the implications of the Budget announcements, said it all. This is a Budget with very strong income distribution implications: very clearly favouring the upper income categories of the population, and likely to reduce the real incomes of wage earners and self-employed.

This Budget will definitely add to the cost-push pressures that have already led to rapid increases in prices in the past two years. To control food prices, it was essential to focus on measures that will increase food supply and expand distribution, as well as to ensure that marketing margins and speculative activity do not go up by providing more resources for public distribution. But no resources have been set aside for this.

Meanwhile, indirect taxes have been increased, even on previously exempt items of mass consumption, which have been brought under the VAT regime. The Finance Minister announced his intention to abandon subsidies on kerosene and fertiliser, in favour of cash transfers to a designated category of beneficiaries. This means first of all an increase in the market prices of these goods consumed by the poor and by farmers, with uncertain later monetary transfers for a subset of consumers.

Petroleum prices were recently deregulated, itself a problematic move in a period of extreme global price volatility. To lessen the burden on the people, it was widely expected that the government would at the very minimum reduce its own tax rates, since it is anyway getting windfall revenue gains from the high world prices. But this has not been done, and fuel prices are therefore likely to keep increasing. Since oil is a universal intermediate that enters into all other prices, this will obviously have a further impact on inflation.

In any case, the attempt to control the fiscal deficit by restraining expenditure has other adverse effects, which affect the chances for gainful employment. Cutting public spending has negative effects on other economic activities because it operates to reduce demand for them. This in turn affects both employment prospects, so here too, there is little to cheer about.

The inadequacy of public services in health and education is very well-known, but they are also strongly related to the fact that the government simply does not provide enough resources for quality service provision. There is hardly any increase here, so Indian will continue to have some of the poorest human development indicators in the world.

The adverse implications of such a strategy go beyond this. There is a growing number of disaffected youth whose frustrations make them more prone to violent or socially undesirable behaviour. Growing inequality and material insecurity increase the receptivity of local people in depressed areas to ''extremist activity'' designed to overthrow an economic system that is seen to be completely unjust.

The resulting instability can have all sorts of expected and unexpected effects, as governments across the developing world are finding in painful ways.


Site optimised for 800 x 600 and above for Internet Explorer 5 and above