Budget 2012-13*

Mar 17th 2012, Jayati Ghosh

There is always a statement that a government makes with its annual fiscal statement, even if the actual speech is presented in as boring and sleep-inducing a manner as Finance Minister Pranab Mukherjee's speech was for Budget 2012-13. So what exactly is the political economy statement being made in this budget?

On the face of it, it may appear that the Budget is as directionless and haphazard as all of the UPA government's current policies. But in fact there is a clear economic strategy. Unfortunately, it is a strategy that has already failed to deliver more ''inclusive growth'' and it is unlikely that a new omelette can be made with these clearly broken eggs.

The strategy broadly seems to be based firstly on the premise that we must have economic growth at all costs, regardless of whether that growth delivers more decent employment or better living conditions for the people or is sustainable beyond a temporary bubble. Secondly, such growth can only really be delivered by large capital, whether foreign or domestic, and that in particular foreign capital is desirable because it will also fill the growing gap in the current account. Thirdly, the government must therefore do all it can to provide more incentives, including fiscal sops and viability gap financing, to attract foreign capital. Fourthly, that therefore there is no need to be overly concerned with the other aspects of ''inclusion'' such as employment or food security, since these will come about through trickle-down.

Once we recognise these features, then a lot of what was presented (not in the Budget Speech, which was masterful in its use of banality to disguise reality, but in the actual fiscal data) makes much more sense.

In terms of tax collection, this is a very regressive Budget, shifting the dominant burden of tax payments on to ordinary citizens, and particularly the poor. Direct tax concessions are being provided to amount to an estimated loss of Rs 4500 crore. Meanwhile, the very significant increases in excise duty rates and the extension of services taxation to a wider range of activities are estimated to bring in massively increased revenues of nearly Rs 73,000 crore. Direct taxes have declined to only 35 per cent of total tax revenues in the proposed budget estimates, compared to 38 per cent in 2010-11.

This increase in indirect taxes will obviously lead to rising prices, which will disproportionately hit the poor (in terms of share of their incomes). This will be aggravated by the attempt to reduce the subsidy burden by cutting fuel and fertiliser subsidies. Of these, the proposed reduction in fuel subsidies (by almost Rs 25,000 crore) will have the greatest inflationary impact, because fuel is a universal intermediate and there will be cascading effects on all other prices. There can be no illusions about whom this will hit, and the smokescreen of providing ''direct cash transfers'' to intended beneficiaries cannot hide the crude attempt to shift the burden on to consumers, since the total subsidies are projected to come down so sharply. It emerges that the greatest winner from the high and volatile global oil prices will be the central government, while the greatest losers will be Indian consumers, particularly the poorer sections.

In terms of expenditure too, this Budget disappoints. It is true that some social sector spending has increased, which is certainly welcome - but only because we are now so grateful for any crumbs.

For example, allocations for school education have been increased by around 17 per cent compared to the current year's revised estimates, though the increase is mostly in elementary education. As it happens, secondary education increasingly needs much more money, but the increased outlay barely keeps pace with the projected inflation (which incidentally is likely to be much higher than the anticipated 7.2 per cent because of the inflationary effect of the Budget itself).

The outlay for health and family welfare has gone up by nearly 22 per cent compared with the current year's revised estimates, but at a total of only Rs 30,702 crore it is still embarrassingly small in relation to India's projected GDP - only 0.3 per cent! There has been a substantial increase in outlay for the ICDS compared to the previous year's budget estimates. But this essentially reflects the increase in remuneration for anganwadi workers and helpers, which was implemented in the middle of this fiscal year and therefore raised the actual spending by about Rs 3,000 crore. In fact the increase in outlay needs to be much more, because the ICDS is still not fully universal despite seven years of Supreme Court strictures, and because the ICDS workers still do not receive legal minimum wages.

A big disappointment comes with respect to food. The UPA government had trumpeted the proposed Food Security Bill as the fulfilment of its promise to aam aadmi. But in the past four years food prices have skyrocketed. They are likely to increase in the coming year, not only because of global pressures but because of the impact of this budget on fuel and fertiliser prices. In this context, the fact that the Finance Minister has maintained the food subsidy at more or less the current level (Rs 75,000 crore compared to Rs 73,000 spent in 2011-12) seems to reflect a rather cynical approach to the proposed Food Security Bill.

Clearly, the Finance Ministry at least does not see this coming Food Security Act in any way as increasing the central government's spending commitments in order to ensure minimally adequate food grains to all citizens. Instead, we are supposed to be grateful that the food subsidy bill has not actually been cut (as have the fuel and fertiliser subsidies). Indeed, the fact that there was clapping in Parliament when the FM announced no cut in food subsidy shows how low our expectations have become.

Finally, the employment scheme - the Mahatma Gandhi National Rural Employment Guarantee Act - is being given such obvious step-sisterly treatment that it is now an open question whether the scheme will actually survive in the medium term. The combination of vested interests that have come together to undermine this scheme need not be gone into here, but the effects are obvious in the spending data. In the current year, only Rs 31,000 crore was spent out (around three-quarters of the budgeted amount) and the Government has been quick to reduce the allocation to only Rs 33,000 crore in the coming year. Since on average less than half the promised 100 days of work are being provided across India, this suggests that the government has stopped taking its own scheme too seriously, and may even be part of the attempt to undermine it.

So where does this leave us? The likelihood in the coming year is uncertain growth (because it is not at all clear that these fiscal sops will be enough to bring in lots more foreign capital in a very uncertain global environment) combined with higher inflation and continuing shortfalls in employment. This is a recipe for more than economic; given the complex and rapidly changing political situation and the rising social tensions, it may even be a recipe for disorder. The blandness of the Finance Minister's Budget presentations may still have much more dramatic, if unfortunate, consequences.

*This article was originally published in sify.com and is available at


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