MacroScan (Printable Version) - The Union Budget 2004-05 and employment

Much was expected of the new government's budget. It is after all the first really serious policy statement of the new government, since the National Common Minimum Programme (NCMP) is more a wish-list of proposed policies and programmes. Also, as the Finance Minister admitted in the opening sentences of his Budget speech, the people of Indian have clearly and unambiguously expressed a desire for change in government - and, it should have been added, in economic strategy.

Certainly the budget speech was filled with many references to agriculture, education, health and employment. And some measures do indicate a commitment to change in certain areas. For example, Mr. Chidambaram stuck by the decision to impose a 2 per cent cess on taxes, so as to mobilise about Rs. 4,000 crore for education, and also indicated a desire to revive public sector enterprises, both the ailing and the healthy ones, through specific measures. The Rural Infrastructure Development Fund has been revived. The intention to double agricultural credit in three years is not a budgetary measure, but is still important. The tax on services has been increased and widened.

In addition, the Finance Minister has made a special allocation of Rs. 10,000 crore in terms of budgetary support for the Central Plan, supposedly to implement the NCMP. But this amount is really nothing compared to the huge need for funds required to go even some way towards fulfilling the promises already made. Nor does it indicate a very dramatic change in course.

The actual budgetary allocations for crucial programmes such as rural employment schemes and Antyodaya Anna Yojana are no higher than had already been provided for in the Interim Budget of the previous government. Most of the additional plan allocation for the CMP is likely to go towards education. Other claims are being realised simply by aggregating existing expenditures on a range of employment and rural development schemes and placing them under the NCMP allocation for the Planning Commission. Even in other schemes which are important, such as rural sanitation and drinking water, the increases in outlay are relatively modest, in the Rs.40-100 crore range. This is not likely to inspire much confidence in the claim of redirecting economic policy.

Meanwhile, in a surprise move, the government has chosen to allocate an additional Rs. 12,000 crores for defence, by increasing the defence budget from Rs. 65,000 to Rs. 77, 000 crores over the remaining months of the financial year. It is being argued that this represents a rollover of unspent funds and committed order from the previous year. But still this huge increase in allocation seems unwarranted at a time when the security situation can hardly be described as critical and when problems such as an agrarian crisis, rising unemployment and persisting hunger and malnutrition are serious. It turns out that the additional allocation for defence exceeds the total additional expenditure allocated for the NCMP, which sends out wrong signals about the priorities of the government.

Finally, despite claims of strengthening the hands of the state government's which must necessarily play an important role in implementing the CMP, no major effort has been made to correct the fiscal squeeze being faced by the states. The Finance Minister highlighted the plan to reduce interest rates paid by the states on borrowing from the centre from 10.5 to 9 per cent. What was not mentioned was that the Centre today is still effectively a usurious moneylender to the states. It borrows in many cases at interest rates which vary between 4 and 6 per cent, and then lends to the states at 10 per cent.

There was much more scope to reduce the state governments' interest payments. Also, something urgently needs to be done about the overhang of past debt. The Planning Commission had recommended that the non-small savings part of state governments' debt to the centre should be written off, but no such measure has been taken.

These inadequate moves on the development front have been accompanied by policies that still stick with the liberalisation agenda of the previous government. Foreign Direct Investment caps have been raised substantially in telecom, civil aviation and insurance. Foreign Institutional Investors have been provided a range of concessions. Banks are to be encouraged to increase their speculative exposure to the stock market. And privatisation is to be persisted with in the name of “piggy-backing” on new share issues by profit-making companies like the NTPC.

The biggest disappointment is in the allocation for rural employment schemes. One of the most important promises of the UPA government - and a declared priority in the National Common Minimum Programme - was the offer of employment guarantee in the rural areas. The UPA government has even promised to promulgate legislation to guarantee 100 days of employment in public programmes at the minimum wage, to one member of every rural household.

It has been clear for some time now that rural employment generation has been one of the critical casualties of the reforms. The annual growth of all forms of rural employment (that is principal or subsidiary occupation) was less than 0.6 per cent per annum between 1993-94 and 1999-00, compared to 1.7 per cent per annum between 1983 and 1993-94. The daily status unemployment rate in rural India as a whole increased from 5.63 per cent in 1993-94 to 7.21 per cent in 1999-00, and was more than 15 per cent in some states.

Most of this was because of the absolute decline in agricultural employment, which had very negative impact since agriculture still accounts for just under two-thirds of rural employment. But even non-agricultural employment growth was slower than before.

Some of this was because of the decline in public spending on rural employment programmes since the mid-nineties. As a percentage of GDP, expenditure on both rural wage employment programmes and special programmes for rural development declined from the mid-1990s. The total central allocation for rural wage employment programmes was already only 0.4 per cent of GDP in 1995-6, but it declined further to a minuscule 0.13 percent of GDP in 2000-1. Special expenditure on rural development (the IRDP and its later incarnation the Swarnajayanti Gram Swarojgar Yojana) also fell.

In such a context, it was only to be expected that the first Annual Budget presented by this government would reflect this goal by substantially increasing the allocation for rural employment programmes. Of course, it could not be expected that from the start there would be a huge increase in such allocation. The estimated maximal cost of such a guarantee varies between Rs. 40,000 and Rs. 60,000, depending upon the proportion of rural households that would opt for the scheme (likely to be between one-third and two-fifths).

Obviously, this amount should not be budgeted unless the programme is already in place in a substantial part of the country. But certainly it was assumed that there would be some large increase in allocation as a signal of the importance that the new government places on this particular goal.

This is what makes the actual allocations mentioned in the Budget so disappointing. The budget has not made any extra allocations for 2004-5, over the amount of Rs. 6100 crores that was already announced in the interim budget of the previous government. And this actually represents a substantial decline compared to the Rs. 9640 crores that were spent in the previous year.

What is worse is that this smaller amount of money is now to be redirected to “priority” areas rather than being continued in places where they already existed, which would have provided some continuity and stability of expectation among rural workers. The Finance Minister in his Budget Speech announced a new Food for Work programme in 150 districts classified as most backward and identified as areas in immediate need of such a programme. This programme is to be funded by cutting down allocations under the existing rural development programmes.

This reflects the typical neo-liberal economic thinking, whereby “targeting” actually becomes a euphemism for cutting down and reducing the aggregate availability, which has already created so much harm in the Public Distribution System for food and in the provision of other public services. To introduce this in the first major economic policy statement of a government that is supposedly committed to universal rural employment guarantee, makes a mockery of the whole exercise.

Indeed, the current allocations will have to be substantially increased by several multiples, if the promise made in the NCMP is to be kept in any meaningful manner. To some extent, the unfortunate weather conditions - the combination of floods and drought that are currently affecting the countryside - have already made this inevitable, since public relief works will have to be started almost immediately in many states. But any real attempt to improve employment conditions in rural India must accept that there has to be a very large increase in the budgetary allocations towards this, if necessary through supplementary demands.

These do not have to be only in the form of public works, although of course they are important. But there are many potential activities which can have important effects on supply conditions, productivity and sustainability of rural economic activities, in both agriculture and non-agriculture.

In addition to constructing and maintaining roads and other connectivity (which has thus far been the most popular form of activity in such schemes) there are other activities such as building and maintaining bundhs, minor irrigation works, clearing out and desilting ponds and rivers, also have very positive short run and long run effects on production conditions and can also improve the sustainability of cultivation patterns generally, implying important social gains.

In addition, there is a huge range of social services that must be performed, which are now systematically underprovided across rural India. These include activities such as those performed by workers in educational and health institutions who provide maintenance and support, the provision of mid-day meals in schools, sanitation services, and the like.

The point is also to ensure that financing for such activities is chiefly the responsibility of the central government, even though it must be implemented by state government and below them by panchayats. It is important to make sure that the central government does not try to wriggle out of this crucial financial promise.

In part, the government's inability to move ahead further is because of its sticking with the irrational obsession with cutting the fiscal deficit. The Finance Minister is proud of the fact that he has been able to keep the fiscal deficit at 4.4 per cent of GDP as compared with 4.8 per cent in 2003-04. The fact of the matter is that a comfortable food supply and strong foreign exchange situation provides an opportunity to raise output and employment growth without triggering inflation, even if this involves deficit spending.

In fact, if the government had simply stuck to the deficit projection of 4.8 per cent of GDP in the Interim Budget (which have had no adverse macroeconomic consequences) this would have released more than Rs. 10,000 crores. This could have been effectively used in rural employment schemes and other necessary expenditures.

As it happens, even the current estimate of 4.4 per cent fiscal deficit to GDP ratio depends on extremely optimistic projections of tax revenue growth because of tax buoyancy and collection of tax arrears. If this remains unrealised, as is likely, the actual revenue and expenditure figures would show up a much higher deficit.

So all in all, this is a disappointing budget, despite its rhetoric. It is disappointing particularly because this was the first major opportunity for the new central government to tell the people that it would respect their mandate and keep to its own promises made during and after the elections. The challenge now will be to ensure that, despite the evident fiscal caution, overall economic policies are still redirected in favour of the working people of this country.



Themes > Current Issues	06.08.2004


The Union Budget 2004-05 and employment

Jayati Ghosh

Much was expected of the new government's budget. It is after all the first really serious policy statement of the new government, since the National Common Minimum Programme (NCMP) is more a wish-list of proposed policies and programmes. Also, as the Finance Minister admitted in the opening sentences of his Budget speech, the people of Indian have clearly and unambiguously expressed a desire for change in government - and, it should have been added, in economic strategy. Certainly the budget speech was filled with many references to agriculture, education, health and employment. And some measures do indicate a commitment to change in certain areas. For example, Mr. Chidambaram stuck by the decision to impose a 2 per cent cess on taxes, so as to mobilise about Rs. 4,000 crore for education, and also indicated a desire to revive public sector enterprises, both the ailing and the healthy ones, through specific measures. The Rural Infrastructure Development Fund has been revived. The intention to double agricultural credit in three years is not a budgetary measure, but is still important. The tax on services has been increased and widened. In addition, the Finance Minister has made a special allocation of Rs. 10,000 crore in terms of budgetary support for the Central Plan, supposedly to implement the NCMP. But this amount is really nothing compared to the huge need for funds required to go even some way towards fulfilling the promises already made. Nor does it indicate a very dramatic change in course. The actual budgetary allocations for crucial programmes such as rural employment schemes and Antyodaya Anna Yojana are no higher than had already been provided for in the Interim Budget of the previous government. Most of the additional plan allocation for the CMP is likely to go towards education. Other claims are being realised simply by aggregating existing expenditures on a range of employment and rural development schemes and placing them under the NCMP allocation for the Planning Commission. Even in other schemes which are important, such as rural sanitation and drinking water, the increases in outlay are relatively modest, in the Rs.40-100 crore range. This is not likely to inspire much confidence in the claim of redirecting economic policy. Meanwhile, in a surprise move, the government has chosen to allocate an additional Rs. 12,000 crores for defence, by increasing the defence budget from Rs. 65,000 to Rs. 77, 000 crores over the remaining months of the financial year. It is being argued that this represents a rollover of unspent funds and committed order from the previous year. But still this huge increase in allocation seems unwarranted at a time when the security situation can hardly be described as critical and when problems such as an agrarian crisis, rising unemployment and persisting hunger and malnutrition are serious. It turns out that the additional allocation for defence exceeds the total additional expenditure allocated for the NCMP, which sends out wrong signals about the priorities of the government. Finally, despite claims of strengthening the hands of the state government's which must necessarily play an important role in implementing the CMP, no major effort has been made to correct the fiscal squeeze being faced by the states. The Finance Minister highlighted the plan to reduce interest rates paid by the states on borrowing from the centre from 10.5 to 9 per cent. What was not mentioned was that the Centre today is still effectively a usurious moneylender to the states. It borrows in many cases at interest rates which vary between 4 and 6 per cent, and then lends to the states at 10 per cent. There was much more scope to reduce the state governments' interest payments. Also, something urgently needs to be done about the overhang of past debt. The Planning Commission had recommended that the non-small savings part of state governments' debt to the centre should be written off, but no such measure has been taken. These inadequate moves on the development front have been accompanied by policies that still stick with the liberalisation agenda of the previous government. Foreign Direct Investment caps have been raised substantially in telecom, civil aviation and insurance. Foreign Institutional Investors have been provided a range of concessions. Banks are to be encouraged to increase their speculative exposure to the stock market. And privatisation is to be persisted with in the name of “piggy-backing” on new share issues by profit-making companies like the NTPC. The biggest disappointment is in the allocation for rural employment schemes. One of the most important promises of the UPA government - and a declared priority in the National Common Minimum Programme - was the offer of employment guarantee in the rural areas. The UPA government has even promised to promulgate legislation to guarantee 100 days of employment in public programmes at the minimum wage, to one member of every rural household. It has been clear for some time now that rural employment generation has been one of the critical casualties of the reforms. The annual growth of all forms of rural employment (that is principal or subsidiary occupation) was less than 0.6 per cent per annum between 1993-94 and 1999-00, compared to 1.7 per cent per annum between 1983 and 1993-94. The daily status unemployment rate in rural India as a whole increased from 5.63 per cent in 1993-94 to 7.21 per cent in 1999-00, and was more than 15 per cent in some states. Most of this was because of the absolute decline in agricultural employment, which had very negative impact since agriculture still accounts for just under two-thirds of rural employment. But even non-agricultural employment growth was slower than before. Some of this was because of the decline in public spending on rural employment programmes since the mid-nineties. As a percentage of GDP, expenditure on both rural wage employment programmes and special programmes for rural development declined from the mid-1990s. The total central allocation for rural wage employment programmes was already only 0.4 per cent of GDP in 1995-6, but it declined further to a minuscule 0.13 percent of GDP in 2000-1. Special expenditure on rural development (the IRDP and its later incarnation the Swarnajayanti Gram Swarojgar Yojana) also fell. In such a context, it was only to be expected that the first Annual Budget presented by this government would reflect this goal by substantially increasing the allocation for rural employment programmes. Of course, it could not be expected that from the start there would be a huge increase in such allocation. The estimated maximal cost of such a guarantee varies between Rs. 40,000 and Rs. 60,000, depending upon the proportion of rural households that would opt for the scheme (likely to be between one-third and two-fifths). Obviously, this amount should not be budgeted unless the programme is already in place in a substantial part of the country. But certainly it was assumed that there would be some large increase in allocation as a signal of the importance that the new government places on this particular goal. This is what makes the actual allocations mentioned in the Budget so disappointing. The budget has not made any extra allocations for 2004-5, over the amount of Rs. 6100 crores that was already announced in the interim budget of the previous government. And this actually represents a substantial decline compared to the Rs. 9640 crores that were spent in the previous year. What is worse is that this smaller amount of money is now to be redirected to “priority” areas rather than being continued in places where they already existed, which would have provided some continuity and stability of expectation among rural workers. The Finance Minister in his Budget Speech announced a new Food for Work programme in 150 districts classified as most backward and identified as areas in immediate need of such a programme. This programme is to be funded by cutting down allocations under the existing rural development programmes. This reflects the typical neo-liberal economic thinking, whereby “targeting” actually becomes a euphemism for cutting down and reducing the aggregate availability, which has already created so much harm in the Public Distribution System for food and in the provision of other public services. To introduce this in the first major economic policy statement of a government that is supposedly committed to universal rural employment guarantee, makes a mockery of the whole exercise. Indeed, the current allocations will have to be substantially increased by several multiples, if the promise made in the NCMP is to be kept in any meaningful manner. To some extent, the unfortunate weather conditions - the combination of floods and drought that are currently affecting the countryside - have already made this inevitable, since public relief works will have to be started almost immediately in many states. But any real attempt to improve employment conditions in rural India must accept that there has to be a very large increase in the budgetary allocations towards this, if necessary through supplementary demands. These do not have to be only in the form of public works, although of course they are important. But there are many potential activities which can have important effects on supply conditions, productivity and sustainability of rural economic activities, in both agriculture and non-agriculture. In addition to constructing and maintaining roads and other connectivity (which has thus far been the most popular form of activity in such schemes) there are other activities such as building and maintaining bundhs, minor irrigation works, clearing out and desilting ponds and rivers, also have very positive short run and long run effects on production conditions and can also improve the sustainability of cultivation patterns generally, implying important social gains. In addition, there is a huge range of social services that must be performed, which are now systematically underprovided across rural India. These include activities such as those performed by workers in educational and health institutions who provide maintenance and support, the provision of mid-day meals in schools, sanitation services, and the like. The point is also to ensure that financing for such activities is chiefly the responsibility of the central government, even though it must be implemented by state government and below them by panchayats. It is important to make sure that the central government does not try to wriggle out of this crucial financial promise. In part, the government's inability to move ahead further is because of its sticking with the irrational obsession with cutting the fiscal deficit. The Finance Minister is proud of the fact that he has been able to keep the fiscal deficit at 4.4 per cent of GDP as compared with 4.8 per cent in 2003-04. The fact of the matter is that a comfortable food supply and strong foreign exchange situation provides an opportunity to raise output and employment growth without triggering inflation, even if this involves deficit spending. In fact, if the government had simply stuck to the deficit projection of 4.8 per cent of GDP in the Interim Budget (which have had no adverse macroeconomic consequences) this would have released more than Rs. 10,000 crores. This could have been effectively used in rural employment schemes and other necessary expenditures. As it happens, even the current estimate of 4.4 per cent fiscal deficit to GDP ratio depends on extremely optimistic projections of tax revenue growth because of tax buoyancy and collection of tax arrears. If this remains unrealised, as is likely, the actual revenue and expenditure figures would show up a much higher deficit. So all in all, this is a disappointing budget, despite its rhetoric. It is disappointing particularly because this was the first major opportunity for the new central government to tell the people that it would respect their mandate and keep to its own promises made during and after the elections. The challenge now will be to ensure that, despite the evident fiscal caution, overall economic policies are still redirected in favour of the working people of this country.



© MACROSCAN 2004