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02.03.2003

A Deflationary Budget

Prabhat Patnaik

It used to be said of the Bourbon kings of France that they "learn nothing and forget nothing". The same can be said of the current Indian Establishment. Lakhs of people have been demonstrating across the globe against the policies of "globalization" which have wrought havoc on the lives of the people in the third world. Lakhs of people demonstrated on the 26^th of February in Delhi itself at the call of the Central Trade Unions against these policies. Financial crises in the wake of these policies have hit a whole range of countries from East Asia to Latin America. Over large tracts of the third world, governments pursuing such policies have been replaced through the exercise of popular franchise by regimes committed to fighting "globalization". But our Establishment proceeds as if nothing has changed. The same old cliches are trotted out, the same borrowed theories from Washington DC are peddled, and the same double-speak learnt from the metropolis is resorted to, even as the same policies are pursued relentlessly. An example of this Bourbon attitude is the Budget presented by Jaswant Singh on February 28, which carries forward the "neo-liberal agenda", to the accompaniment of cheers from the Confederation of Indian Industry.

Lest I be accused of unfairness, just consider the following. The two obvious problems facing the economy at this moment are: the desperate condition of the peasantry owing to the output price-crash which has been imported from the world market under the WTO-dictated "liberal trade" regime, and the dwindling employment opportunities in every sector, including, in particular, agriculture, which underlie acute and persistent poverty, and to which even the government's own Economic Survey this year has drawn attention. What does the Budget offer on each score?

The Finance Minister has chosen this very time to hit the peasantry. Fertilizer prices have been jacked up. Light diesel oil, used for running pump-sets, would now attract an additional excise duty of Rs.1.50 per litre; and this is in addition to the general hike in petrol and diesel prices: the 50 paise per litre cess on diesel and the Rs.50 per tonne duty on domestic and imported crude oil (the latter in the name of the National Calamity Contingency Fund). In short, precisely when the output prices are low, the input prices have been jacked up, catching the peasantry in  a double-squeeze.

To be sure, a Price Stabilization Fund of Rs.500 crores has been set up for tea, coffee and rubber; and agriculture is now supposed to pay an interest rate on credit that is no more than 2 percentage points above the Prime Lending Rate. But the former measure would typically benefit the plantation sector, not so much the peasantry. And since the amount of credit to agriculture has been dwindling in relative terms in recent years, with private, especially foreign, banks falling way below the stipulated "norm" (and even nationalized banks violating them), a reduction in the lending rate can scarcely bring much comfort. What is striking about all this, and illustrates the double-speak mentioned above, is the fact that the Finance Minister has included agriculture as one of his "five priority areas" even while imposing the squeeze on the peasantry!

As regards employment, the Finance Minister had an excellent opportunity to launch a large-scale Employment Generation Programme. Owing to the deflationary squeeze on purchasing power in rural India, there are plenty of foodgrains stocks available with the government at present, notwithstanding last year's drought and the secular slowdown in foodgrain output growth in the nineties. Industry too has substantial unutilized capacity to meet the demand for the non-food component of any Employment Programme. Banks are flush with liquidity which they would be more than willing to lend to the government. And if the government does launch such a programme, since the bulk of the demand would accrue back to the government sector itself, the net indebtedness of the government would increase only fractionally.

The Finance Minister however has not used this opportunity. All he has done instead is to spend Rs.507 crores more on the Antyodaya scheme, and this he claims to be a major attack on poverty (garib ke pet me dana)! The Antyodaya Anna Yojana is an even more narrowly-targeted programme within the already narrow Targeted Public Distribution Scheme, whereby food is made available to a small subset of the Below-Poverty-Line population at the subsidized rate of Rs.2 per kg. of wheat and Rs.3 per kg. of rice. Since the TPDS itself, which catered to the BPL population as a whole, was riven with problems of under-numeration and misidentification of BPL households, and became one contributory factor towards the reduction of off-take from the PDS, the further targeting within the TPDS would be even more fruitless. Indeed the High Level Committee on Long-term Grain Policy had recommended a complete abandonment of TPDS in favour of a comprehensive and uniform PDS. (Under such a scheme the BPL population can always be provided adequate purchasing power through Employment Programmes). The Minister has instead gone in for further targeting through the Antyodaya Scheme, which, as the High-level Committee had warned, would only increase the budgetary drain without significantly improving foodgrain off-take (and hence ipso facto making much impact on poverty).

In short, the problem of rural unemployment is not addressed at all. At the same time, a host of measures have been devised, such as the de-reservation of items hitherto reserved for the Small-Scale sector, and the reduction in import duties (the peak Customs Duty has been brought down from 30 to 25 percent), which would hurt urban employment through their adverse impact on small industries.

But then what of the claim that the Budget is a "growth-oriented" one? Such a claim which by now has become routine for every budget is particularly hollow in the context of the present one, since it does not provide for any increase in budget support for plan outlay in real terms. Budget support for Central Plan is supposed to increase in nominal terms by 5.8 percent over the current year's revised estimate; total Central assistance for State and Union Territory Plans is supposed to increase by 6.4 percent. These figures are not too different from the underlying inflation rate assumed in the budget itself. (The current inflation rate (WPI) is 4.4 percent, and the Finance Minister acknowledges that the budget would contribute towards an increase in it). The proposed increase in the Central Plan outlay itself is only 8 percent in nominal terms, which scarcely entails any real increase. Indeed even if we take all expenditures, plan and non-plan, capital and revenue, transfers (including interest payments) and others, we still find a nominal increase of only 8.6 percent, which means no more than a couple of percentage points of increase in real terms. This in short is a highly deflationary budget, which far from promoting growth, would only contribute towards a perpetuation and accentuation of the prevailing demand constraint. The fact that this budget is being criticized on precisely the opposite grounds, for having "too large a fiscal deficit", even in the midst of a recession, shows only the utter poverty of thought that currently prevails.

This is not to say that the budget would not lead to an acceleration in inflation. It certainly would, but that is because of the cost-push it has imparted to the economy, via the withdrawal of subsidies on inputs like fertilizers, via hikes in petrol and diesel prices, and via the increase in the excise duties on a whole range of commodities which earlier had attracted less than 8 percent excise duty but would now be subject to this minimum rate. Expenditure and income deflation in other words is perfectly compatible with price inflation caused by a cost-push, which after all is why unemployment and inflation can, and do, co-exist, and occasionally even grow in tandem. The budget is pushing the economy towards such a predicament.

The deflationary nature of the budget is sought to be camouflaged by grandiose announcements about infrastructure development and health insurance. But, the contribution of this year's budget towards the Rs.60,000 crore infrastructure development plan happens to be a paltry Rs. 2,000 crores.  Not only does the figure 60,000 refer to the entire cost of the projects spread over a number of years, but it is optimistically assumed to be financed from diverse sources, among which the public exchequer happens to be one tiny contributor. Likewise the Health Insurance Scheme does not refer to any comprehensive plan to spread public health facilities all over the country. It means in fact just the opposite: the people have to take recourse to private, and hence expensive, health facilities, whose availability in remote areas cannot even be ensured by the government. They would get back a part of the expenses involved in hospitalization cases, but only if they have been regularly paying insurance premia. The scheme in other words camouflages an actual disengagement of the government from the health sector.

The claim that the budget is "growth-oriented" is based however on invoking a myth, namely that doling out concessions to the capitalists (including foreign ones) ipso facto promotes growth. This self-serving proposition which capitalists always put forward and which has now become officially respectable is utterly vacuous, both theoretically and empirically. Capitalists invest only when demand is sufficiently buoyant; when this is not the case, no matter how large a transfer is made to them from the public exchequer, they would not invest. They would simply pocket the transfers, which is why this self-serving argument is put forward with particular vehemence precisely in periods of recession when profits are otherwise low. Our own experience bears this out. For several years now, every successive budget has given concessions to the private corporate sector for stimulating investment and output growth; and yet gross capital formation in the private corporate sector as a proportion of GDP has stagnated and, of late, even come down.

Deflation is the inevitable fate of any economy that gets trapped in the vortex of international speculative financial flows. For the promotion of growth therefore it is necessary that the economy gets out of this trap, by arresting and reversing the process of so-called "financial liberalization" (which is the mechanism through which economies get trapped). The Budget however does the very opposite: it allows foreign direct investment up to 74 percent in Indian private banks, an increase from the current 49 percent, even as it removes all restriction on voting rights in banking companies. At the same time it allows the "merger" of private banking companies with nationalized banks. By these measures, it opens the way for the takeover by foreigners of Indian banks, and the takeover by the private sector, whether Indian or foreign, of nationalized banks, i.e. for both the de-Indianization of private banks and the privatization of nationalized banks. These measures clearly carry the neo-liberal agenda forward; the deflationary nature of the budget is a symptom of this.

A notable feature of the budget is the proposed debt-swap vis a vis the states. With the decline in nominal interest rates this had become a long overdue measure, and the states had been demanding this for some time. Whatever succour to state finances this measure would bring (the figure Rs.81,000 crores mentioned by the Finance Minister is somewhat misleading, since it refers to the total savings by states over the entire residual maturity period of the loans and includes savings on account of both interest payments and deferred loan payments), would be offset, partly at any rate, by the shift to VAT from sales tax. That there would be a loss to the states from this shift is now admitted by the Finance Minister himself; what is unclear is why the Central government, which has been pressing for this shift, would be compensating the states for the revenue loss only in the first year (the compensation tapers off to 75 percent in the second and 50 percent in the third year, after which presumably there is no further compensation). It is intriguing why the state governments, which are collectively experiencing an even more acute fiscal crisis than the Centre, have allowed themselves to be cajoled into accepting this revenue loss, which, in some cases at least would be quite substantial, given the overwhelming importance of the sales tax in state government revenues.

This budget throws into sharp relief the changes occurring in the class character of the State in the era of globalization. Analysts of political economy during the dirigiste period used to identify the urban bourgeoisie, the landlords (whether in their pristine feudal garb or donning the capitalist mantle), and the emerging class of rural capitalists as constituting the ruling class combine behind State power. In the era of globalization however, changes occur both in the composition of the ruling class combine and in the relative weights of the different elements within it. In particular as the economy is opened up to the unfettered movement of finance capital, the relative weight of the rural component of the ruling combine declines, even as a new "globalized" component of the bourgeoisie, consisting of financial operators, speculators, local frontmen for MNCs, multinational banks and foreign agencies, NRI capitalists, together with certain segments of the earlier bourgeoisie, acquire greater importance. The fact that a government which pleads incapacity to maintain the fertilizer subsidy, has no compunctions at the same time about "disinvesting" valuable public property "for a song" is a symptom of this shift.