MacroScan (Printable Version) - The Union Budget 2006-07

The presentation of the Union Budget by the Finance Minister this year was bound to be a balancing exercise. For one thing, there is a basic political context in which the Budget is being drawn up. The UPA government is in power on the basis of a National Common Minimum Programme (NCMP) which has been broadly endorsed by the Left parties, and it is the support of these parties which allows the government to remain in power. Naturally therefore, some attention must be paid by the Finance Minister to the commitments of the NCMP and the demands of the Left parties.

Moreover, this budget is being framed in what will be an election year, in which five states will go to the polls to elect new assemblies, and in all of which the ruling party is a major contender for power. Therefore, very unpopular budgetary strategies, or those which would directly affect the living conditions of people very adversely, were not to be expected.

In addition, there is a broader economic context, in which the aggregate economic growth has apparently accelerated to a dizzy pace, but in which deep agrarian crisis, widespread rural distress and completely inadequate employment generation are still the most dominant facts affecting the majority of the population. In this context, urgent measures are required to provide some protection and support to farmers and to provide some measure which would allow increased employment generation.

Most people would think that these conditions should be sufficient to make the Budget one which is actually, for a change, skewed towards the poor rather than towards large capital in industry and finance. If despite these conditions the Budget was still likely to be a ''balancing exercise'', it is because the neo-liberal economic strategy, to which the leaders of this government are apparently still committed, is one which is fundamentally antithetical to fulfilling many of the promises of the NCMP in an effective way. For example, trade and financial liberalisation reduces the ability of the government to raise enough revenues to increase expenditure in desired areas as much as is required or has been promised.

This is why the Budget has been a balancing act, high on rhetoric for the poor but less forthcoming with enough money for the important programmes that would affect living conditions of ordinary people to provide decent quality health and education facilities for all. At the same time, the Finance Minister has sought to keep large industry satisfied by persisting with all the exemptions that allow corporates to reduce tax payments. He has placated finance capital with some more financial liberalisation measures that are potentially very dangerous, including allowing foreign investors to hold more government securities and allowing Indian mutual funds to invest abroad.

It must be said, however, that for a change, there are some positive features that deserve to be welcomed in this budget. The first is the revelation that in the current fiscal year there is evidence of increased tax revenues and an increase in the tax-GDP ratio. Coming after more than fifteen years of decline, this is clearly a positive sign. Some of this increase in tax collections reflects the growth of the economy, while some of it is the result of the higher imports and higher prices of oil imports which sharply raised government tariff collections.

However, some of it is apparently also due to greater enforcement and computerisation-aided identification of tax-paying potential. It should be noted, of course, that while corporate taxes are projected to increase by around 20 per cent compared to last year’s actual collections, corporate profits over the same period are likely to have increased even more, as this has been a year of exceptionally high increases in corporate profitability, reflecting a pattern of growth that has been very unequal. If this increase in tax-GDP ratio is to mark a real turning point and be sustained into the future, it will be essential to tax the rich more, for example by reinstating capital gains tax.

The really bad news relates not to what has been done, but to what has not been done in the Budget. The extent of rural distress and the problems faced by cultivators are simply not being taken as seriously as they deserve, despite the fact that it was the political reaction to this distress that has brought the UPA government to power at the Centre. There was a lot of lip-service to farmers in the Budget speech, but very little in terms of concrete measures, even though much could have been done.

The only significant measure is the promise of debt relief, in terms of reduction of interest rates on institutional credit from 9 to 7 per cent (although the National Commission on Farmers had recommended a lower rate of 4 per cent) and some concession on interest payments. (Incidentally, while these have been mentioned in the Finance Minister’s speech, they do not seem to be accounted for in the expenditure budget.)The government is also seeking to increase the number of farmers with access to institutional credit. But even now, only a minority of farmers in the country can access banks or formal institutions for crop loans, and most still rely on input dealers, moneylenders and other informal sources for their loans, so this measure will not help them much.

In any case, credit is only a small part of the problem – the real issue is the collapse of viability of farming, the fact that often the prices farmers receive are lower than the costs of cultivation. The National Commission on Farmers has recommended a number of steps to be taken on an urgent basis, such as the establishment of the Price Stabilisation Fund which would protect our cultivators from the vagaries of the international market. But no such step has been taken and no provision has been made in the Budget for this. Even such a necessary step as increased protection for raw cotton producers by raising import duties on this, has not been taken despite the fact that several Chief Ministers of Congress-ruled states have asked for this.

In addition, despite all the verbiage, the allocations for the eight ''flagship programmes'' of the Government, which were part of the NCMP, is extremely meagre, amounting to less than Rs. 16,000 crore in total. Total education spending is still below 4 per cent of GDP, despite the Government’s promise to raise it to 6 per cent. The National Rural Health Mission has received only Rs. 2,000 crore more, despite the grandiose claims made about its spread. The ICDS programme will require at least Rs. 8,000 crore if it is to be universalised within a few months as the Supreme Court has ordered the government to do, yet the allocation is less than Rs. 5,000 crore.

So this Budget reveals not only a complex political balancing act, but also a basic tension between sticking to a neo-liberal economic strategy and meeting the economic expectations of the mass of people, generated by the government’s own promises. It remains to be seen how this tension will eventually be resolved.



Themes > Current Issues	02.03.2006


The Union Budget 2006-07

Jayati Ghosh

The presentation of the Union Budget by the Finance Minister this year was bound to be a balancing exercise. For one thing, there is a basic political context in which the Budget is being drawn up. The UPA government is in power on the basis of a National Common Minimum Programme (NCMP) which has been broadly endorsed by the Left parties, and it is the support of these parties which allows the government to remain in power. Naturally therefore, some attention must be paid by the Finance Minister to the commitments of the NCMP and the demands of the Left parties. Moreover, this budget is being framed in what will be an election year, in which five states will go to the polls to elect new assemblies, and in all of which the ruling party is a major contender for power. Therefore, very unpopular budgetary strategies, or those which would directly affect the living conditions of people very adversely, were not to be expected. In addition, there is a broader economic context, in which the aggregate economic growth has apparently accelerated to a dizzy pace, but in which deep agrarian crisis, widespread rural distress and completely inadequate employment generation are still the most dominant facts affecting the majority of the population. In this context, urgent measures are required to provide some protection and support to farmers and to provide some measure which would allow increased employment generation. Most people would think that these conditions should be sufficient to make the Budget one which is actually, for a change, skewed towards the poor rather than towards large capital in industry and finance. If despite these conditions the Budget was still likely to be a ''balancing exercise'', it is because the neo-liberal economic strategy, to which the leaders of this government are apparently still committed, is one which is fundamentally antithetical to fulfilling many of the promises of the NCMP in an effective way. For example, trade and financial liberalisation reduces the ability of the government to raise enough revenues to increase expenditure in desired areas as much as is required or has been promised. This is why the Budget has been a balancing act, high on rhetoric for the poor but less forthcoming with enough money for the important programmes that would affect living conditions of ordinary people to provide decent quality health and education facilities for all. At the same time, the Finance Minister has sought to keep large industry satisfied by persisting with all the exemptions that allow corporates to reduce tax payments. He has placated finance capital with some more financial liberalisation measures that are potentially very dangerous, including allowing foreign investors to hold more government securities and allowing Indian mutual funds to invest abroad. It must be said, however, that for a change, there are some positive features that deserve to be welcomed in this budget. The first is the revelation that in the current fiscal year there is evidence of increased tax revenues and an increase in the tax-GDP ratio. Coming after more than fifteen years of decline, this is clearly a positive sign. Some of this increase in tax collections reflects the growth of the economy, while some of it is the result of the higher imports and higher prices of oil imports which sharply raised government tariff collections. However, some of it is apparently also due to greater enforcement and computerisation-aided identification of tax-paying potential. It should be noted, of course, that while corporate taxes are projected to increase by around 20 per cent compared to last year’s actual collections, corporate profits over the same period are likely to have increased even more, as this has been a year of exceptionally high increases in corporate profitability, reflecting a pattern of growth that has been very unequal. If this increase in tax-GDP ratio is to mark a real turning point and be sustained into the future, it will be essential to tax the rich more, for example by reinstating capital gains tax. The really bad news relates not to what has been done, but to what has not been done in the Budget. The extent of rural distress and the problems faced by cultivators are simply not being taken as seriously as they deserve, despite the fact that it was the political reaction to this distress that has brought the UPA government to power at the Centre. There was a lot of lip-service to farmers in the Budget speech, but very little in terms of concrete measures, even though much could have been done. The only significant measure is the promise of debt relief, in terms of reduction of interest rates on institutional credit from 9 to 7 per cent (although the National Commission on Farmers had recommended a lower rate of 4 per cent) and some concession on interest payments. (Incidentally, while these have been mentioned in the Finance Minister’s speech, they do not seem to be accounted for in the expenditure budget.)The government is also seeking to increase the number of farmers with access to institutional credit. But even now, only a minority of farmers in the country can access banks or formal institutions for crop loans, and most still rely on input dealers, moneylenders and other informal sources for their loans, so this measure will not help them much. In any case, credit is only a small part of the problem – the real issue is the collapse of viability of farming, the fact that often the prices farmers receive are lower than the costs of cultivation. The National Commission on Farmers has recommended a number of steps to be taken on an urgent basis, such as the establishment of the Price Stabilisation Fund which would protect our cultivators from the vagaries of the international market. But no such step has been taken and no provision has been made in the Budget for this. Even such a necessary step as increased protection for raw cotton producers by raising import duties on this, has not been taken despite the fact that several Chief Ministers of Congress-ruled states have asked for this. In addition, despite all the verbiage, the allocations for the eight ''flagship programmes'' of the Government, which were part of the NCMP, is extremely meagre, amounting to less than Rs. 16,000 crore in total. Total education spending is still below 4 per cent of GDP, despite the Government’s promise to raise it to 6 per cent. The National Rural Health Mission has received only Rs. 2,000 crore more, despite the grandiose claims made about its spread. The ICDS programme will require at least Rs. 8,000 crore if it is to be universalised within a few months as the Supreme Court has ordered the government to do, yet the allocation is less than Rs. 5,000 crore. So this Budget reveals not only a complex political balancing act, but also a basic tension between sticking to a neo-liberal economic strategy and meeting the economic expectations of the mass of people, generated by the government’s own promises. It remains to be seen how this tension will eventually be resolved.



© MACROSCAN 2006