MacroScan (Printable Version) - Budget 2002-03: Results of Missing an Opportunity

In an implicit defence of the Budget proposals for 2002-03, Revenue Secretary S. Narayan attacked the corporate sector for failing to deliver. Speaking to representatives of the Confederation of Indian Industry during a post-Budget interaction, he argued that unlike last year when the budget provided Rs. 16,000 crore in the form of “giveaways”, this year’s budget offers none, because of the lack of resources resulting from the poor performance of industry. Industry’s failure to deliver, according to him, had in fact forced the government to impose additional taxes on the middle classes. “The corporate world must understand that this year the middle class is bearing your burden,” he is reported to have said.

This candid assessment of differential contributions made and burdens borne by different sections is likely to have been inspired in the main by two factors. First, it was possibly triggered by disappointment with the adverse response of industry and finance in and through the media. That response would only serve to strengthen resentment among sections adversely affected by the surcharge on income taxes, reduced tax concessions for savings, higher LPG and kerosene prices, hiked sugar prices, enhanced postal and rail tariffs and increased excise duties on items of mass consumption. Through these means the Finance Minister has after all mobilised a significant amount of resources over a full year.

Second, the response was possibly driven by the government’s own shock with the shortfall in revenues in 2001-02 relative to what was budgeted for. As Chart 1, shows the shortfall in gross tax revenue in 2001-02 relative to what was budgeted for amounted to a whopping 30,000 crore or 13 per cent of the budgeted figure. The shortfall occurred in all major taxes (corporation and income taxes and customs and excise duties). However, there were significant differences in the extent of the shortfall, which amounted to 9 per cent in the case of excise, 12 per cent in the case of income tax, 15 per cent in the case of corporation tax and a huge 21 per cent in the case of customs tariffs. As a result of the last of these, customs duties collected in 2001-02 were 9 per cent less than actual collections in 2001-02.



The shortfall in revenues has meant that the post-liberalisation trend of a decline and subsequent stagnation of the tax-GDP ratio has persisted (Chart 5). Combined with the government’s obsession to keep the deficit under control, irrespective of the supply situation in the economy, and despite the government’s accelerated effort to garner resources from disinvestments, this has substantially reduced its ability to stimulate the economy. In year’s of recession this contributes to a worsening of the fiscal position of the government.



In fact, the differentials in the extent of the revenue shortfall in the case of different taxes do suggest that the shortfalls in revenue generation in 2001-02 occurred because of a combination of reduced tax rates and the industrial recession. It is known that over the liberalization years the area in which the most substantial reductions have been made in taxes is customs duties. It was presumed that these reductions would be accompanied by a burgeoning of trade, resulting in increased rather than decreased customs revenues. The huge shortfall in customs duty collections reflect the fact that the expectation that duty reduction would be accompanied by an increase in trade volumes has been belied. If in addition trade growth tends to slow for external reasons, tax collections collapse, as happened in 2001-02.

This experience with the effects of tax reduction and rationalisation on revenue generation has implications for other areas of taxes as well. Though in these cases revised revenue estimates for 2001-02 are higher than in 2000-01, the shortfall relative to budgeted estimates must to some degree be attributed to the reduction in rates and the rationalisation of tariffs. Thus, if the trend towards revenue shortfall in 2001-02 is to be stalled, it would be necessary for the government to both adjust tax rates or the tax base suitably as well as work towards a reversal of the recession.

Interestingly, however, the shortfall in tax collection has not affected the government’s expenditure as adversely as is to be expected. As Chart 3 shows, while there was a shortfall in revenue expenditures relative to budget estimates to the tune of Rs. 10,000 crore, an increase in plan expenditure relative to budgeted, has resulted in an overall shortfall in expenditure of just about Rs. 5000 crore. The question then is how the government has been able to sustain its expenditures despite the huge tax collection shortfall.




There are two developments of relevance here, besides the fact that a third of the tax revenue shortfall is a burden on the states rather than the centre, making the latter’s revenue loss on this count about Rs. 20,000 crore. First, despite the recession, the government has been able not just to meet but in fact exceed its non-tax revenue by Rs.1,500 crore relative to what was budgeted (Chart 4). This is predominantly due to windfall gains in two areas. An excess accretion of Rs. 3,000 crore in the case of Dividends and Profits, due to a sharp jump in dividends from public sector enterprises from the budgeted Rs.5419.50 crore to the realised Rs.10295.78 crore. This is largely explained by the one-time “revenue farming” resorted to by the government, by transferring to itself cash surpluses with enterprises like VSNL prior to their disinvestment. The other was the gain in non-tax revenues in Communications, which stood at Rs.7395.21 crore against a budgeted figure of Rs.3725.29 crore because of licence fees for basic/cellular telecom services and fees from VSNL, MTNL and BSNL.



The second, and more obvious way in which the government has been able to keep expenditures going is by increasing its budgeted fiscal deficit of Rs. 116314 crore to an estimated Rs.131721 crore and its budgeted open market borrowing of Rs. 77353 crore to an actual Rs. 91480 crore, which helped neutralise the much lower than budgeted receipts from disinvestments as well.

It should be obvious that the government cannot expect the first of these windfall gains to accrue every year. Yet, the budgeted figures for 2002-03 provides for a large contribution from non-tax revenues, that rose in 2001-02 to 33 per cent of all revenues as compared with 28.9 per cent in 2000-01. Revenues from Dividends and Profits are expected to remain at Rs. 18805 crore as compared with Rs. 18292 crore and revenues from the Communications sector at Rs.5256 crore as compare with Rs. 7395 crore. But with the government having chosen to budget for a fiscal deficit of just Rs.135524 crore in 2002-03 as compared with 131721 crore in 2001-02, even this is inadequate to finance the close to Rs.46,000 crore increase in expenditure it expects to incur in the coming financial year (Chart 3).

It is for this reason that the government has decided to resort to a range of imposts which put together seems to have no driving perspective other than increasing revenues through any means possible. In the event, the government has budgeted for a Rs.39107 crore increase in tax revenues (Chart 2). Since revenues from Customs duties are expected to rise by just Rs. 2000 crore from their depressed 2001-02 levels, the burden must be imposed through other means. The structure of that burden is disconcerting indeed. While corporation taxes are expected to contribute an additional Rs.9,500 crore, taxes on income are budgeted to garner an additional Rs.8,000 crore and excise duties a huge Rs.17,000 crore.




Since the corporate tax rate on foreign companies has been reduced from 48 to 40 per cent, all of the increase here is due to the hike in surcharge and the expected buoyancy. The gains in income taxation are expected to come from a combination of buoyancy, changes in the dividend tax, the effects of the surcharge and a reduction in tax exemptions for savings by middle class households. And the increase in excise duties, which would now apply at higher rates on goods that were taxed at a lower 4 per cent, would be a burden on all consumers, rich and poor alike. This change in the structure of taxation is clearly regressive. The Revenue Secretary is wrong to say the burden would be borne by the middle class. It would fall heavily on the poor as well.

The problem is that this burden is unlikely to resolve the problem of revenue shortfall that the government confronted in 2001-02. The budget presumes that nominal incomes in 2002-03 would grow at the rate of 10.7 per cent in 2002-03 as compared with 10.9 per cent in 2001-02. The government expected to mobilise an additional Rs.38,000 crore by way of tax revenues in 2001-02 but actually garnered only an additional Rs.8,000 crore. Yet this time around, with nominal GDP growth expected to be even lower, it has budgeted for an increase in revenues of Rs.39,107 crore. It clearly expects the new taxes to do the job.

However, the slump in revenues last year was not just the effect of accumulated giveaways, it was also the result of the slump in demand and growth. The government spent an additional Rs.38825 crore last year, but could not correct for that slump. Even with its heroic assumptions regarding non-tax revenues it expects to spend an additional Rs. 45873 crore in 2002-03. After allowing for inflation, this is a small increase. Clearly that cannot achieve what last year’s effort did not. It is no surprise therefore that the Revenue Secretary is exhorting the private sector to “deliver”, ignoring the fact that the latter is waiting for the government to stimulate growth.

It is here that the fact that the government has missed an opportunity in 2001-02, and threatens to do so in 2002-03 as well, is of relevance. Budget 2002-03 exposes the complete paralysis in economic policy-making that characterises the BJP-led government. That paralysis stems from two sources, which together have trapped the government in a crisis of its own making. The first of these is the collapse in the revenue-generating capacity of the Central government discussed above. The second, is the persistence of a high interest burden resulting from the decision taken as part of economic reform to borrow from the open market at higher rates of interest than charged by the Reserve Bank of India. When combined with the goal of limiting the fiscal deficit, these trends have resulted in a loss in its room for manoeuvre. This has meant that despite the steep recession in the industrial sector, evidence of the persistence of a high incidence of poverty and the rising levels of unemployment and under-employment, the government has not been able to provide any thrust in the budget for restoration of growth and improvement in the welfare of the common people.

This paralysis is indeed shocking because economic circumstances are such that they provide the government with a major opportunity. Food stocks touched record levels of more than 60 million tonnes, foreign exchange reserves are comfortable and inflation rules at an all time low. These circumstances demand that the government should use the food stocks it has at hand to launch a massive food-for-work programme aimed at strengthening rural and urban infrastructure, with the complementary rupee resources required financed with an expanded deficit. This, given the easy supply situation would not result in inflation, but in an expansion of output and employment and a concomitant reduction in rural and urban poverty. Further, in as much as the recession is partly responsible for the collapse in revenue generation, as the Finance Minister himself admits, the recovery in growth would lead to an increase in revenues that would help sustain the investment thrust.

Despite protestations to the contrary, effort along the food-for-work front has been meagre. As Chart 7 shows, the expenditure on rural employment was raised by Rs.1300 crore in 2001-02, by introducing a food component of just Rs.800 crore. And the budget figures for 2002-03 expect to raise these expenditures by just Rs. 371 crore, though the food component is raised by Rs. 421 crore. That this is a minimal use of the foodstock should be clear from the fact that stocks with the government are valued in excess of Rs.50,000 crore.

The point is that the cost of carrying these stocks has increased the subsidy bill of the government substantially, from Rs.12125 crore in 2000-01 to Rs.17,612 crore in 2001-02 and a budgeted Rs. 21,200 crore in 2002-03 (Chart 6). The government could have saved much on these subsidies by diverting stocks to a food-for-work programme, which would have helped build rural infrastructure and spur growth.



But paralysed by its internalisation of the obsession with the size of the fiscal deficit, the BJP-led government has not merely chosen to forsake this opportunity, but to use the large foodstocks to launch an attach on the farming community. There are two ways in which the government has decided to rid itself of the food stocks that provide the above opportunity: first, it is choosing to dispose as much of these stocks. The Finance Minister has listed a number mechanisms through which he plans to reduce the level of stockholding. These include increased allocations for BPL families; launching of a major food for work programme; allocation of 30 lakh tonnes of free foodgrain to the states for relief works in areas affected by natural calamities; open market sales of 30 lakh tonnes; and enhanced incentives for export of foodgrains.

Of these the budgeted allocation of food for employment programmes in 2002-03 totals Rs. 1221 crore as compared with Rs. 800 crore in 2001-02, indicating the rather limited increase on this ground. The real effort at disposal is likely to occur through provision to the trade at extremely low prices for sale either in the domestic or export market.

The second, medium and long term strategy for reducing the embarrassing level of foodstocks is to curtail the level of procurement. The Finance Minister has declared that: “The current situation of open-ended procurement by FCI at a high price and disposable at a heavily subsidised price is not sustainable.” This is nothing but a misleading justification of a decision to dismantle the system of procurement and distribution. The reason why stocks with the government are high as they are is its decision in recent times to repeatedly increase the issue price of foodgrains, which resulted in a fall in offtake. This not only increased stocks with the government but also resulted in large outlay on “subsidies” aimed at covering the carrying costs of the FCI.

In response to that problem the government is seeking to limit its procurement so as to reduce the accretion to its stocks. This would leave farmers to their own resources and expose the farming community to fluctuations in market prices at a time when international prices of agricultural commodities are falling. The impact of the latter is intensified by the removal of quantitative restrictions and the Centre’s hesitation to raise tariffs on agricultural imports substantially, though the evidence of protection for agriculture in the G-7 is overwhelming. Further, at a time when competition from exports from abroad is intensifying, the ability of domestic producers to face up to international competition is being undermined by the decision to cut fertiliser subsidies which would raise fertiliser prices by at least 5 per cent.

Thus it is not just that the budget misses a major opportunity to spur growth in a slowing economy, but it imposes or seeks to impose new burdens on those most effected by the global and domestic slowdown. One are where this can have extremely debilitating consequences is in the evolving fiscal relationship between the Centre and the states. The budget threatens to accelerate the slowdown in the economy by increasing the fiscal squeeze applied on the states. Out of the Rs.30,000 crore shortfall in tax revenues as a result of the Centre’s fiscal reform, close to Rs. 10,000 crore would have accrued to state governments as their share of devolved taxes. This loss would only intensify the fiscal crunch that the states have been facing. In addition, the government has decided to use these financial difficulties of the states to force them to adopt World Bank and IMF type reform. Thus as much as Rs. 12,300 crore is being provided as “reform-linked assistance” to states and another Rs.2,500 crore for policy reforms in sectors which are constraining growth and development. This totals close to Rs. 15,000 crore or as much as a third of the budgeted central plan assistance to the state governments of Rs.46,629 crore for 2002-03. Thus a major chunk of statutory central transfers are now being linked to the willingness of the states to implement neoliberal reform. After putting the states in a fiscal bind through its own policies, the BJP government is now using what are constitutionally warranted transfers to impose its own failed economic ideology on the state governments. This effort to impose deflationary and contractionary policies that are generating a crisis at the central level on state governments as well is a sure means of widening and intensifying the crisis facing the economy today.



Themes > Policy Watch	04.03.2002


Budget 2002-03: Results of Missing an Opportunity

In an implicit defence of the Budget proposals for 2002-03, Revenue Secretary S. Narayan attacked the corporate sector for failing to deliver. Speaking to representatives of the Confederation of Indian Industry during a post-Budget interaction, he argued that unlike last year when the budget provided Rs. 16,000 crore in the form of “giveaways”, this year’s budget offers none, because of the lack of resources resulting from the poor performance of industry. Industry’s failure to deliver, according to him, had in fact forced the government to impose additional taxes on the middle classes. “The corporate world must understand that this year the middle class is bearing your burden,” he is reported to have said. This candid assessment of differential contributions made and burdens borne by different sections is likely to have been inspired in the main by two factors. First, it was possibly triggered by disappointment with the adverse response of industry and finance in and through the media. That response would only serve to strengthen resentment among sections adversely affected by the surcharge on income taxes, reduced tax concessions for savings, higher LPG and kerosene prices, hiked sugar prices, enhanced postal and rail tariffs and increased excise duties on items of mass consumption. Through these means the Finance Minister has after all mobilised a significant amount of resources over a full year. Second, the response was possibly driven by the government’s own shock with the shortfall in revenues in 2001-02 relative to what was budgeted for. As Chart 1, shows the shortfall in gross tax revenue in 2001-02 relative to what was budgeted for amounted to a whopping 30,000 crore or 13 per cent of the budgeted figure. The shortfall occurred in all major taxes (corporation and income taxes and customs and excise duties). However, there were significant differences in the extent of the shortfall, which amounted to 9 per cent in the case of excise, 12 per cent in the case of income tax, 15 per cent in the case of corporation tax and a huge 21 per cent in the case of customs tariffs. As a result of the last of these, customs duties collected in 2001-02 were 9 per cent less than actual collections in 2001-02. The shortfall in revenues has meant that the post-liberalisation trend of a decline and subsequent stagnation of the tax-GDP ratio has persisted (Chart 5). Combined with the government’s obsession to keep the deficit under control, irrespective of the supply situation in the economy, and despite the government’s accelerated effort to garner resources from disinvestments, this has substantially reduced its ability to stimulate the economy. In year’s of recession this contributes to a worsening of the fiscal position of the government. In fact, the differentials in the extent of the revenue shortfall in the case of different taxes do suggest that the shortfalls in revenue generation in 2001-02 occurred because of a combination of reduced tax rates and the industrial recession. It is known that over the liberalization years the area in which the most substantial reductions have been made in taxes is customs duties. It was presumed that these reductions would be accompanied by a burgeoning of trade, resulting in increased rather than decreased customs revenues. The huge shortfall in customs duty collections reflect the fact that the expectation that duty reduction would be accompanied by an increase in trade volumes has been belied. If in addition trade growth tends to slow for external reasons, tax collections collapse, as happened in 2001-02. This experience with the effects of tax reduction and rationalisation on revenue generation has implications for other areas of taxes as well. Though in these cases revised revenue estimates for 2001-02 are higher than in 2000-01, the shortfall relative to budgeted estimates must to some degree be attributed to the reduction in rates and the rationalisation of tariffs. Thus, if the trend towards revenue shortfall in 2001-02 is to be stalled, it would be necessary for the government to both adjust tax rates or the tax base suitably as well as work towards a reversal of the recession. Interestingly, however, the shortfall in tax collection has not affected the government’s expenditure as adversely as is to be expected. As Chart 3 shows, while there was a shortfall in revenue expenditures relative to budget estimates to the tune of Rs. 10,000 crore, an increase in plan expenditure relative to budgeted, has resulted in an overall shortfall in expenditure of just about Rs. 5000 crore. The question then is how the government has been able to sustain its expenditures despite the huge tax collection shortfall. There are two developments of relevance here, besides the fact that a third of the tax revenue shortfall is a burden on the states rather than the centre, making the latter’s revenue loss on this count about Rs. 20,000 crore. First, despite the recession, the government has been able not just to meet but in fact exceed its non-tax revenue by Rs.1,500 crore relative to what was budgeted (Chart 4). This is predominantly due to windfall gains in two areas. An excess accretion of Rs. 3,000 crore in the case of Dividends and Profits, due to a sharp jump in dividends from public sector enterprises from the budgeted Rs.5419.50 crore to the realised Rs.10295.78 crore. This is largely explained by the one-time “revenue farming” resorted to by the government, by transferring to itself cash surpluses with enterprises like VSNL prior to their disinvestment. The other was the gain in non-tax revenues in Communications, which stood at Rs.7395.21 crore against a budgeted figure of Rs.3725.29 crore because of licence fees for basic/cellular telecom services and fees from VSNL, MTNL and BSNL. The second, and more obvious way in which the government has been able to keep expenditures going is by increasing its budgeted fiscal deficit of Rs. 116314 crore to an estimated Rs.131721 crore and its budgeted open market borrowing of Rs. 77353 crore to an actual Rs. 91480 crore, which helped neutralise the much lower than budgeted receipts from disinvestments as well. It should be obvious that the government cannot expect the first of these windfall gains to accrue every year. Yet, the budgeted figures for 2002-03 provides for a large contribution from non-tax revenues, that rose in 2001-02 to 33 per cent of all revenues as compared with 28.9 per cent in 2000-01. Revenues from Dividends and Profits are expected to remain at Rs. 18805 crore as compared with Rs. 18292 crore and revenues from the Communications sector at Rs.5256 crore as compare with Rs. 7395 crore. But with the government having chosen to budget for a fiscal deficit of just Rs.135524 crore in 2002-03 as compared with 131721 crore in 2001-02, even this is inadequate to finance the close to Rs.46,000 crore increase in expenditure it expects to incur in the coming financial year (Chart 3). It is for this reason that the government has decided to resort to a range of imposts which put together seems to have no driving perspective other than increasing revenues through any means possible. In the event, the government has budgeted for a Rs.39107 crore increase in tax revenues (Chart 2). Since revenues from Customs duties are expected to rise by just Rs. 2000 crore from their depressed 2001-02 levels, the burden must be imposed through other means. The structure of that burden is disconcerting indeed. While corporation taxes are expected to contribute an additional Rs.9,500 crore, taxes on income are budgeted to garner an additional Rs.8,000 crore and excise duties a huge Rs.17,000 crore. Since the corporate tax rate on foreign companies has been reduced from 48 to 40 per cent, all of the increase here is due to the hike in surcharge and the expected buoyancy. The gains in income taxation are expected to come from a combination of buoyancy, changes in the dividend tax, the effects of the surcharge and a reduction in tax exemptions for savings by middle class households. And the increase in excise duties, which would now apply at higher rates on goods that were taxed at a lower 4 per cent, would be a burden on all consumers, rich and poor alike. This change in the structure of taxation is clearly regressive. The Revenue Secretary is wrong to say the burden would be borne by the middle class. It would fall heavily on the poor as well. The problem is that this burden is unlikely to resolve the problem of revenue shortfall that the government confronted in 2001-02. The budget presumes that nominal incomes in 2002-03 would grow at the rate of 10.7 per cent in 2002-03 as compared with 10.9 per cent in 2001-02. The government expected to mobilise an additional Rs.38,000 crore by way of tax revenues in 2001-02 but actually garnered only an additional Rs.8,000 crore. Yet this time around, with nominal GDP growth expected to be even lower, it has budgeted for an increase in revenues of Rs.39,107 crore. It clearly expects the new taxes to do the job. However, the slump in revenues last year was not just the effect of accumulated giveaways, it was also the result of the slump in demand and growth. The government spent an additional Rs.38825 crore last year, but could not correct for that slump. Even with its heroic assumptions regarding non-tax revenues it expects to spend an additional Rs. 45873 crore in 2002-03. After allowing for inflation, this is a small increase. Clearly that cannot achieve what last year’s effort did not. It is no surprise therefore that the Revenue Secretary is exhorting the private sector to “deliver”, ignoring the fact that the latter is waiting for the government to stimulate growth. It is here that the fact that the government has missed an opportunity in 2001-02, and threatens to do so in 2002-03 as well, is of relevance. Budget 2002-03 exposes the complete paralysis in economic policy-making that characterises the BJP-led government. That paralysis stems from two sources, which together have trapped the government in a crisis of its own making. The first of these is the collapse in the revenue-generating capacity of the Central government discussed above. The second, is the persistence of a high interest burden resulting from the decision taken as part of economic reform to borrow from the open market at higher rates of interest than charged by the Reserve Bank of India. When combined with the goal of limiting the fiscal deficit, these trends have resulted in a loss in its room for manoeuvre. This has meant that despite the steep recession in the industrial sector, evidence of the persistence of a high incidence of poverty and the rising levels of unemployment and under-employment, the government has not been able to provide any thrust in the budget for restoration of growth and improvement in the welfare of the common people. This paralysis is indeed shocking because economic circumstances are such that they provide the government with a major opportunity. Food stocks touched record levels of more than 60 million tonnes, foreign exchange reserves are comfortable and inflation rules at an all time low. These circumstances demand that the government should use the food stocks it has at hand to launch a massive food-for-work programme aimed at strengthening rural and urban infrastructure, with the complementary rupee resources required financed with an expanded deficit. This, given the easy supply situation would not result in inflation, but in an expansion of output and employment and a concomitant reduction in rural and urban poverty. Further, in as much as the recession is partly responsible for the collapse in revenue generation, as the Finance Minister himself admits, the recovery in growth would lead to an increase in revenues that would help sustain the investment thrust. Despite protestations to the contrary, effort along the food-for-work front has been meagre. As Chart 7 shows, the expenditure on rural employment was raised by Rs.1300 crore in 2001-02, by introducing a food component of just Rs.800 crore. And the budget figures for 2002-03 expect to raise these expenditures by just Rs. 371 crore, though the food component is raised by Rs. 421 crore. That this is a minimal use of the foodstock should be clear from the fact that stocks with the government are valued in excess of Rs.50,000 crore. The point is that the cost of carrying these stocks has increased the subsidy bill of the government substantially, from Rs.12125 crore in 2000-01 to Rs.17,612 crore in 2001-02 and a budgeted Rs. 21,200 crore in 2002-03 (Chart 6). The government could have saved much on these subsidies by diverting stocks to a food-for-work programme, which would have helped build rural infrastructure and spur growth. But paralysed by its internalisation of the obsession with the size of the fiscal deficit, the BJP-led government has not merely chosen to forsake this opportunity, but to use the large foodstocks to launch an attach on the farming community. There are two ways in which the government has decided to rid itself of the food stocks that provide the above opportunity: first, it is choosing to dispose as much of these stocks. The Finance Minister has listed a number mechanisms through which he plans to reduce the level of stockholding. These include increased allocations for BPL families; launching of a major food for work programme; allocation of 30 lakh tonnes of free foodgrain to the states for relief works in areas affected by natural calamities; open market sales of 30 lakh tonnes; and enhanced incentives for export of foodgrains. Of these the budgeted allocation of food for employment programmes in 2002-03 totals Rs. 1221 crore as compared with Rs. 800 crore in 2001-02, indicating the rather limited increase on this ground. The real effort at disposal is likely to occur through provision to the trade at extremely low prices for sale either in the domestic or export market. The second, medium and long term strategy for reducing the embarrassing level of foodstocks is to curtail the level of procurement. The Finance Minister has declared that: “The current situation of open-ended procurement by FCI at a high price and disposable at a heavily subsidised price is not sustainable.” This is nothing but a misleading justification of a decision to dismantle the system of procurement and distribution. The reason why stocks with the government are high as they are is its decision in recent times to repeatedly increase the issue price of foodgrains, which resulted in a fall in offtake. This not only increased stocks with the government but also resulted in large outlay on “subsidies” aimed at covering the carrying costs of the FCI. In response to that problem the government is seeking to limit its procurement so as to reduce the accretion to its stocks. This would leave farmers to their own resources and expose the farming community to fluctuations in market prices at a time when international prices of agricultural commodities are falling. The impact of the latter is intensified by the removal of quantitative restrictions and the Centre’s hesitation to raise tariffs on agricultural imports substantially, though the evidence of protection for agriculture in the G-7 is overwhelming. Further, at a time when competition from exports from abroad is intensifying, the ability of domestic producers to face up to international competition is being undermined by the decision to cut fertiliser subsidies which would raise fertiliser prices by at least 5 per cent. Thus it is not just that the budget misses a major opportunity to spur growth in a slowing economy, but it imposes or seeks to impose new burdens on those most effected by the global and domestic slowdown. One are where this can have extremely debilitating consequences is in the evolving fiscal relationship between the Centre and the states. The budget threatens to accelerate the slowdown in the economy by increasing the fiscal squeeze applied on the states. Out of the Rs.30,000 crore shortfall in tax revenues as a result of the Centre’s fiscal reform, close to Rs. 10,000 crore would have accrued to state governments as their share of devolved taxes. This loss would only intensify the fiscal crunch that the states have been facing. In addition, the government has decided to use these financial difficulties of the states to force them to adopt World Bank and IMF type reform. Thus as much as Rs. 12,300 crore is being provided as “reform-linked assistance” to states and another Rs.2,500 crore for policy reforms in sectors which are constraining growth and development. This totals close to Rs. 15,000 crore or as much as a third of the budgeted central plan assistance to the state governments of Rs.46,629 crore for 2002-03. Thus a major chunk of statutory central transfers are now being linked to the willingness of the states to implement neoliberal reform. After putting the states in a fiscal bind through its own policies, the BJP government is now using what are constitutionally warranted transfers to impose its own failed economic ideology on the state governments. This effort to impose deflationary and contractionary policies that are generating a crisis at the central level on state governments as well is a sure means of widening and intensifying the crisis facing the economy today.



© MACROSCAN 2002