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JUST A LITTLE LESS BRAZEN
- Liberalization with a human face is impossible

The 2004-05 budget has been hailed as being “pro-poor” and “pro-farmer”. Nothing could be further from the truth. The outlay for the department of agriculture and co-operation remains at the same level as the National Democratic Alliance’s interim budget, Rs 3014 crores. There is no additional outlay over what the interim budget had provided for the food-for-work programme; and the extension of coverage from 1.5 crore to 2 crore families under the Antyodaya Anna Yojana had also figured already in the NDA’s interim budget.

Indeed, there is a marked decline in Central plan outlay on rural employment compared to 2003-04 (revised estimate), from Rs 9,640 crore to Rs 4,590 crore. True, the outlay for 2003-04 was inflated because of “calamity”-related special expenditure, but even if we remove this special component from both years’ figures, the outlay actually decreases from Rs 4,751.25 crore to Rs 4,310 crore. For the outlay for the Department of Rural Development as a whole, again excluding the “calamity relief” component, the increase is meagre, from Rs 10,612 crore to Rs 11,437 crore

No doubt there are off-budget measures promised, such as the Rural Infrastructure Development Fund, and the doubling of credit to agriculture over three years, but the budget itself is extraordinarily niggardly towards agriculture and rural development, contrary to the promise of the national common minimum programme.

The budget does defer to the NCMP by raising the amount of budgetary support for the plan by Rs 10,000 crore over the interim budget. Of this however a significant amount, Rs 4,910 crore according to the receipts budget, which is financed by the 2 per cent cess, should go for education. The remainder is too small to make much difference. By contrast, defence expenditure has increased by Rs 11,000 crore over the sum provided by even the interim budget of the Bharatiya Janata Party-led government. Questioning the need for such an enormous jump in defence expenditure may not be de rigueur, but the contrast between the attitudes to defence and to rural development is quite striking.

Apart from its commitment to the NCMP, the budget’s macroeconomics too is questionable. The relentless pursuit of neo-liberalism, especially during the NDA years, had imposed a drastic deflation on the economy, giving rise to a combination of unutilized industrial capacity, unsold foodstocks, and increased unemployment. Boosting domestic demand through increased government expenditure, particularly rural outlays, was the obvious need of the hour. The budget not only does not raise outlays in rural India significantly, but it does not even give much boost to aggregate demand in the economy. First, the fiscal deficit is supposed to come down from 4.8 per cent of the gross domestic product in 2003-04 (RE) to 4.4 per cent in 2004-05, which is contractionary per se. Second, since a large chunk of defence expenditure would finance equipment imports, representing a demand leakage from the economy, the 27.7 per cent increase in defence expenditure, which significantly alters the composition of public expenditure, would have a further contractionary effect.

Of course, the revenue estimates of the budget are unrealistic. Income tax revenue is budgeted to rise by 26.5 per cent over the revised estimates of 2003-04, even though 14 million tax-payers are out of the tax net. Corporation tax revenue is expected to grow at an even more phenomenal rate, 40.4 per cent. These patently unrealistic estimates are sustained by the assumption that a “tidy sum” would be fetched from tax arrears, but this is rather sanguine.

If, in the likely event of a revenue shortfall, the government cuts back on expenditures to meet the fiscal deficit target, then the deflationary scourge on the economy would persist. But if the revenue shortfall gets covered by a larger fiscal deficit, then aggregate demand would receive a boost. True, even in such a case, we would not have used the best means of boosting aggregate demand — namely, through rural development expenditure; but at least there would have been some escape from deflation.

The finance minister must therefore stick to his expenditure targets even in the event of a revenue shortfall, flouting the Fiscal Responsibility and Budget Management Act, which is an absurd piece of legislation anyway. In a demand-constrained system like ours, insisting on keeping down the fiscal deficit is bad economics, apart from being socially retrograde. This is particularly so when the expenditure financed by the fiscal deficit creates demand within the public sector itself, giving rise to larger public sector profits.

A further point must be noted here. We have had huge foreign exchange inflows through foreign institutional investors, because of which the Reserve Bank of India holds foreign exchange reserves exceeding $120 billion. The high-powered money created as a consequence has boosted bank reserves even though credit demand from quarters which the banks consider creditworthy (which unfortunately excludes the peasantry and petty producers) has been limited. To support the banks’ profitability, the RBI has been putting government securities into their portfolios, reducing sharply its own holding of such securities and hence its own profitability. This has reduced the flow of rural credit, since much of the finance for rural credit through National Bank for Agriculture and Rural Development comes from the RBI’s profits. It is extremely urgent, therefore, that additional government securities be put into the RBI’s portfolio; for the government not to do so because of the Fiscal Responsibility Act would be silly.

Capital controls are a pre-condition for any governmental activism on social objectives. The budget however has taken some steps towards increasing the role of globalized finance in our economy, such as raising the investment ceiling for FIIs in debt-funds from $1 billion to $1.75 billion, and allowing banks, including foreign banks, greater latitude in the capital market.

Likewise raising the FDI cap in telecommunications, civil aviation and insurance is thoroughly unwarranted. The government-owned insurance companies in India have far greater experience, far larger reach, far greater social commitment, far greater expertise, and a far better record of honouring claims than foreign companies. To induct the latter into the economy serves no purpose other than giving them a chunk of the lucrative Indian market. Raising the FDI cap in telecommunications hands over a strategic area to foreign investors, going beyond what even the NDA had dared to do. And raising the cap in civil aviation amounts to giving foreign companies, again quite gratuitously, a share of the profitable Indian market at a time when the global industry continues to be in crisis.

The implementation of the NCMP requires a strengthening of state government finances, which are in a crisis for no fault of theirs. While the budget does reduce interest rates on fresh Central loans to 9 per cent, it is silent on the issue of debt write-off, which even the NDA government’s Planning Commission had proposed for non-small savings debt. And the eagerness to introduce value-added tax when there has been no study whatsoever of its consequences and when the Centre’s promise of full compensation to states extends only to one year, is completely unjustified.

Many, including myself, believe that “liberalization with a human face” is an impossibility; but not so the United Progressive Alliance leaders The 2004-05 budget was an ideal opportunity for them to prove their case, but they have singularly failed to do so. What we have is little of “the human face”, but a continuation, perhaps in a less brazen manner than the NDA, of “liberalization”.

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