Home > Archives (2006 on) > 2008 > March 1, 2008 > A Bag of Tricks to Get the Vote: Union Budget 2008-09

Mainstream, Vol XLVI No 11

A Bag of Tricks to Get the Vote: Union Budget 2008-09

Saturday 1 March 2008, by Arun Kumar

The Union Budget 2008-09 has been greeted in the media as an election Budget, a farmer’s Budget and a common man’s Budget. This has strengthe-ned expectation that the Congress party may announce elections in the coming months and cash in on the favourable popular sentiment created by the Budget.

Please-all Budget

IT goes without saying that a Budget which plans to spend Rs 7,50,884 crores (roughly 14 per cent of the GDP at current prices) has the potential to give sops to all sections of the population. The FM has not been found wanting in this and has announced schemes for all conceivable sections, like the Dalits, minorities, women, children, the aged, small scale and cottage sector and, above all, the farmers. The FM announced expenditures from a few crores to a few thousand crores as if they were equally important. No doubt some of the smaller expenditures announced are politically significant because of the constituency being addressed. One may then ask: should these items not have had more allocations? Alternatively, should each of the constituencies now measure their importance to the ruling group by the share of expenditures allotted to them?

There are also constituencies that have got much without any fuss or mention. These are the favouri-tes of the government, like the rich and the corporate sector. The tax expenditures to the corporate sector have gone up by Rs 39,000 crores (p. 58, Revenue Budget), without even a mention in the speech. While not changing the structure of corporate taxation means not giving further concessions, it also implies not tampering with the massive subsidies given to this sector which now will amount to Rs 2,78,000 crores. In contrast, the direct subsidies to the poor, like on food, employment guarantee scheme and housing, will not amount to Rs 50,000 crores. The disparity is glaring considering that the subsidy to the corporate sector will benefit about one per cent of the population while the subsidy to the poor is shared by about 50 per cent of the population. Continuing with the SEZ policy and not announcing any changes in it is also continuing the massive concessions granted to the corporate sector.

Debt Waiver and Write-off

THE biggest concession and maximum publicity has gone to the debt waiver and relief scheme for the farmers. The sum involved is estimated to be Rs 60,000 crores. It is no doubt true that in semi-arid and arid areas the definition of small and marginal farmer ought to be different from that in the irrigated areas. Further, it is also true that loans from private parties, which form a major component of the problem, is not being tackled. In spite of these two factors, if the amount of relief announced reaches the farmers, it will make a positive impact on their lives.

The question that is being asked is: where is this money coming from? It is not shown in the Budget. Is it because it would worsen the fiscal and possibly the revenue deficits? But how can sums be allotted without a mention in the Budget documents or is this going to be a pure loss to the banks involved? According to one Ministry official, the amount is to be written off over many years as the loans fall due and not all at once. If this is true, then why has the FM written that “the implementation of the … scheme will be completed by June 30, 2008” (FM’s speech, p. 14)?

Several issues arise in this context. What does implementation mean? Further, if the loan was overdue on December 31, 2007 and remained unpaid until February 29, 2008, then the FM says there would “be a complete waiver” of the loan. It seems that the government would take over the liability of repaying the loan and the farmer would be free of repayment. But then these sums would have to be mentioned in the Budget in one form or the other. Since the largest chunk of the repayment is likely to be in the first year itself, this should have been reflected in the Budget and this sum should have been mentioned in the FM’s statement.

Is the FM taking the public and Parliament for a ride? If the wavier is to be completed over several years, then why announce that it would be completed in the next four months? If it is not to be funded through the Budget, then why wait to announce it as a part of the Budget and why not do it earlier? Has it only suddenly become known that the farmers are facing a crisis? When the PM announced the package for farmers in Vidarbha and talked of it sometime back, debt waiver could have been announced then and there. Why let more people die and then announce the package of debt waiver just when the elections are around the corner? Does it not display callousness that the scheme is an election related one and not one born out of concern for the farmers? No wonder the public hardly trusts the politicians.

The FM does not tire of quoting Saint Tiruvalluvar. This time, the quote he has used is: “Generous grants, compassion, righteous rule and succour to the downtrodden … are the hallmarks of good governance.” (p. 30) Is the FM’s generosity linked to the elections or has good governance started only in this election year? Does the FM ever think what would the Saint have said of his overall lack of concern for the downtrodden and his overtly pro-corporate sector stance in life? Or this is perhaps one more window-dressing for his constituency!

Non-transparencies

THE moot point remains: where is the money for the debt waiver scheme going to come from? Even if bonds (like the petroleum sector bonds) are given to the banks in lieu of the losses they suffer in writing off the loans, this should be reflected as borrowings. However, the borrowings are projected to fall next year by Rs 13,000 crores. It is unlikely that this would be possible after taking into account the bond requirements for the debt scheme. Since it is a subsidy to the farmers via the banks, this item should actually be accounted for in the revenue non-Plan account but that head shows little increase in allocation after taking into account the increase in the interest burden by Rs 18,000 crores. The FM is not being transparent in reflecting the debt waiver in the Budget. Similar non-transparency is visible in other items also.

For instance, take the statement on p. 29: “My tax proposals on direct taxes are revenue neutral.” However, before that para he has talked of reduction of taxes (like, Income tax and BCTT) on various items and the only item of increase in tax is capital gains. Then how can these be revenue neutral? Where would the revenue be increased to compensate for the fall? Here the reference is only to the increase in revenue due to policy changes and not due to a rise in the national income and the consequent increase in revenue. If the latter were to be true then neutrality should have meant no rise in the revenue but the Budget shows a huge rise of Rs 60,000 crores under this head. The FM should have mentioned the likely loss of revenue and then said he hopes it would be more than made up by other factors. Given that most of this tax is paid by the top one per cent in the income ladder, perhaps the FM did not wish to draw attention to how much concession he was giving to this section.

Another are of non-transparency is visible on p. 11, when the FM mentions investment in agriculture. He is suggesting an increase in capital formation in agriculture from 10.2 to 12.5 per cent between 2003-04 and 2006-07. The trick is that this is an increase based on calculation as a per cent of the GDP in agriculture and not the GDP. Since the contribution of agriculture to the GDP is falling, the FM is projecting a marginal rise in a falling share. The implication is that as a fraction of the GDP this would have hardly risen. Further, since the share of overall investment has risen sharply in this period, agricultural investment as a share of the total investment has fallen sharply. This is indeed a cause for worry and the underlying cause of the distress in agriculture. It is also the cause of inadequate employment generation in this sector and the cause of distress amongst the rural youth. This is also the reason for mass migration from the rural to urban areas and the growing distress in the urban areas.

The decline in the share of investment in agriculture also suggests that debt write-off will only give temporary respite to the farmers. It is the marginalisation of agriculture that is at the root of its problems. The country’s progress is not seen to depend on the progress of this sector; so industry and services are receiving the lion’s share of the nation’s resources. The figures given by the FM imply that agriculture is receiving only about one per cent of the total investment in the economy. Investment per person in agriculture is 1/1000 of that in modern industry and services. This is the cause not only of the distress in agriculture but also of the growing disparity between rural-urban, agriculture-non-agriculture, and backward and forward States.

Faulty Assumptions in the Budget

ANOTHER aspect of the lack of transparency is whether the assumptions underlying the Budget are indeed correct. The Budget is drawn up on the assumption that the real rate of growth would be 8.6 per cent and the rate of inflation would be 4.4 per cent giving a nominal growth rate of 13 per cent. Given the slowdown in the Indian economy due to reasons of the business cycle and due to the slowdown in the world economy following recessionary conditions in the USA, these assumptions are unlikely to hold. The effects have been visible over the last six months with a decline in the rate of growth of consumer durables, infrastructure and exports.

The situation is reminiscent of the US situation late last year when it was being said that there was no problem for the US economy; but now Ben Bernanky (Chief of the US Central Bank) has admitted a huge problem and a slowdown. A recession may have already set in. Economic managers are known to not admit problems and keep up a brave front till it is a bit too late. Is our FM also doing the same? One only needs to look back to 2002-03 to realise that the economy was averaging a growth rate of five per cent for four years before that. Thus, why would it be surprising if the economy again slows down to that earlier level?

The rates of investment and saving that have increased in the last six years to about 35 per cent have done so on the back of the massive disparities that are being created in the economy and the massive profitability that businesses have been allowed to garner. As the economy slows down and the profit levels fall, the rate of investment and rate of savings can again fall and this would signal a fall in the rate of growth. Hence projecting a marginal fall in the rate of growth is likely to prove to be incorrect.

Prices are supposed to be rising at about four to five per cent per annum. However, the services sector, whose share in the economy is now about 60 per cent, is not represented in the inflation index; so the index is not representative of the price rise. The rise in rents, school fees, medical expenses, cost of financial services, etc. are not represented in the present inflation index. A committee was set up to go into the issue of under-representation of the services sector in the inflation index but its report has not yet come. Is it that the government finds it convenient to delay this report so that it can keep claiming a low rate of inflation? After the elections whichever government comes can face the music.

That the government uses incorrect assumptions in drawing the Budget is evident from the revised figures of the previous year. The Plan size was claimed to have been stepped up by 30 per cent but there is a shortfall of Rs 28,000 crores or about 11 per cent so the actual increase is only 19 per cent. But the government knows that public memory is short and no one will worry about it. The government can then claim a lot, like a massive step-up in the Plan size. Further, this step-up was to be financed through a very high increase in IEBR to be garnered from the public sector. This too has turned out to be short by Rs 21,400 crores or about 20 per cent. In this Budget again the government is claiming a step-up of the Plan by about 28 per cent and IEBR by 36 per cent. How realistic is this? Or, is it another ploy to claim a lot?

Conclusion

THE government has lost another chance of putting the economy (while it was still growing fast) on a more broadbased growth path taking care of the poor. It could have also tried to use resources to ward off the impending economic problems due to the global slowdown. But for political reasons it neither wishes to admit any problems nor displease its real constituency, the corporate sector, so as to create a euphoria to come back to power.

Actually, given the situation of the poor, a lot more needs to be done but the government is not even able to fulfil its own expenditure targets. For instance, we are far from the goal of six per cent of the GDP on education. We are not close to achieving at least three per cent of the GDP on health. Expenditures on the NREGA are hardly commensurate with the need to spend about Rs 25-40,000 crores. This year rather than garner more resources for substantially increasing the help to the margina-lised sections, the government continues to give up resources by giving (or continuing) tax concessions to the well-off sections.

The problem is that the poor, who live at the margins, are likely to suffer more from any slowdown and recession than the rich. Thus, increase in social sector expenditures, employment generation, etc. should have been sharply stepped up. For the sake of votes, noise is being made to show that the government is with the poor. It is not clear now much would actually be done and how much would be achieved given the massive corruption all around us. How much and for how long can the public be fooled? What if it wakes up to the reality of the last four years? Not only should we ask when the public would wake up; the moot question is: when would the ruling party wake up?

Dr Arun Kumar is a Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail: arunkumar1000@hotmail.com

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