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Mainstream, Vol XLVII, No 32, July 25, 2009

Union Budget 2009-10: Growth with a Conscience

Monday 27 July 2009, by Pulin B. Nayak

Finance Minister Pranab Mukherjee’s Budget for 2009-10 seems to have received mixed responses. It is clear that the corporate sector is not very pleased with it. We are also told that it has nothing for the urban sector, and that it is too heavily biased towards the rural populace. It is also true that the Budget leaves too big a resource gap, with the fiscal deficit figure being 6.8 per cent of the gross domestic product (GDP), which is more than double of the earlier fixed Fiscal Responsibility and Budget Management (FRBM) target of three percentage points of the GDP.

All of the above, and more, may well be true, and these have not endeared Mukherjee to the upper echelons of our society. Yet it is possible to argue that the Finance Minister seems to have done a commendable job given the current conjuncture. The present scenario is one where the international setting is anything but propitious. For the past year the United States and Western Europe have been reeling under possibly the severest financial and economic crisis in recent memory. With increasing globalisation in recent years, the implications of the above have obviously not been salutary for the Indian economy. There has been much reduction of outsourced IT sector activity, in particular, due to the recession in the US, and there has been a rather poor showing in the Indian export sector as well. All of these, and more, have had a negative impact on the growth figures of the Indian economy in the past year.

During 2008-09, the Indian economy grew at 6.7 per cent. This is a decline of 2.1 per cent from the rate of 8.8 per cent that the economy achieved during the previous five years. But considering the adverse circumstances, the performance in the past year has possibly not been as bad as it could have been. There is little doubt that the conservative stance of our Central Bank, combined with a fairly strict regulatory environment under which our nationalised banks have to operate, stood us in good stead and helped us in being insulated from the toxic financial assets from abroad.

Everything that the Finance Minister has now sought to do via the Budget is explicitly purported to push the economy back to the nine per cent growth trajectory. That, however, would be far too limiting a way of looking at the Budget. It would be well to remember that a high growth rate is neither necessary nor sufficient to ensure distributive justice and social inclusion. And it is in this context that one needs to seriously examine Mukherjee’s Budget.

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If there are any core set of factors that catapulted the Congress party to the kind of unexpected, and even stunning, victory in the just concluded general elections, it would have to be the key initiatives of the National Rural Employment Guarantee Scheme (NREGS) and the loan waiver. There has been widespread condemnation of the NREGS ever since its inception from the proponents of reform. This is unfortunate. The argument usually made is that there are leakages and there is widespread corruption. The counter question may well be asked: Which government scheme is free of it?

There already are several evaluation studies and social audits of the NREGS from diverse areas, stret-ching from Jharkhand to Maharashtra to Rajasthan, and it has been seen repeatedly that where there is a sensitive and sympathetic group of panchayat-level workers involved with the scheme, and where the beneficiaries themselves play a role in the decision-making process, it is turning out to be a moderate success. It is specifically seen that the scheme has made a real difference to households headed by women. Since the poor can now demand work in a close radius of their homestead, they do not have to move long distances across States in search of physical work opportunities.

The other major initiative that the Finance Minister has talked of is the National Food Security Act which is to be brought in to ensure entitlement of 25 kilos of rice or wheat per month at Rs 3 per kilo to every family living below the poverty line in rural or urban areas. The most shameful blot on our development process more than six decades after the country’s independence is the sad truth that nearly half, if not more, of our population lives below the poverty line. India is home to the maximum number of homeless and destitutes in the world. Just under half our children in the age-group zero to five are severely undernourished. It is in this context that one needs to look at the Food Security Act. It is today a moral imperative for any responsive and responsible government.

It is concerns of the above sort that seem to have dictated the agenda of Mukherjee. And this has no doubt contributed to the substantial fiscal deficit of the Centre which is now placed at 6.8 per cent of the GDP. The combined fiscal deficit of the Centre, States and local bodies is likely to be in the range of about 10.5 to 11 per cent of the GDP. This is no doubt on the high side, but it needs to be pointed out that the real difficulty here is not the high fiscal deficit but the unconscionably high revenue deficit of close to 4.5 per cent of the GDP. A high fiscal deficit may be defensible provided durable assets are being created, so it may not be a bad thing in itself. But this is not so with a high revenue deficit. This would mean that the government is borrowing to spend by way of consumption expenditure, which is devoid of any productive potential.

It would be well to remember that Budget-making ultimately has to be not merely a pure economic exercise but necessarily a political economic act. By being too much of a fiscal fundamentalist one might give fillip to the undercurrents of social and political unrest in large swathes of underdeveloped and poverty stricken tracts. It is this issue that Mukherjee has tried to address.

(Courtesy: The Asian Age)

The author is a Professor of Economics at the Delhi School of Economics.

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