Union Budget 2008-09: Faulty Assumptions?
Arun Kumar
CESP/SSS, JNU, N Delhi
For the Mainstream.
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 strengthened expectation that the Congress party may announce elections in the coming months and cash in on the favourable popular sentiment created by the budget.
SOME HIGHLIGHTS OF THE BUDGET
PLEASE ALL BUDGET
It goes without saying that a budget which plans to spend Rs. 7,50,884 crores (roughly 14% of GDP at current prices) has the potential to give 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. What has been done for these sections is far less than what is required. Simple mention of some spending is not going to mitigate the stress in the lives of these people. 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 favourites of the government, like, the rich and the corporate sector. The tax expenditures to the corporate sector have gone up by Rs. 39,000 crore (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 crore. 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 1% of the population while the subsidy to the poor is shared by about 50% 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 the 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.
Question that is being asked is where is this money coming from? It is not shown in the budget. Is it not shown 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 obligation. 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 the Parliament for a ride? If the waiver is to be completed over several years then why announce that it would be completed in the next 4 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 some time back, debt waiver could have also been announced. Why let more people die and then announce the package of debt waiver just when the elections are around the corner? Does it 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 politicians.
The FM does not tire 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 of 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 borrowing 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. Is it possible that the banks have already written off a large part of this bad debt in their books? So the FM may be counting on not doing anything about it. Hence it need not be shown in the budget. It could also be the case that the scheme was suddenly introduced at the last minute so not well worked out and the FM had not worked out the financing mechanism. The FM is not being transparent in reflecting 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 revenue be neutral? Where would the revenue increase to compensate for the fall? Neutrality only refers to unchanged revenue due to policy changes. It can not include an increase in revenue due to a rise in the national income. If that were to be the case, 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. What the FM needed to do was to 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 1% in the income ladder, perhaps the FM did not wish to draw attention to how much concession he was giving to this section.
Another area 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% between 2003/04 and 2006/07. The trick is that this is an increase based on calculation as a per cent of GDP in agriculture and not GDP. Since contribution of agriculture to 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 total investment has fallen sharply. This is indeed a cause of worry and the underlying cause of the distress in agriculture. Further, since banks have to show a profit they have decreased the number of rural bank branches and forced the farmers to depend on the local money lenders. Further, there is talk of legitimizing such money lenders and this can only make the situation worse. Low investment is also the cause of inadequate employment generation in this sector and the cause of distress amongst rural youth. This is also the reason for mass migration from rural to urban areas and the growing distress in 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 marginalization of agriculture that is at the root of its problems. Country's progress is not seen to depend on the progress of this sector so it is industry and services that are receiving the lion's share of the nation's resources. The figures given by the FM imply that agriculture is receiving only about 1% 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% and the rate of inflation would be 4.4% giving a nominal growth rate of 13%. Given the slow down in the Indian economy due to reasons of business cycle and due to the slow down in the world economy following recessionary conditions in the USA, these assumptions are unlikely to hold. The effects have been visible over the last 6 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 slow down. 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 realize that the economy was averaging a growth rate of 5% for 4 years before that. Thus, why would it be surprising if the economy again slows down to that earlier level?
The rate of investment and saving that have increased in the last 6 years to about 36% 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. As the economy slows down and the profit levels fall, the rate of investment and the rate of savings can again fall and this would signal a fall in the rates 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 4 to 5% per annum. However, the services sector whose share in the economy is now about 60% is not represented in the inflation index, so that 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. Plan size was claimed to have been stepped up by 30% but there is a short fall of Rs 28,000 crores or about 11% so that the actual increase is only 19%. But the government knows that the public memory is short and no one will think about it later. The government can then make exaggerated claims, like, a massive step up in 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 by about 20%. In this budget again the government is claiming a step up of Plan by about 28% and IEBR by 36%. 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 broad based 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 slow down. 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 fulfill its own expenditure targets. For instance we are far from the goal of 6% of GDP on education. We are not close to achieving at least 3% of GDP on health. Expenditures on 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 help to the marginalized 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 slow down 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 how much would actually be done and how much would be achieved given the massive corruption all round. How much and for how long can the public be fooled? What if it is already alert to the reality of the last 4 years and does not get taken up in the announcements? Not only should we ask when would the public wake up but when would the ruling party wake up? Perhaps the FM thinks it is well worth a try given the bad situation the government finds itself in.