In
a budget speech that was tiresome to the point of
being boring and sought to conceal far more than it
revealed, Finance Minister Pranab Mukherjee has paved
the way for an acceleration of inflation. By hiking
indirect taxes that would be passed through to buyers,
and slashing subsidies that would raise the prices
of petroleum products and fertilisers, the Finance
Minister has exposed a nation already reeling under
the effects of a prolonged price rise to another bout
of cost push inflation. In a country where for the
last two years or more inflation has been among the
most pressing economic problems, this tendency to
engineer inflation is shocking to say the least.
The magnitudes involved here are by no means small.
Consider for example the across-the-board hike in
union excise duties on non-petroleum goods, involving
a two percentage points increase in the standard rate
(from 12 to14 per cent) and a one percentage point
increase in merit rates. As a result of these changes,
revenues from central excise duties are projected
to rise from Rs. 150,075 crore to Rs. 1,93,729 crore
or by close to 30 per cent in a single year.
To augment the gains derived from these indirect taxes,
the Finance Minister has decided to slash expenditures
on non-food subsidies, especially those on fertiliser
and petroleum products. The fertiliser subsidy bill,
which stood at Rs. 67,199 crore, as per the revised
estimates for the financial year 2011-12, is expected
to fall significantly to Rs. 60,974 crore in 2012-13,
implying a significant increase in the price paid
by the farmer for fertiliser. Simultaneously, the
petroleum subsidy is projected to fall from Rs. 68,481
crore in 2011-12 to Rs. 43,580 crore in 2012-13. Since
this is to occur at a time when global petroleum prices
are on the rise and political uncertainty in West
Asia and elsewhere is threatening to take oil prices
to an all-time high, the large reduction in subsidies
implies that the prices of petroleum products paid
by the consumer would have to rise sharply. These
are intermediates, and petroleum products are universal
intermediates at that. A more generalized rise in
prices that affects adversely the average citizen
is, therefore, inevitable.
The fertiliser subsidy cut also needs to be seen in
the context of the claim that the budget is coming
to terms with the long term neglect of agriculture.
It promises, for example, to raise some allocations,
such as to productivity enhancing investments in agriculture
in eastern India, and to enhance the flow of credit
to the agricultural sector. However, the actual allocation
to previously neglected sectors like irrigation and
extension services that could raise productivity remains
woefully inadequate, even after the projected increase.
On the other hand, costs would rise because of the
cut in fertiliser subsidies and the imposition of
higher charges for other inputs, squeezing margins
accruing to farmers even further. This is particularly
damaging because the problem in agriculture today
is that the viability of crop production is under
challenge, since costs are rising faster than prices
received by farmers. In that context, to squeeze the
net returns garnered by farmers while promising them
more credit makes no sense. It could trap them in
debt with consequences that experience has shown can
be tragic.
The Finance Minister justifies this trend to place
huge burdens on poorer citizens as the cost of his
principled allegiance to reform above all else. There
are, as often expressed, two components to such reform.
The first is to continue with stalled liberalization
in areas varying from multi-brand retail to the financial
sector. The second is to ensure fiscal contraction
through a reduction in the fiscal deficit to GDP ratio.
Referring to the latter as ''fiscal consolidation'',
Mukherjee explains that it ''calls for efforts both
to raise the tax-GDP ratio and to lower the expenditure.''
However, reading the budget it is clear that imposing
direct taxes on the rich is not considered a way of
raising the tax-to-GDP ratio, which stands at a pathetic
10.5 per cent in India. In fact, given the ethos of
liberalisation promoted by the UPA, even his effort
to collect taxes he thinks is rightfully due to the
government is under challenge. The government has
attempted to respond to the Supreme Court's verdict
that the capital gains tax imposed on the beneficiaries
of the Vodafone-Hutchinson deal was not legally sustainable.
That verdict not only implied a loss of revenues in
this instance but potential losses of taxes imposed
on similar deals in the past. Hence the Finance Minister
has promised a retrospective clarification of government
intent. To his surprise he has come under attack from
sections of the media that scream at the mention of
a subsidy for the poor.
The corporate sector is also upset that the Finance
Minister has not been able to offer it much more by
way of tax concession than the continuation of previously
granted benefits. On the direct tax side, he has highlighted
minor sops provided to the middle class by raising
the exemption limit and widening the income slabs
subject to lower than maximum tax rates. This is combined
with some concessions to other direct tax paying sections,
resulting in a revenue loss of Rs. 4,800 crore. He
hopes this would win him middle class support. But,
he has possibly angered the ''new'', upper middle
class, with a combination of higher service tax rates
and a widening of the service tax base to more than
neutralise this loss.
Overall, the reliance on means other than direct taxation
implies that India is returning to a phase when indirect
tax revenues constitute a rising proportion of total
taxes. This amounts to imposing a disproportionately
larger burden on poorer sections of the population
and makes the tax regime pushed by this budget regressive
from the point of view of income distribution.
Has the Finance Minister done this in order to finance
schemes that would benefit the really poor? Consider
two flagship schemes that are supposed to be directed
at making growth more inclusive: the subsidised food
distribution programme that is supposed to reach affordable
food to the poor and the National Rural Employment
Programme that is geared to providing employment and
putting purchasing power in the hands of the really
poor.
The government has been debating and is in the process
of legislating and implementing a major Food Security
programme, which is being presented as the first of
its kind in a large and poor developing country. So
it is surprising that as compared to an expenditure
of close to Rs. 73,000 crore in 2011-12, the budget
for 2012-13 provides for just Rs. 75,000 crore for
covering the subsidy on food. Clearly, the government
is either not planning to expand the food security
programme substantially, or it hopes that its new
effort at targeting subsidies would help rein in expenditures
and reduce real outlays. Similarly, there has been
much hype about the employment guarantee scheme being
implemented under the NREGA. However, assistance for
the Mahatma Gandhi Rural Employment Guarantee Scheme
under the Ministry for Rural Development, which fell
from Rs. 35, 841 crore in 2010-11 to Rs. 31,000 crore
2011-12, is budgeted to increase to only Rs. 33,000
crore in 2012-13. This was a period when inflation
was ruling high, so that in real terms we are likely
to have seen and would possibly see a substantial
decline in allocations. NREGA is increasingly all
about much talk and little action.
Does this mean that the budget is only concerned with
fiscal consolidation, and therefore, does not provide
benefits to any section? That is clearly not true.
Consider for example Finance Capital in general, and
foreign finance in particular. To start with, the
government has decided to slash by 20 per cent (from
0.125% to 0.1 %) the already low tax it puts on transactions
in stock markets. That tax was designed not just to
obtain revenue, but also to discourage speculation
through repeated transactions in the market. Further,
in the name of promoting investment in infrastructure,
the budget proposes to reduce the rate of withholding
tax on interest payments on foreign borrowings in
select sectors from 20 per cent to 5 per cent for
three years. Finally, to activate sluggish stock markets
the government is encouraging middle class investors
to move savings into those markets so that big investors
can profit. To that end, a new Rajiv Gandhi Equity
Savings Scheme is offering middle class investors,
with an annual income less than Rs. 10 lakh who invest
upto Rs. 50,000 in equities, an income tax deduction
of 50 per cent of that amount. Middle class investors
are being enticed into the market to serve the interests
of big capital. Finally, individual foreign investors
(or Qualified Foreign Investors), who recently have
been permitted to invest in the stock market, are
now being permitted to access the Indian corporate
bond market, to benefit from the higher interest rates
in the country.
Thus, external reform in the form of concessions to
attract the foreign investor is very much a part of
the Minister's conception of reform and this budget.
But this has been to an extent ''balanced'' by higher
budgeted (though not necessarily realizable) allocations
for sectors like rural development, health and education.
But, the additional tax revenues expected to be garnered
are inadequate to fund these projected increases.
So, the budget relies on other measures, such as the
continuation of the hitherto largely unsuccessful
disinvestment programme. In 2011-12, as compared with
a budgeted target of Rs. 40,000 crore, the government
garnered just Rs. 14,000 crore. Ignoring the implied
signal, Budget 2012-13 provides for a target of Rs.
30,000 crore as receipts from disinvestment. Clearly
the Minister needs this sum to prove that after all
his inflationary financing efforts he has managed
to enhance expenditures to spur inclusive growth.
But even after accounting for such receipts, he has
to allow himself optimistic assumptions on revenue
buoyancy to ensure that the numerical value of the
fiscal deficit to GDP ratio does not cross acceptable
boundaries.
Despite all this, the Finance Minister can hardly
claim he has done much to revive a slowing economy,
and realize the projected 7.6 per cent growth of GDP
in 2012-13. Total expenditure, which fell from 15.7
per cent of GDP in 2010-11 to 14.9 per cent of GDP
in 2011-12, is budgeted to be marginally lower at
14.8 per cent of GDP in 2012-13. And capital expenditure
that fell from 2.1 to 1.8 per cent of GDP between
2010-11 and 2011-12, is budgeted to rise to only 2
per cent of GDP in 2012-13.
However, the Finance Minister claims he has paid the
price for necessary ''fiscal consolidation''. Whether
such consolidation is good or not is another matter.
But, in practice, despite huge revenues from spectrum
sale and reined in expenditures on many fronts, the
fiscal deficit to GDP ratio in 2011-12 stood at 5.9
per cent as compared with a target of 4.6 per cent
set in the budget for that year. And in 2012-13, despite
the resource mobilization planned and optimistic assumptions
about revenue generation, the fiscal deficit is projected
at 5.1 per cent. The minister is not successful even
in terms of his own objectives.
Of course, Mr. Mukherjee prides himself for contributing
(through these measures) to the implementation of
''economic reform'' in a country that he claims now
sits at the same high table as policy makers from
the developed countries. That position, he says, puts
''new responsibilities'' on India's shoulders. But
a reading of the budget seems to suggest that the
responsibility merely lies in speaking of economic
reforms, such as inviting foreign investment into
multi-brand retail, giving special concessions to
foreign investors, and bailing out the industrialists
that ran aground some of the leading private airlines.
It does not seem to involve the responsibility to
improve the economic conditions of India's marginalised
majority that is poor.
*This article was originally
published in the Frontline, Volume 29 - Issue 06:
Mar. 24-Apr. 06, 2012, and is available at:
http://www.frontlineonnet.com/fl2906/stories/
20120406290612600.htm
