The NDA led by BJP coined the ‘India Shining’ slogan hoping to sail through in the last general elections. The result was for anybody to see. To counter NDA’s ‘India Shining’, the UPA led by the Congress ironically took a leaf out of NDA’s book itself and rhetorically presented a model of ‘Inclusive Growth’. It was nothing but a caricature of the same concept. ‘India Shining’ was also a rosy growth story of the country. In contrast, ‘Inclusive Growth’ is a vulgar attempt to desperately tag the aam aadmi behind the ‘growth’ bandwagon. The declared central theme of the Central Budget 2008-09 is also this so called ‘inclusive growth’.

Growth – Inclusive or Exclusive?

In the budget speech the Finance Minister P Chidambaram highlighted a ‘sample of facts’ to judge the record of the UPA government on inclusive growth. Those are:

Doubling of agricultural credit in the first two years of the government to reach Rs.2,40,000 crore by March,2008.

National Rural Employment Guarantee Scheme (NREGS) proving to be a historic measure for empowerment of SCs/STs, especially women.

The Mid Day Meal Scheme covering 11.4 crore children is the largest school lunch programme in the world.

The National Rural Health Mission strengthening and improving primary health care in rural India with 8,756 centres having 24x7 facilities.

Kasturba Gandhi Balika Vidyalaya Scheme enrolling 1,82,000 girls in residential schools, is helping bridging gender gap in education.

Everyday experience of the aam aadmi (common man) will speak how far this ‘sample of facts’ alleviated the miseries of their daily life. Before examining the same, we have another ‘sample of facts’ to prove that a minuscule minority of amir aadmi (rich men) in the country have definitely flourished by leaps and bounds during the UPA rule. According to a recent report of the Forbes magazine, Indians are emerging as world beaters at creating individual wealth and four of the world’s eight richest individuals are Indians. In fact, India has more billionaires owning more than 1 billion dollars worth of wealth in the top ten than any other country. In all, India has 53 billionaires, which is the highest in Asia and fourth highest in the world, behind only the US (469), Russia (87) and Germany (59). The combined wealth ($334.6 bn) of these 53 Indian billionaires is 31% of the GDP of the country and is greater than the wealth of Germany’s 59 billionaires put together ($284.6 bn). In this regard, India is second only to Russia, whose billionaires own 36% of Russian GDP.

That everything is not all right with the Indian economy has been expressly admitted by Finance Minister himself in his budget speech. He has informed us that:

Agriculture has struck a disappointing note and the growth rate for the whole year in agriculture is estimated at only 2.6 per cent.

World prices of crude oil, commodities and food grains have risen sharply in the period between April, 2007 and January, 2008. The prices of wheat and rice have increased in the world market by 88 per cent and 15 per cent respectively. All these trends are inflationary, and there is pressure on domestic prices, especially on the prices of food articles.

We have also witnessed capital inflows that are far in excess of the current account deficit. This poses a challenge to monetary management. Government will, in consultation with the RBI, continue to monitor the situation closely and take such temporary measures as may be necessary to moderate the capital flows consistent with the objective of monetary and financial stability.

At the beginning of the year, the outlook for the global economy was benign. Our economy, thanks to our own policies as well as globalisation, was poised to record another year of high growth; in fact, the first half of 2007-08 returned a growth rate of 9.1 per cent. However, since August, 2007, the financial markets in the developed countries have witnessed considerable turbulence that has not yet abated. The consequences for developing countries are also not clear.

Many thanks, Mr. FM! He has himself acknowledged at least four of the main crisis points facing the country. It is clear from his statement itself that whatever growth is taking place is bypassing agriculture, if not happening at the very cost of agriculture. If the growth story does not encompass an economy which engages more than 65 per cent of the populace of the country, then what sort of an inclusive growth is this? Why has the growth rate in agriculture almost been stagnating for the last several years? The deep agricultural crisis emanating from the policy of dependence on imperialist-dictated agricultural strategy does not find any serious response in the budget, except for the usual rhetoric and feigned concern about some aspects of the crisis. The FM tells us that in order to guarantee agricultural growth and food security, Rs.25,000 crore would be allocated to National Farm Development Scheme and the Rs.4,882 crore National Food Security Mission Scheme would be implemented during the Eleventh Plan period.

The FM’s growth story has already been busted by the recent CSO report that the Indian industry crawled at a measly 5.3% in January this year compared to last January. This sharp downturn in industrial growth has brought down the overall growth rate during the first 10 months of this fiscal to 8.7% compared to 11.2% registered in the same period last year. The capital goods sector, which grew by an average 20% and more from April-December, logged 2.1% in January. The basic goods sector also registered a growth of just 3.5% and consumer durables, on the contrary, saw a decline of 3.1% in January. Just a fortnight back, the FM looked confident that our economy would still be on the higher growth trajectory despite the impending global slowdown, ‘thanks to our own policies as well as globalisation’. Is the FM still putting up a brave front after seeing the latest CSO industrial data?

The US economy has started showing lasting sign of slowdown preceded by bursting of the housing bubble and a bitter sub-prime lending crisis. A US-led globalisation is giving rise to a US-led global slowdown too. The US is the largest export market for India and the growth strategy pursued by Indian governments of all hues is export-oriented growth. How can such a strategy be sustained by the sheer magic of ‘our own policies as well as globalisation’, when globalisation itself is at the root of this crisis and our policies are nothing but an Indian translation of globalisation?

Thirdly, the prices of essential items, particularly of food articles, are skyrocketing, spurred by a sharp increase globally. This is another fall-out of the FM’s pet globalisation strategy. The latest official data has put the figure for the inflation rate at 5.11%. The Great Wheat Panic of 2007 saw the global prices of wheat shoot up by over 92% between January and December, 2007. Rice and corn also rose very sharply. The whole world including parts of our own India saw food riots. The FAO has estimated the number of hungry around the world at 854 million. It is apprehended that this trend will worsen in 2008.

Fourthly, foreign capital flows into the country are only aggravating the already precarious inflation situation. Much of this capital is unproductive and speculative. A part of indigenous black money is also being re-channelled back into the country through this capital flow route.

The politics of debt waiver

The budget’s entire claim to credibility rests on this proclamation of Rs. 60,000 crore debt waiver – a measure that comes in the wake of over two lakh farmers’ suicides. A careful look at the budget figures and a deeper probe into the causes of farmers’ suicides, however, reveals a deception at its core. No waiver to the tune of 60,000 crore actually exists: no provision has been made in the budget for the proclaimed loan waiver amount.

Where the money will come from, has remained a great mystery. In the face of severe criticism, the FM has subsequently agreed to provide Rs.10,000 crore from this year’s budget and the balance in two subsequent years. But it is still not clear how even this Rs.10,000 crore will be provided for.

In an interview given to Times of India, the FM has clearly stated that the money will come from the banking system. He has stated that debts will have to be written off in the same manner as the banks write off the Non Performing Assets (NPAs). However, if they face any liquidity problem, the government will reimburse them. How? He could not elaborate. When there is no provision in the budget, the money must obviously be raised by issuing bonds or the banks will have to bear the brunt and bleed. The FM lacks transparency and informs that the same would be thought of in the future. Is it fair or pragmatic to force a liability on posterity? There is no difference between this waiver scheme and the ‘Loan Melas’ of the eighties and nineties.

According to the information provided by an NSSO survey, 60 per cent of the loans taken by the farmers in the whole of the country are from private money-lenders, who charge usurious rate of interest. Most of the farmers who committed suicide during the last few years had to take loans from the private money-lenders at exorbitant rates of interest. The budget is silent on what will happen to these loans. The Radhakrishna Committee set up in last year’s budget has indicated that the farmers of Vidarbha and Chhattisgarh, where the predominance of suicides is most, mostly took predatory private loans. Bank loans are predominant only in the irrigated regions, where sugarcane and grape are grown. Hence, the waiver scheme will benefit the sugarcane and grape farmers of Maharashtra most.

Further, according to a survey made by economist Surjeet Bhalla, only 5 per cent of bank loans are outstanding. So, the amount of loan covered under the waiver scheme appears to be grossly overstated. Also, the poorest of the rural population are agricultural labourers. They do not get any agricultural loan. Besides, the holding pattern in rural India is generally not so much individual-oriented as family-oriented. Hence the criterion for waiver fixed in the budget, i.e. less than one hectare and between one to two hectares, will keep most of the family-oriented holdings outside the purview of waiver and the owners of such holdings will remain deprived.

The FM has said that four crore farmers would be benefited from this waiver. This figure is also grossly overstated. The total number of farmer families in the country is nine crore. It is quite unlikely that fifty per cent of the farmer families would get the benefit of this waiver. Moreover, according to Bhalla’s figures, only a fraction of the farmer families takes bank loans and of them too, only 5 per cent keep their loans outstanding. According to that estimate, only 2.25 million farmers have outstanding loans. If we consider cooperative loans, the figure may be somewhat higher. But in any case, it is unlikely that fifty per cent of the farmer families have outstanding bank or cooperative loans.

Most importantly, indebtedness is only one of the symptoms of the agricultural crisis. The root lies elsewhere. The main reason for this crisis is that cultivation of cash crops like cotton is gradually becoming unprofitable. The farmers are not getting remunerative prices for their products. So they require Minimum Support Price (MSP) at which they can sell their products to offset the enhanced cost of cultivation. Besides, cultivation of high yielding crops like Bt. Cotton is very costly. The prices of implements are also shooting up day by day. The budget has only attempted to cure the symptom without paying any attention to these maladies.

Deficit – Fact and Reality

The deficit projected by the FM in this year’s budget is largely fudged. According to the Fiscal Responsibility and Budget Management (FRBM) Act, revenue deficit has to be brought down to nil and fiscal deficit to 3 per cent of GDP by 31 March, 2009. But in the budget for 2008-09, the FM has projected a revenue deficit of Rs.55,184 crore, which is 1 per cent of GDP. This entire deficit was supposed to be wiped out in this budget. However, the fiscal deficit has been pegged at Rs.1,33,287 crore, which is projected to be 2.5 per cent of GDP, i.e. well within the FRBM target. This implies that the government will be resorting to mobilization of some sort of capital receipts (disinvestment, borrowing et al) to offset the revenue deficit and still bring down the fiscal deficit to below the FRBM ceiling. But the FM does not disclose the tricks up his sleeve.

The FM has expressly acknowledged that significant liabilities of the government on account of oil, food and fertilizer bonds are currently below the line. And our fiscal and revenue deficits are ‘understated’ to that extent. He feels that there is need to bring these liabilities into fiscal accounting. So as a first step, he has shown them in the ‘Budget at a Glance’ figures. He has not made any provision for the additional liabilities to be created on account of the recommendations of the 6th Central Pay Commission. After the same crystallizes, he proposes to request the Thirteenth Finance Commission to revisit the FRBM roadmap and suggest a suitable revised roadmap. There is absolute lack of transparency in this year’s budget. Does the FM propose to present another full-fledged budget after all these additional liabilities crystallize and if so, how? How can the requirements of the FRBM Act passed by the Parliament be relaxed by the Thirteenth Finance Commission?

Thus the deficit figures of this year’s budget is full of such ‘ifs’ and ‘buts’. In many cases, the expenditure has been projected at a much less figure. Debt waiver is a glaring case in point. The result will be a definite escalation in the deficit, which will have adverse ramification for the already inflationary situation.

The Reforms Basket

Though the FM spared no efforts to give the budget a populist colour in view of the impending elections, he was not found wanting in carrying forward his avowed reforms goals. The instances are:

• • According to the ‘Tax Foregone Statement (TFS)’ submitted along with the Budget, the total estimated loss to the exchequer this fiscal due to various exemptions, rebates and concessions granted in respect of taxes is Rs. 2,78,644 crore. If some of the export related subsidies and concessions are added to this, the figure will rise up to a whopping Rs.3,37,060 crore, which is about 58 per cent of the total tax revenue of the country. The government has deliberately kept these export-related concessions worth Rs.58,416 crore outside the TFS on the plea that these are some sort of input loans. Within these taxes foregone, the corporate sector has got Rs.58,655 crore. According to the budget documents, only 3.28 lakh companies in the country pay taxes. Their profit before taxes is Rs.5,56,190 crore and they have disclosed only Rs.3,41,606 crore in their return of income for the Assessment Year 2006-07. Taking advantage of various tax concessions they have paid taxes at a much lesser effective rate of 20.60 per cent than the statutory rate of 33.66 per cent. Similarly, the ITES and BPO companies have also paid taxes at an effective rate of only 7 per cent and the IT companies at still lower rate of 6 per cent.

On the basis of the R.H. Patil Committee Report, the government will take steps to create an exchange-traded market for corporate bonds. Both Bombay Stock Exchange and National Stock Exchange have created platforms for trading in corporate bonds. To expand the market for corporate bonds, the FM proposes to take measures to develop the bond, currency and derivatives market that will include launching exchange-traded currency and interest rate futures. The tradability of domestic convertible bonds will be enhanced and the embedded equity option will be separated from the bond proper.

The FM has taken another step towards capital account convertibility. The proposed move to deepen bonds, currency and derivatives market and allowing currency and interest futures will help Corporate India raise money at a finer rate and cover risks from currency and interest rate fluctuations. The decision to develop the corporate bonds market will allow Indian companies to raise funds locally and not to look to the overseas market. The removal of tax deducted at source on demat bonds listed on stock markets will enable companies to raise cheaper funds. As declared in the last budget, a panel has been appointed to look at Mumbai as a regional financial hub, which will enjoy full capital account convertibility. The panel has recommended development of the financial market as pre-requisite and accordingly, this budget has taken steps to establish a bond-currency-derivative nexus to develop the financial market.

In the case of Service Taxes, the exemption limit for small service providers has been raised from 8 lakh to 10 lakh.

To encourage the manufacturing sector which is facing visible signs of slump, the peak rate of Cenvat has been lowered from 16 to 14 per cent.

In order to provide incentive to the producers of small cars like the ‘Nano’, the excise duty on such cars has been lowered from 16 to 12 per cent. Moreover, duty on hybrid cars has been reduced from 24 to 14 per cent and that on two wheelers from 16 to 12 per cent.

The excise duty on project import has been reduced from 7.5 to 5 per cent. Duty on specified accessories and raw materials for set top boxes has been fully waived.

The rate of Central Sales Tax has been reduced from 3 to 2 per cent in the direction of introducing a unique Goods and Service Tax (GST) with effect from 1 April, 2010.
Last year the Foreign Institutional Investors (FIIs) invested 17 billion dollar in Indian shares. The FIIs have been exempted from the increase in short term capital gains tax from 10 to 15 per cent, because these FIIs operate from countries like Mauritius, Singapore and such other countries with whom India has Double Taxation Avoidance Agreement. It was necessary to impose some tax on the companies operating from these countries in order to prevent the flow of black money from them.

The Banking Cash Transaction Tax (BCTT) introduced to trace and prevent cash transaction of black money will be abolished from the next financial year.

Neglected Social Sector

Except for the hype about agricultural loan waiver, no significant investment or allocation is visible in the social sector. Let us first consider the NREGS. All the 596 districts of the country are proposed to be brought under the purview of the scheme. But a mere Rs.16,000 crore has been allocated for the scheme which amounts to Rs. 10 crore less per district, if one factors in the increased coverage of districts. Chidambaram had promised more funds according to demand; but these are bound to subjected to delays and equivocation. As it is, the recent interim report of the CAG on NREGS has informed us that on an average, only 18 days of employment has been provided under the scheme so far in place of the stipulated 100 days and only 3.2 per cent of the registered households have got the benefit of this scheme. One can imagine how even tighter allocation will impact the already poor performance of the scheme.

The budget claims to make public health facilities more accessible to the poor. What is the reality? The allocation for premier government hospitals which cater to the poor has been significantly reduced! While the allocation for Safdarjung Hospital has been reduced from 129 crores to 126 crores, AIIMS has seen a similar reduction from Rs 470 crores to Rs 452 crores ! At the same time, allocation for “AIIMS-type” hospitals has been reduced from Rs 26.3 crores to Rs 10.8 crores. The expenditure on the National Rural Health Mission (NRHM) is supposed to go up by just 12%, which amounts to a decline in terms of share of GDP; the ASHA workers under this scheme who have been agitating against gross exploitation and underpayment are unlikely to find relief. The expenditure on ICDS (Integrated Child Development Services) has been marginally increased by Rs. 852 crore is inadequate to meet the Supreme Court directive to universalise it. While the monthly honorarium of anganwadi workers and helpers has been increased to Rs. 1500 and Rs. 750 a month respectively, it still falls short of ensuring even minimum wages for this all-woman workforce.

The figures on the much hyped "increase" in total education budget also demands a closer scrutiny. Total proposed allocation for education (for the entire school, literacy and higher education sector) in 2008-09 is Rs. 38702.87, which is merely 5.15% of total budget, that too lower than last year's budget proposal which was 5.76%. Remember, the revised estimate for the last year is far less at 4.17%. Who is there to guarantee that once again this year's actuals will not follow last year's trend? The so called 20% hike in the budgetary allocation for school education and literacy therefore does not reflect any increase in emphasis towards the crying needs of this sector. Infact, if the share of school education and literacy in last year's budget proposal was 4.15%, this year it is 3.7%! This is further substantiated by the random allocation of funds for various heads within this sector. The target fixed in the National Common Minimum Programme for allocation on education is 6 per cent of GDP, with at least half that amount to be spent on primary and secondary sectors. But last year’s Economic Survey reveals that the actual amount spent was less than 3% (less than what the NDA spent as a share of GDP), and this year’s allocations are unlikely to result in any increase. There has been a nominal 7% increase in the total proposed outlay on elementary education; given the projected inflation rate of 6.4%, this is unlikely to mean any real increase in spending on elementary education. The Right to Education Bill was not tabled in the Budget Session, and the expenditure on the much-touted Sarva Shiksha Abhiyan has been reduced. The budgetary allocation for higher education also indicates that the UPA is yet again washing its hands off its fundamental responsibilities. On the face of it, the budget talks of increased allocation. But, understanding the numbers reveals entirely another story. Last year's budget proposed an allotment of Rs 9209 crores for higher education, and the UPA ended up allotting much less - just Rs 6397. When the government refuses to spend even what it allots to higher education, with what face can it talk of fund crunch and fee hike in higher education? This year, the budget proudly mentions that a royal Rs 10853 crores has been allotted! What does this mean? The proposed spending on higher education has actually been decreased from 1.65% of total budget proposed in last year's budget to 1.45% in this year's budget! Though much fanfare has been made regarding the 6th Pay Commission, the budget for higher education makes no additional allocation for improvement in salary scale of University and College teachers. Contrast this tardy allocation for higher education with a massive increase in defence spending. The budget proposes to increase its defence spending from Rs 92500 crores to Rs 105500 crores! Note that last year's budget estimate for defence was Rs 85509 crores, while the actual spending went far beyond this to touch the level of Rs 92500 crores. So one can easily guess that the government's actual spending on defence will cross the proposed budgetary estimate of this year as well. And just who will be the loser is not difficult to guess. Last year, the government actually spent far less on higher education than it had proposed - it spent just 0.9% of its budget, compared to 13% on defence!

The Public Distribution System (PDS) in the country is on the verge of total break-down. However, the allocation for food storage and warehousing is an insult to the millions of starving people in the country - a marginal increase from Rs 31651 crores to Rs 32628 crores has been announced! The percentage allocation for PDS has actually decreased from 4.46% to 4.35% of the total budget. In spite of the sharp increase in the prices of food articles, the budget allows for a less than 4% increase in food subsidy, which cannot keep up with the inflation projection for the coming year. The budget talks about a ‘Smart Card’ delivery system, which will be initially implemented in Haryana and the Union territory of Chandigarh. This is nothing but a gimmick and cannot be a substitute for revamping the PDS altogether.

Encashing middle class votes with extra cash

The school advocated by Manmohan-Chidambaram is pure and simple supply-side economics. An upwardly moving section of the middle classes has come up as a by-product of liberalization-globalization. The whole market system in the country today is being tuned to meet the consumption needs of this section and the market is squarely thriving on their demand. The growth story so fondly articulated by the UPA government and the other liberalizers is mainly addressed to this section in order to co-opt them into the liberalized regime. In order to counteract the US-driven slump which has engulfed the entire world economy today and is shedding its ominous shadow on the Indian economy too, the remedy prescribed by Manmohan-Chidambaram is to provide some extra money in the hands of this section of the middle classes so as to generate a consumption-driven recovery. The individual taxpayers have been offered handsome relief this year by way of reduction in personal income tax with this specific end in view.

But the fact remains, the country cannot be rescued from the impending slump without enhancing the purchasing power of the rural masses who constitute the largest chunk of the consumers. Of course, this objective does not fit into the philosophy of liberalization-globalization. The immediate motive behind this tax concession to the middle classes is obviously to pamper and win over this most articulating section of the society before the run up to the elections and ensure their vote-box.

On the whole, the budget is oriented to encashing cheap electoral benefits by doling out some extra cash to the farmers and the upper middle classes. But a deeper probe will reveal that all the tall talks in the budget are high sounding nothing. There is no direction in the budget to get over the nagging agricultural crisis or the acute unemployment situation in the country. But the FM could still be liberal enough to increase the defence allocation by Rs.9,600 crore to Rs.1,05,600 crore. He has assured the Defence Minister that any further amount needed, especially for capital expenditure, will be provided.

‘India Shining’ spelled doom for NDA. ‘Inclusive Growth’ of the UPA, badly caricaturing the miseries of the masses, will also prove to be no better and is sure to boomerang back on its author. 