The 2009 Budget and the Political Economy of the Indian state
August 16, 2009
By Ramaa Vasudevan. Guest columnist, Sanhati
The present regime is caught between exigencies of continuing to roll forth the neo-liberal juggernaut that has allowed the corporate elite to reap a bonanza of profits and the recognition that the pernicious impact of these policies is fomenting deep distress and discontent amongst the working poor. The union budget is in a sense a signal of policy direction and provides some critical insights into the political economy of the Indian state. The crucial question is whether the budget reflects any shift in the neo-liberal tide with a genuine attempt to address the inequities of the recent economic growth process.
The budget in context
The budget has been announced in context of the comfortable majority that the United Progressive Alliance (UPA) garnered in the recent elections. This majority has a mixed message. On the one hand the electoral verdict is interpreted as a mandate for progressive policies implemented by the old UPA regime: the National Rural Employment Guarantee SchemeAct (NREGS), the loan waiver program for farmers, the Right to Information Act 2005, the Unorganized Workers’ Social Security Bill 2008. On the other, the eclipse of the parliamentary left in the elections has been heralded by corporate capital and finance as paving the way for an acceleration of neo-liberal agenda now that the new UPA regime is no longer constrained by any need to accommodate the left political parties to stay at the helm. The clamor for the implementation of further “market reforms” has gained a new lease of life.
Behind this rhetoric for reform are the corporate elites who have reaped a bonanza in the last decade of aggressive “pro-business” policy regime. By 2008 India could boast having 50 billionaires whose net worth had soared to more than 20% of GDP in February 2008, compared to about 1% of GDP in 1996. This share is significantly higher than comparable ratios in Brazil or Mexico [1].
The global crisis has eroded the net worth of this group (which fell to a little less than 9% of GDP in November 2008). After experiencing annual growth rates of around 9% between 2004 and 2006, the Indian economy slowed to a 6.7% growth rate in the wake of the global crisis. The imperative for this oligarchy is to recreate the conditions of the pro corporate policies of the “India shining” years. So much so that a mainstream group like the Emerging Market Forum (a not-for-profit venture of the Centennial Group, a Washington based strategic advisory firm specializing in emerging market economies) warned that “there is now a growing risk that parts of the corporate sector will wield excessive influence over different parts of the state”. In fact it goes on to caution that “in the longer term this system is likely to take India down a path of entrenched inequalities, excessive power to the few, distributional fights over patronage and rising collective and criminal violence. Think of this as the Latin Americanisation of India” [2].
The surging economic performance of the recent past reflects a distorted pattern of development fostered by the neo-liberal regime that has lead to a decline in employment growth in the organized sector which fell from about 1.2% per annum in the period 1983-1994 to about 0.12% 1994-2006 [3]. The Economic Survey uses the data on the decline in the number of strikes and lockouts between 2004-8 as an indicator of improved industrial relations, though the fact that more man-days were lost due to lockouts rather than strikes between 2004 and 2006 (about 20.96 million man days lost due to strikes compared to 52.91 million man-days lost due to lockouts) is more suggestive of the crushing of the organized resistance of workers. As the organized workforce has been squeezed, much of the growth in employment has been concentrated in the unorganized sector which comprised about 86% of the employed workforce according to the 61st National Sample Survey round of 2004-5 (p 266).
At the same time a deep crisis has been engulfing the agrarian economy which constitutes 56% of the workforce and contributes 21.1% of GDP. An indicator of this agrarian crisis is the fact that between 60 to 77% of the total population consumes less than Rs 20 per capita daily (in 2004-5). 45% of children under 3 suffer from malnutrition [4]. That nearly 1.8 lakh farmers committed suicide between 1997 and 2007 is just a symptom of this crisis. In fact the incidence of farmers’ suicides during 2002-07 (17,366 farmers’ suicides a year) - when GDP growth rates were around 9% annually- was higher than that for the preceding period 1997-2001 (15,747 farmers’ suicides a year) [5].
The Economic Survey of 2008-9 that preceded the announcement of the budget reflected the embrace of the neo-liberal trajectory. Its wish list for reforms included easing the entry of multinationals in retail, raising the share of foreign equity in insurance and defense to 49 percent, increasing foreign direct investment limits in banking decontrol of petroleum and diesel prices and disinvestment of the Public Sector. It also stressed the need for “reviewing labor laws and labor market regulations” in order to promote the growth of labor intensive industries - in other words further promoting the unorganized sector at the expense of the organized. Specific proposals include scrapping of the need for prior permission of the Government (under Chapter V B of the industrial disputes act) before firing workers and allowing the use of contract labor in non-core and seasonal activities.
The Economic Survey also puts its weight behind the proposals espoused by finance and corporate capital that favor fostering markets for new financial instruments and asset backed securities including derivatives in corporate debt, exchange traded derivatives (like interest rate swaps) and credit default swaps as the path to restructuring the financial sector. Such securitized financial instruments have been the basis of the unprecedented surge of finance globally in the last decade but the recent unraveling of these markets has laid bare the fragile edifice on which this boom was erected. The irony is that the concerted attempt by corporate capital and finance to ensure that the ‘reform agenda’ does not get derailed comes at a time when the neo-liberal faith in the markets restorative and dynamic potential has suffered a rude shock in the wake of the meltdown of the global financial markets. In fact the relatively conservative approach of the Indian state to financial liberalization, despite the strong lobby pushing this agenda through the past decade, helped insulate India from the worst impact of the global crisis.
In light of this context what does the recent budget reveal about the current regime’s vision about the path of economic development? Does it usher a renewed impetus for liberalization in the service of financial and corporate oligarchs and multinationals? Or does the union budget reflect a genuine engagement with an electoral mandate for “inclusive growth and equitable development” as professed by the Finance Minister Pranab Mukherjee in his budget speech. The budget lays bare the constraints of the new regime as it grapples with the dilemma of acknowledging the message of the electoral verdict that rejected the distorted and lopsided development pattern of the past decade while being hand in glove with the corporate elite in pushing the neoliberal developmental vision that has been instrumental in its surging private fortunes.
Inclusive Growth and Equitable Development?
In his budget speech the Finance Minister Pranab Mukherjee acknowledges the need to “deepen and broaden the agenda for inclusive development” as a fundamental challenge facing the current regime and declared that “aam aadmi” is the focus of government programs. The most important prong of these programs is the NREGS which has been widely perceived to be the driving force of the UPA victory at the hustings. So of course the NREGS had to enjoy a center stage in the vision for inclusive development and the Finance Minster announced a small increase in the real wage under the scheme to Rs 100. This is welcome in that it might help raise the floor on wages in rural areas. The actual allocation to this critical program has however only increased by a modest Rs 2350 crore or 6% above the revised estimates for 2008-9.
The other major announcement in the budget speech was the National Food Security Act entitling families living below the poverty line to 25 kg of rice or wheat per month at Rs 3 a kg. This entitlement is below the 35 kg entitlement under the Antyodyaya Anna Yojana, and the proposal aims to freeze the number of beneficiaries to the present levels of “below poverty line families”. Since the exact number of such beneficiaries would vary according to the criterion for targeting the below poverty line families the scope of coverage is not clear. While the planning commission estimates of poverty are at around 27.5%, the Supreme Court appointed committee headed by N. C.Saxena suggests that the degree of “food insecurity” is significantly underestimated by the Planning commission estimates, with a proportion closer to 50% of India’s population actually living below the poverty line. Given the ambitious nature of the scheme, increase in the food subsidy of Rs.8,862 crores – a 20% increase over 2008-9 - seems far from adequate. The primary burden of distribution would continue to lie with state governments without adequate provision for budgetary support and the proposal envisages deploying the existing infrastructure and logistical support of the public distribution system (PDS) and aims to replace existing schemes like the Integrated Child development Scheme and the Mid Day Meal scheme; so the actual outcome in terms of food security is uncertain.
With these two flagship programs directed at unemployment and food insecurity delivering less than what is promised, is there any hope from overall social services spending? The allocation of Rs 111,774 crores to social services represents a 14.5 % increase over the previous year. Contrast this with the spending on of Rs 141,703 crores for defence – an increase of 24% over the previous year. It is also less than the step up in social services in last budget which allocated a 35% hike in social service spending in the crucial pre-election year. Social sector spending has increased marginally from 1.54% of GDP in 2008-9 to 1.68% of GDP. While any increase is welcome after the unbridled neoliberalism of the previous decade, the quantum of spending is singularly inadequate in what is turning out to be a drought year, with soaring food prices and a slowing of employment growth
How well then does the budget take up the other major challenge – that of restoring growth which has fallen to 6.7% last year after an unprecedented performance of a 9% growth rate for three years?
Reviving the economy
While the neo-liberal dogma that has dominated policy for the past two decades has been stridently advocating fiscal austerity to developing countries across the globe, the implosion in the core of the developed world after the collapse of Lehman Brothers in August 2009 has sent the governments in the US and Europe rushing into the embrace of traditional “Keynesian” fiscal stimulus plans to revive their collapsing economies. The Union budget needs to be decoded for what it means in terms of a fiscal stimulus in the face this slowdown in economic growth
What is disturbing especially in the light of the situation of agrarian distress and the poor monsoon prospects is the deceleration of agricultural growth from 4.8 per cent in 2007-08 to 1.8 per cent in 2008-09, while manufacturing output suffered a sharp decline from 8.25 to 2.4 per cent. The two sectors that did register some increase were mining and quarrying, where the growth rate rose marginally from 3.3 per cent to 3.6 per cent and community, social and personal services, where the growth rate nearly doubled from 6.8% to 13.1%. The huge growth of the latter is primarily the outcome of the implementation of the Sixth Pay Commission rather than a reflection of any structural change. All other sectors witnessed a slowdown.
The greater integration of India to the global economy with external trade in goods and services constituting 47% of GDP in 2007-8 and foreign capital inflows surging from 1.9% of GDP in 200-1 to 9.1% of GDP in 2007-8 has also meant that the economy was vulnerable to the impact of the financial collapse and recession in the US and Europe. The impact of the global crisis has made itself felt in the Indian economy as export demand contracted and foreign capital inflows dried up.
That the Indian state is facing the prospect of a slowdown rather than a full blown recessionary crisis is of course cause for some comfort. Private consumption grew at a slower rate of 2.9% in 2008-9 compared to 8.5% in the previous year, while its contribution to growth fell from 53.8% to 27%. Gross Domestic Fixed Capital Formation also slowed, growing by only 8.2% in 2008-9 compared to a 12.9% growth in 2007-8. The slack in demand was taken up by government consumption spending which grew by only 7.4% in 2007-8, and rose by 20% in 2008-9. The contribution of government consumption to growth rose from 8% to 32% in this period. As markets collapsed it would seem the government sector emerged as the main stabilizer of the economy.
In fact the finance minister declared that the state had packed in a significant 3.5% of GDP as fiscal stimulus spending since the budget deficit increased from 2.7% of GDP in 207-8 to 6.2% of GDP. The surge in the fiscal deficit of course set off alarm bells amid those who continue to cling to neo-liberal orthodoxy, but this increase in the deficit does not constitute a fiscal stimulus. The impact of the budget depends both on how it is spent and how it is financed. It would seem that a good chunk of the increase in spending was due to previously committed expenditures rather than actual “stimulus” spending that would boost the economy. For instance payments of subsidies in 2008-9 overshot the budget estimate by 80% (mainly on account of increased fertilizer subsidies). With the fiscal deficit slated to rise to 6.8% in 2009-10 is there any reason to hope for more “stimulus” to the economy?
The political economy of the budget
A significant part of the proposed increase in expenditure is on account of non plan expenditure which rose by 31.6% over the 2008-9 budget estimates (though only 8% over the revised estimates for 2008-9). Interest payments comprise more than a third of the non plan expenditure and have grown by 17% over the 2008-9 budget estimates. Defense, with a 21% share, is the next major item in non-plan expenditure and has risen by 24%. Spending on subsidies, which is about 15% of the non plan expenditure, however is set to actually decline below the revised estimates of 2008-9 by about 21%.
Plan expenditure which might actually help boost the economy and develop productive capacity in contrast will increase by an insignificant 0.07% over the revised estimates for 2008-9. How then is the State going to deliver on the goal of reviving the flagging economic machinery?
The Nehruvian model of state investment in developing basic industry and infrastructure has long been abandoned. The preferred means by which the neoliberal state seeks to stimulate the building of productive capacity in core sectors is by facilitating and mobilizing finance for private corporations entering the fray. This approach is evident in the strategy adopted to revive two critical sectors – infrastructure and agriculture.
To boost productive capacity in infrastructure, the UPA regime proposes setting up the Indian Infrastructure Finance Company Limited (IIFCL)– a special purpose vehicle that will help commercial banks refinance up to 60% of loans for critical infrastructure projects using a form of “take-out financing” that allows a bank to offload the long duration loan from their books to the IIFCL. The idea is to facilitate commercial banks, which mobilize short term deposits, to deal with the maturity mismatch on their books when they engage in long duration loans. Instead of creating a new “tradable asset” (in the manner of the securitization that underlay the creation of asset backed securities against mortgage loans in the US) what is envisaged is a spreading of risk through a rolling loan with the IIFCL underwriting the project risk!
Again the strategy to reinvigorate the crucial agrarian sector eschews actual investment in capital formation or infrastructure in agricultural sector and expects the revival to arise from an increased flow of credit of about Rs 28 crore (less than 10% increase over 2008-9) to the sector. The impact of the drought on rural lives and livelihoods is being addressed by an extension of the loan waiver scheme by another six months. The budget allocates only 2% of the central plan outlay (about Rs 11000 crores) on the agricultural activities and irrigation. An additional 9% has been allocated to rural development.
Thus in both the critical sectors of infrastructure and agriculture the envisaged role of the state is not that of investing to build capacity, but rather that of channelizing the vast pools of savings into corporate hands.
A variety of measures to promote exports have been announced. The deductions from taxable income of the export profits of the Software Technology Parks of India (STPI) units, and units in the Special Economic Zones (SEZs), the Export Processing Zones (EPZs) and the Free Trade Zones (FTZs) has been extended for another year. The tax revenue foregone in 2008-9 on account of concessions to the corporate sector amounts to a whopping Rs 68914 crores or nearly double the allocation for the NREGS in 2009-10!
The same political dilemma of the imperatives of revving up the reform process and accommodating the political constituency has hamstrung the task of mobilizing resources. While a simplified direct tax code has been announced there is little the Government is doing to increase the narrow tax base and the tax - GDP ratio for 2009-10 is less than 11%. The gross tax revenue for 2009-10 is expected to rise by only 7% over last year’s revised estimates (and is actually lower than 2008-9 budget estimates). So there is no real drive to pursue “fiscal responsibility” through increased tax collection. Instead the agenda of privatization and disinvestment public sector enterprises has been reaffirmed - this time cloaked in the rhetoric of “people’s participation” through equity ownership. And this in an economy where less than 1% of the population dabbles in the equity markets!
The overall message is that the basic neoliberal strategy of the past decades is not being questioned or rethought. The function of the state is to enable and promote the accumulation of wealth by the corporate elite. This role was brought out in sharp relief in the recent dispute over the gas fields of the Krishna Godavari basin by the Ambani brothers – a dispute over the division of spoils from public wealth! The current budget signifies a nod to the “aam aadmi” and the recognition that the worst inequities of this developmental paradigm need some amelioration. This does not however imply a shift in paradigm but rather a marking of time as the reform process that the Economic Survey promised is kept in abeyance in deference to the popular mandate. Next year’s budget will in all probability mark an acceleration of the passage of the stalled reforms.
References
1. Emerging Markets Forum, 2009. India 2039: An affluent society in one generation (available at http://www.emergingmarketsforum.org/papers/pdf/2009-EMF-India-Report_Overview.pdf), p 34
2. Emerging Markets Forum, 2009. India 2039: An affluent society in one generation (available at http://www.emergingmarketsforum.org/papers/pdf/2009-EMF-India-Report_Overview.pdf) p 34-35
3. Economic Survey 2008-9 p 264
4. Economic Survey 2008-9
5. P. Sainath 2009 The largest wave of suicides in India, Counterpunch (available at http://www.counterpunch.org/sainath02122009.html)
August 16th, 2009 at 4:30 am
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
August 22nd, 2009 at 11:08 am
A very good analysis. What I liked most is your measured statement - “That the Indian state is facing the prospect of a slowdown rather than a full blown recessionary crisis is of course cause for some comfort.”
Very useful indeed.
Jayaram P.K.