A Budget for Pranab Babu’s People

March 23, 2010

By Debarshi Das, Sanhati

Elaborating on how in a democratic republic capital exercises its power by means of corruption and by an alliance of the government and the stock exchange, Lenin writes “[a] democratic republic is the best possible political shell for capitalism, and, therefore, once capital has gained possession of this very best shell … it establishes its power so securely, so firmly, that no change of persons, institutions or parties in the bourgeois-democratic republic can shake it.” (The State and Revolution, 1917)

Amazing continuity of neo-liberal policy for the last two decades is a testimony that capitalism is getting ever more entrenched in India. Phases of NDA, UF, UPA + Left, UPA sans the Left notwithstanding, each budget has become a familiar exercise for redistributing wealth of the nation to the already-wealthy, thus securing domination of the powerful over the powerless. Strange too is the reiteration of phrases such as inclusive growth. One finds it right at the top of the budget documents: as one of the three priorities of the government. The substance of the budget, of course, flies in the face of this putative priority. Let us see how.

Agricultural Sector at the Centre Stage

This year Pranab Babu declared, “The agriculture sector occupies centre-stage in our resolve to promote inclusive growth, enhance rural incomes and sustain food security.” The emphasis is extremely timely. India is presently experiencing a food item inflation rate of nearly 20% (the budget document plays it down, describing it as ‘double digit’). Last year there was bad monsoon, nearly half of the districts of the country experienced drought conditions. Couple this with the fact that global recession had had an adverse impact on the rural economy. Seasonal and non-seasonal migration from villages to cities are a common feature in India. Most of the migrants seek employment in the expanding unorganised sector (informal sector, that is). With recession dampening international demand thus curtailing production of export oriented industries there has been reverse flow of people from cities to the villages. This homecoming is not a happy one. For, in his otherwise exuberant speech Pranab Babu slips in, agricultural sector in fact contracted last year. Homecoming village folks were returning to a world of declining credits, backbreaking input cost, un-remunerative output prices.

So after reading the laudable proclamation quoted above one may wonder what does Pranab Babu have for the agricultural sector? He informs us that an additional 900 crore rupees have been allocated for boosting agricultural production. How much is 900 crore? This year’s defence budget had an additional 5.5 thousand crore rupees, nearly 6 times the additional money in agricultural allocation [1]. 900 crore is 0.61% of the aggregate defence allocation.

Juxtapose this generosity with the fact that agricultural sector provides jobs to nearly 60% of the countrymen. It’s a moot question however if this 60% fits into the category of ‘people’. Apparently people are those who invest money in stock exchanges. The budget document tells us that 40000 crore rupees would be raised through sale of share of OIL, NHPC, NTPC and other top profit making public sector units. This is to ensure ‘People’s ownership of PSU’s’. The State has ceased to be of the, by the, and for the people it seems, which is why State’s ownership of companies needs to be replaced by that of the real People. Going by hard numbers, Pranab Babu’s ‘People’ comprise about 1.15% of the population. Thus from the ‘Public’ to the ‘People’, a neat reapportioning of resources is visible. The people are also being called aam aadmi – the common man – for Mr. Mukherjee avers, ‘This Budget belongs to ‘Aam Aadmi’ ‘ at the self-congratulatory denouement of the speech.

What does Gandhi Guarantee Nowadays?

A frail lifeline the non-people of India clung to in such hard times is the National Rural Employment Guarantee Scheme (since then prefixed with the name of the father of the nation). Despite corruption, warts and all, the Mahatma Gandhi NREGS provided substantial relief to the rural poor in a year when the urban and rural sectors were adversely hit by recession and drought. How does Pranab Babu aim to strengthen the MGNREGS? This year provision for MGNREGS has gone up by a measly 2.3% (up from 39,100 to 40,000 crore rupees). Since prices are rising at about 7.5%, a 2.3% nominal increase in allocation means a decline of the allocation by 5.2% in real terms. Moreover the inflation figures one often hears in the media are wholesale price index based. They are not the prices we pay as ordinary consumers. If anything, WPI based inflation rate underestimates the price rise which actually affects us. Secondly, nearly 60% of rural households’ budget is spent on food items whose prices are rising at around 19% per year. Therefore a 2.3% rise in nominal allocation for MGNREGS implies a severe cut back of the fund in real terms. So much for the father of the nation!

Cost of Living…

While we are on inflation, how do the Bharatabhagyavidhatas diagnose the cause of inflation? The budget speech refers to droughts and erratic monsoon which have reinforced supply-side bottlenecks. This apparently spurred inflationary expectations, and consequently pulses are currently selling at more than a hundred rupees a kilo. What is inflationary expectation and how does it work? Inter alia, the belief that in future prices may rise, leads hoarders to stock up grain to reap the benefit of future price rise, which in fact by curtailing supply pushes up prices. Expectation of inflation also implies contracts that bet on future food price rise would be demanded frantically in stock markets (futures trading has been given permission in the neo-liberal casino economy), which would again turn out to be a self-fulfilling prophecy [2]. Translating Pranab Babu’s inflation analysis into simple English, food prices are rising because government has been lax in tackling hoarding and speculation. What does the government propose to deal with this? As the Americans say, search me! The budget does not have a single word on this.

Indeed rather than correcting the ills that are causing inflation, the budget contains provisions that would flare it up. One such measure is the withdrawal of urea and phosphate subsidy. This step will cut the fertiliser subsidy bill by 3000 crore rupees. The euphemism on offer for this reduction is that the government is switching over to ‘Nutrient Based Subsidy’. Essentially the aim is to decontrol fertiliser price and create a playing ground for the multinational fertiliser companies. As a result of withdrawal of urea subsidy it is estimated that fertiliser price per bag is going to go up by 50 rupees.

Similar staggered decontrolling of petroleum prices has been noted in the budget too. Prices of diesel and petrol are to go up by more than Rs. 2.50 per litre. This would cut the subsidy bill by 25000 to 30000 crore rupees. On previous occasions when prices were jacked up the reason was rising international crude price. Present crude price trends do not justify any such a hike. The reason for the hike lies somewhere else. The Parikh Committee appointed by the government had recommended decontrolling of fuel prices so that it gets linked to the global prices [3]. This would enable the private companies to reap huge profits from retail trade of petro products. The present partial withdrawal of fuel subsidy is a step towards that direction.

Both these subsidy cuts, apart from paving the way for private companies, are likely to push up cost of production and impact the general price level in a northward direction.

With subsidy cuts and austerity measures on so many counts one may think the government must be saving a bundle. The media hype about fiscal consolidation might have some substance after all. Pranab Babu refers to the oracle of the thirteenth finance commission recommending an exit from the stimulus phase which was necessitated by global recession. Perhaps all these cuts are part of the withdrawal plan from stimulus package. Such prescriptions of curtailment of government expenditure are pleasantly in conformity with the general theory of neo-liberalism whose results are currently on display in the streets of Greece and Italy.

…and Santa Singh

Then comes the master stroke. Frugality homilies are for the non-people. For the people, Pranab Babu dons the gear of the good old Santa. Why? Because, ‘reliefs will put more money in the hands of individual taxpayers for both consumption as well as saving.’ In short, stimulus continues with a vengeance for the people. Income taxes have been slashed massively for those earning more than three lakh rupees a year. Other direct taxes such as corporate taxes have also been reduced. Through cut in direct taxes the government showers 26000 crore rupees on Shining India. This perhaps is the second law of neo-liberalism: after robbing Peter, Paul must be paid. How many Pauls, that is people, are there in Pranab Babu’s India? There are estimated 31.5 million individual tax payers. Apparently 60% of them would benefit from the cut in income tax rates. So, in a country of 1170 million, 19 million are Pranab Babu’s people: 1.6% of the total population. Recall the fanfare surrounding the 900 crores hand out to the 60%. It is to be noted that total income tax contribution made by this top 31.5 million is not much, it’s less than 20% of the total tax revenue.

Cut in taxes for the rich is not new. Last year’s corporate tax cut was worth 80,000 crore rupees. Indeed tax cuts for the rich worsen government’s finance position, and this then is bandied around to justify curtailment of grants for the poor, taxing them even more through indirect taxes. We have seen the same pattern in W Bush’s first presidency.

Let us look at the following general feature more carefully: direct taxes are being cut, indirect ones are being raised [4]. Direct taxes are those which when imposed on someone (or an institution) have to be borne by that party. On the other hand indirect tax burden is shifted away by those who pay it. This may sound paradoxical, and so an example is in order. Service tax, an indirect tax, can be imposed on a restaurateur. But she does not pay it from her pockets. She collects it by raising the restaurant bill which is paid by the customers. Similarly when excise duties, custom duties are raised (both indirect taxes) the manufacturers who pay them collect them by raising the price of goods they produce. So ultimately it is the ordinary consumer who bears the burden. Indirect taxes are inflationary, they raise prices. Moreover since it is the poor who spend a higher fraction of their income than the rich (who save more), a rise in indirect taxes hits the poor more than the rich. On the other hand if income tax is raised (which is a direct tax) the tax payer has no way to shift the burden on someone else: I cannot ask my employer for a salary hike if income tax rates go up. It therefore has the advantage of tractability. The government knows exactly from whose pocket the tax revenue is being collected. It can fine tune the rates to collect more from those who have a greater ability to pay. Depending more on indirect rather than direct taxes therefore is a retrogressive development.

One last aspect demands special attention. There are proposals in the budget for granting additional banking licenses to private sector banks because ‘there is a need to extend the geographic coverage of banks and improve access to banking services’. One tends to agree with the spirit of this pronouncement. Rural banking has been shrinking at a remarkable pace due to the State’s apathy for priority sector lending. Nearly 5000 rural bank branches have closed down in the 15 years of liberalisation. Small and marginal farmers are being thrown to the mercy of the swelling army of mahajans and micro credit companies whose operations border on usury. What solution is being offered now? Withdrawal of the state is being used as an excuse for the entry of private banks. It might be recalled that fragility of private financial institutions has recently been confirmed in the global financial crisis if any such confirmation was needed at all. This development, therefore, does not bode well for the financial stability of the country.

Conclusion

Via assorted means such as subsidy cuts, income and corporate tax cuts, starving job guarantee schemes of funds, and dismantling public distribution system, the State is preparing grounds for unhindered surplus value extraction by a few. It is perfecting the art of redistributing wealth from the non-people to the people, from labour to capital, while keeping the façade of democracy intact [5]. The budget is a vivid testimony to this process. Current trepidation in corporate media over the fate of the budget in Lok Sabha (after the government lost friends over women’s reservation bill) perhaps is an indication of how valuable it is to Pranab Babu’s people.

I thank Dipankar Basu for helpful comments.

Notes

[1] 5.5 thousand crore was merely a 4% hike, down from the previous year’s 34%. This 34% in absolute terms works out to be 40 times of the 900 crore.

[2] As expectations build up that price of sugar (say) is going to go up in the next year, traders would demand futures contracts which guarantee delivery of sugar at a pre-specified price. High demand for futures contracts increases the price for these contracts (the premium) and this benefits the sellers of futures contracts. Therefore, it is in their interest to feed such expectations. This can be done by holding up supply of sugar in the market and raising its price. Thus in a vicious cycle, rising market price of sugar and high price of futures get linked. It is also to be noted that sellers of sugar who do not deal in futures are likely to gauge future market price from price movements in futures market. A rising price of futures tells them that price of sugar in the real market is going to go up in the future – because that is what the average opinion expects in the Keynes beauty contest allegory. Hence they would hoard, thus actually raising the price of sugar.

[3] Kirit Parikh Committee was appointed in 2009 to look into pricing of petroleum products, which is controlled by the government. The committee submitted its report in February, 2010.

[4] Besides petro products and fertilisers a number of industiral goods’ prices are to go up due to rise in indirect taxes. Government is expecting to collect an additional 46,500 crore rupees through this channel.

[5] Pranab Babu concludes his speech by declaring, ‘It [the budget] belongs to the farmer, the agriculturist, the entrepreneur and the investor.’

No Comments »

Leave a comment