Siddharth Varadarajan

Journalist | Writer | Analyst

Budget 2005: Still waiting for the big push

3 March 2005
The Hindu

Budget 2005
Still waiting for the big push

In defeating the NDA last year, the electorate wanted a change in the direction of the economy and not the continuation of anti-social reforms with a `human face.’ The UPA’s new Budget talks the right talk but fails to set a new course.

By Siddharth Varadarajan

IN BOTH its `growth with equity’ rhetoric and statistical architecture, the Manmohan Singh Government’s first full budget marks a welcome — if small — departure from the minority-interest manifestos that successive Finance Ministers have served up with messianic zeal, bad poetry and florid accents these past few years in the name of `reform.’

Whatever their own instincts might have been, P. Chidambaram and the `dream team’ which put together this year’s budget knew there could be no getting away from the reality of last year’s electoral verdict which swept the Bharatiya Janata Party and its allies away and brought the United Progressive Alliance into power. The election result was no fluke produced by the artifice of coalition but the logical outcome of the democratic majority’s long-simmering frustration and impatience with the direction the Indian economy has been taking for more than a decade.

And yet, after the Finance Bill is passed, after the rare examples of a new tax here and there are rolled back under pressure from a vocal elite and the percentage changes between last year’s actual developmental expenditure and this year’s promises are calculated, we are likely to find that nothing much has changed. The hostility with which the proposed National Employment Guarantee Scheme has been greeted and the lukewarm fiscal support promised to it by Mr. Chidambaram in the budget suggest there is still no willingness at the highest levels of government to be bold and decisive in giving the economy the big push that is needed to push it on to a higher income-consumption-taxation trajectory.

Foreign exchange reserves have grown exponentially and shopping malls might be filled with the latest consumer products but joblessness, poverty, and destitution are also still very much part of the Indian economic reality. The country’s income has grown but a disproportionate share has gone to the rich and super-rich. A study by Abhijit Banerjee and Thomas Pilketty of trends in the income share of the very rich on the basis of individual tax returns data has established that the shares of the top 0.01 per cent, 0.1 per cent and 1 per cent in total income has risen considerably from the mid-1980s onwards after having steadily fallen during the `socialistic’ era which preceded the 1990-91 reforms. (`Top Indian Incomes, 1956-2000′, Bureau for Research in Economic Analysis of Development, Harvard, Working Paper 046, 2003.) Indeed, Banerjee and Pilketty found that the income shares of the rich and super rich are only slightly below what they were in 1956, implying that inequality has risen sharply in the reform years. In the decade of the 1990s, the income of the richest 0.01 per cent of Indians grew by a staggering 285 per cent in real terms — compared to the mere 71 per cent growth recorded by the richest 1 per cent.

Though it is possible the lower peak tax rates in the 1990s might have induced greater compliance by the rich, thereby distorting the findings, the study notes that this is unlikely. Between 1987-88 and 1999-2000, the top rate fell monotonically from 50 to 40 per cent but the income share of the top 0.01 per cent as measured by income tax returns more than doubled from 0.7 per cent to 1.5 per cent, suggesting the surge was due to rapid rises in income rather than less tax evasion.

The Banerjee-Pilketty study on the growth of the rich provides a firm statistical clue to what many economists have suspected all along — that the reason the National Sample Survey (NSS) based data on expenditure comes up with a lower overall growth figure for the 1990s than the aggregate data generated by the National Accounts statistics (NAS) is because the benefits of this growth have largely gone to the rich whose expenditure patterns are rarely picked up by NSS surveys. The two economists themselves say their study can account for only a maximum of 40 per cent of the `growth paradox’ — i.e. the gap between the NSS and NAS growth rates — but if we consider the fact that the rural rich are not taxed at all and the likelihood that the urban rich have hidden income streams, it is clear that growing inequality will explain most of this paradox.

If the rich are today back where they were before, enjoying the lion’s share of economic benefits, the poor are still very much at the bottom of the pile. “Just to take one telling figure,” writes Prof. Prabhat Patnaik in the latest issue of Social Scientist, “per capita foodgrain availability for the country as a whole stands today at the same level where it was on the eve of the Second World War.” After rising to 178 kg by the 1980s, it is today at around 155 kg. “Per capita output did of course decline,” he writes, “but the decline in availability was much sharper because there was a massive increase in foodgrain stocks with the government, which clearly pointed to a decline in purchasing power in the hands of the poor in general, and the rural poor in particular.”

In keeping with the Common Minimum Programme, Mr. Chidambaram’s budget aims to improve the well-being of the rural poor by promising increased expenditure under a variety of development and social sector heads. The Sarva Shikhsa Abhiyan, mid-day meal scheme and drinking water programme have received enhanced allocations, though the promised funding of Rs.11,000 crore (being the sum of a cash component of 5,400 crore and 50 lakh tonnes of grain) is not likely to be enough to see even the stripped down, pilot version of the employment guarantee scheme through safely.

Deciding that discretion is the better part of valour, the Finance Minister pointedly avoided using his budget speech to announce new reforms or concessions that the national and international elite have come to take as their God-given right. He made no mention of privatisation, which does not mean disinvestment has been taken off the radar screen; and on the issue of foreign direct investment, he simply urged Members of Parliament to take a “pragmatic view.” Invoking the example of China, presumably for the benefit of Left MPs, Mr. Chidambaram hinted at the Government’s intention to further liberalise FDI norms in sectors such as mining, trade and pensions. Real estate has already been opened up to FDI and the retail industry is said to be next in line. As and when the Government makes formal proposals, these will have to be evaluated carefully from the perspective of employment loss, environmental degradation, and the land rights of tribals who are already being displaced to make way for large mining concessions.

On the tax front, none of the measures announced by the Finance Minister is likely to raise our abysmally low tax:GDP ratio. From a high of 10 per cent in the 1980s, the tax:GDP ratio fell to a low of 8.2 per cent in 2001-02 before recovering somewhat to the current level of 9.2 per cent in the last fiscal.

The Banerjee-Pilketty study suggests there is plenty of scope to make the rich and super-rich pay more tax. After all, if they are cornering most of the benefits of reforms, they should pay to help those left behind find food, jobs, education and healthcare. Sadly, Mr. Chidambaram breaks no new ground. The Securities Transaction Tax rate on day-trading in the stock market has been increased only marginally, the tax on cash withdrawals of Rs.10,000 or more — which most Indians might not have minded paying if it were honestly described as a tax rather than an “anti-black money” move — has already backfired, and the corporate sector is gearing up to fight the fringe benefits tax.

If the Finance Minister’s annual speech attracts more public attention in India than other countries, this is mainly because the budget is seen as the principal arena for the struggle to shape and mould the country’s economic direction.

As in other countries which have witnessed rising inequality, the dogmatism of an elite-oriented neoliberal reforms agenda is in sharp conflict with a democratic, inclusive vision of the economy rooted in policies which fulfil the needs of the people. Budget 2005-2006 is the product of this conflict, though it is still very much anchored in the old agenda.

© Copyright 2000 – 2005 The Hindu

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This entry was posted on March 3, 2005 by in Uncategorized.

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