April 2007, Number 4


Union Budget 2007-08: Kutta, Billi, Chappal Budget

- —Sukanta Mandal

‘Good news for the cat and dog lovers’–an unashamed Finance Minister (FM) exclaimed in the midst of his budget speech. But alas, there was no good news for the poor! Least concern for the sky-rocketing prices of essential commodities like food, but reduction in customs duty on pet foods and excise duty on relatively insignificant goods like umbrellas and shoes – most befittingly symbolises the very character of this year’s central budget. While the agony of the poor has been submerged under the loud rhetoric about aam aadmi, the anti-people reforms ball has been kept vehemently rolling under the garb of talk of ‘inclusive growth’.

Exactly 10 years ago, the very same FM had won wide accolades from the business and media fraternity, both at home and abroad, for his reforms-friendly ‘Dream Budget’. That ‘dream’ eventually turned out to be the worst ‘nightmare’ for the common toiling people of the country. Ten years hence, in 2007, with disturbing assembly election results in a few states in the background and some more prospectively on the cards, P Chidambaram (PC) has presented another budget which makes desperate attempts to apply a cosmetic facelift to the same.

Of course, annual budgets have lost much of their sheen these days as a policy document of the government. The rulers in our country now prefer to declare the major policy decisions outside the framework of the budget exercise. To cite a most recent example, on 8th February 2006 the UPA government restarted the disinvestment process by giving the nod to stake sell-offs through IPOs in three power sector PSUs, viz. Rural Electrification Corporation (REC), National Hydro-electric Power Corporation (NHPC) and Power Grid Corporation (PGCIL), with the objective of raising Rs. 1,500 crore for the National Investment Fund (NIF). But there is not a single mention in the budget about this fund, whereas the budget arithmetic reveals this amount on the credit side.

The budget has thus been reduced to a mere accounting exercise reflecting the ramification of those policies on the income and expenditure of the government. But in doing that, it can seldom conceal the traces of those policies, their relative priority and impact on different aspects of the economy and the direction they seek to impart to the economy as a whole in the days to come. There has been no exception to this in this year’s budget too.

The empty rhetoric about ‘inclusive growth’

In the preamble, PC hypocritically talks of putting the revenues to good use — ‘to promote inclusive growth, equity and social justice’. This proves at least one point—two decades of growth story in the country has failed to make the so called growth ‘inclusive’ or accessible to the entire populace. He has been forthright to spell out his road map to achieve inclusive growth: “I believe that, given a right mix of policies, the poor will benefit from growth that is driven by savings and investment and that is more inclusive.” He draws inspiration in this regard from Dr. Md. Yunus, who says that faster growth rate is essential for faster reduction in poverty.

Is it really so? What is the real impact of the growth doctrine on the poverty situation in the country? The new official data reveals that, while poverty is declining in India, the pace of decline has not been any faster in the post-reforms period than in the pre-reforms one. Despite being hyped as one of the hottest growing economy in the world, India is chronically struggling to elevate its position from the 126th or 127th position in the UNDP Human Development Indices over the last few years. The National Family Health Survey-III has thrown up a shocking revelation of malnutrition in the country. Findings of the 61st round of National Sample Survey Organisation revealed that poverty fell by just eight percentage points, from 37 to 29 per cent, between 1993 and 2005.

What is PC’s real response to promote this ‘inclusiveness’? The present rate of economic growth is 9.2%, whereas the rate of growth of revenue in his budget proposal has been projected to be only 7.2%. Adjusted for 7% inflation, the real increase is almost nil. Then, where will the additional resources for social expenditure required to promote inclusive growth come from? If we examine the budget from a different angle, we find that the increase in revenue expenditure proposed in the budget is a mere 17%. This is just about the same as the 16% growth of nominal GDP (9.2% real GDP growth adjusted for nearly 7% inflation rate). This also implies that there is simply no additional resource mobilization to support the social sectors. This is further corroborated by the fact that the indirect tax proposals in the budget are revenue neutral and the direct taxes have been projected to yield a measly additional Rs 3,000 crore. The non-plan expenditure and plan expenditure have been projected to grow at 16% and 18.7% respectively, which also hover more or less around the nominal growth rate of GDP. PC has taken much credit at 22.5% increase in gross budgetary support for the central plan, but has adroitly concealed the fact that the increased budgetary support for the state plans is a mere 8.2%. This implies that 14.3% of the central plan support increases will actually be drawn from the state resources.

Together these facts go to show that PC’s talk about inclusive growth is a great bunkum. All additional allocations for the aam aadmi boasted of in the budget will in fact be a status quo compared to the last year. The inherent treachery of this year’s budget lies exactly here.

At this moment, three most burning issues have been haunting the country–first, agricultural crisis and country-wide peasant indebtedness and incidents of peasant suicide consequential thereto; second, growing and nagging inflation manifested mainly by rise in prices of essential goods, particularly food articles; and three, acute unemployment. The FM has virtually sidetracked these issues under cover of grandiose phrases.

Agricultural crisis and peasant indebtedness–no solution offered

The FM had to admit that agricultural production, which is the principal means of subsistence for about 115 million farming families, grew at a meager average annual rate of 2.3 per cent during the Tenth Plan period against a desired level of 4 per cent. He had to admit further that, “a country with a large population has to be nearly self-sufficient in essential food items; otherwise supply constraints could upset macro economic stability and growth prospects…supply constraints have emerged in some essential commodities such as wheat, pulses and edible oils.” Admission is one thing and remedy is another. The FM pretends to have made ‘a number of proposals to improve the economic viability of farming and ensure that farmers can earn a minimum net income’, predictably on the lines prescribed by the Planning Commission. How? Let us see.

To mitigate the indebtedness of the farmers and the peasants, the FM could only conceive of increasing the quantum of bank loan. He is happy at the growth of bank loan to the farming sector. He informs us that the target of Rs. 1,75,000 crore set for 2006-07 will be exceeded comfortably and is likely to reach Rs. 1,90,000 crore. So he is encouraged to raise that target to Rs. 2,25,000 crore and bring an addition of 50 lakh new farmers under the credit net. What he does not inform us is, why despite such a ‘satisfactory’ volume of farm credit flowing into the agricultural sector, peasant indebtedness and suicides have been continuing, if not increasing.

It goes without saying that this problem can hardly be tackled merely by increasing the volume of farm credit. The delivery system of institutional credit still suffers from thousand and one aberrations and bottlenecks, which compels even a large section of middle farmers to resort to private credit to finance their increased cost of cultivation engineered by the pro-WTO agricultural strategy pursued by the government. Usury is back in the Indian rural scene with a vengeance. Remunerative price has remained a far cry, despite shedding of many crocodile tears for the distressed farmers, driven by desperation to commit serial suicides. The need of the hour is to take steps for amortization of all their private loans and interest and to provide them institutional support in the form of remunerative prices, till they recover from the chronic nightmarish situation. He has sought to push the issue under the carpet by announcing setting up of a committee under the leadership of Dr. Radhakrishnan to examine the aspects of agricultural indebtedness. The actual allocation for agriculture is grossly inadequate and plan outlay as a proportion of GDP remains stagnant. Proposed reduction in customs duty on some agricultural products like edible oil would depress domestic agricultural prices and lower income of the farmers further.

Undeterred inflation–no silver lining

FM’s much boasted 9.2 per cent growth story has a disturbing 7 per cent inflation snag imbedded in it. The main engine behind the present spurt in inflation rate has been the sky-rocketing prices of essential commodities, particularly food articles. The FM has himself admitted that supply constraints in some essential commodities such as wheat, pulses and edible oils have contributed to this inflation. The situation has further worsened with undeterred speculation in the commodities market. So a demand for stopping of all futures in essential commodities was strongly gaining ground in democratic circles. The Left supporting the UPA government are also known to have raised a similar demand. The FM has meekly responded to this by announcing that new future contracts on rice and wheat have been banned.

There is an inherent loop-hole in that announcement. Firstly, rice is seldom traded in the futures market. Secondly, the old contracts will squarely remain in vogue and operative. Thirdly, the government itself requires futures for determining its policies and the traders expect that, once the assembly elections are over, the government will reverse its decision and allow futures in wheat again. Fourthly, futures have been kept going in all other essential commodities, except rice and wheat. In this regard, the government has absolved its responsibility by announcing to set up another committee under the Planning Commission member, Dr. Abhijit Sen.

In this budget the rate of education cess has been raised from 2% to 3%. This will aggravate the inflationary situation. The FM has cut the excise duty on the ad valorem portion of the prices of these products from 8% to 6%, which means it will have negligible effect on their prices.

The FM informs us that bank credit has grown by 29.6%, and money supply has expanded by 21.3% and foreign exchange reserves stood at mammoth US$ 180 billion. While acknowledging the pressure of these monetary trends on prices, he identified these trends as ‘concomitant features of high growth’. This is where he is required to be reminded that the policy of ‘growth without development’ pursued by his government is bound to recoil in the form of inflation and no amount of monetary policy can arrest that. Rather it gives rise to a vicious cycle.

Alongside this, service tax has been extended to a number of new services. This will surely have some effect on the price level. Part of the 12.5% service tax imposed on the rent of commercially used premises is likely to be passed on to the consumers.

The great fraud on the unemployed

The main flagship scheme in the armoury of the UPA government to tackle unemployment is the ‘National Rural Employment Guarantee Scheme (NREGS)’. At present the scheme is operative in only 200 districts of the country. In this budget the scheme has been extended to 330 districts. But the primary allocation for the scheme has been increased by only Rs. 700 crore – from Rs. 11,300 crore to Rs. 12,000 crore. Adjusted for inflation, the increase is nil. 130 more districts have been added, still there is virtually no additional allocation! This means, allocation per district has actually been slashed from Rs. 56.5 crore (Rs. 11,300 crore for 200 districts) to Rs. 36.36 crore (Rs. 12,000 crore for 330 districts). There are already complaints galore regarding the implementation of the scheme with the job-card holders in different parts of the country alleging non-availability of promised job and timely payment, and even thrusting of too much of workload for too little money. On top of that, this slashing of allocation will make the scheme all the more farcical.

For the poor people lying beyond the purview of NREGS, the FM has allocated Rs. 2,800 crore for ‘Sampoorna Gramin Rozgar Yojana (SGRY)’, Rs. 1,800 crore for ‘Swarnajayanti Gram Swarozgar Yojana (SGSY)’ and Rs. 344 crore for ‘Swarna Jayanti Shahari Rozgar Yojana’. Together, all these poverty alleviation and employment programmes have received an aggregate allocation of Rs. 16,944 crore. If we divide this allocation across the board among all the 40 to 45 crore poor unemployed in the country, the per capita annual allocation comes to a pathetic figure of Rs. 400 only. This is all about UPA government’s much trumpeted employment drive!

To promote employment for the physically challenged, the FM has proposed to provide incentives to the employers in the organized sector. Under the proposed scheme, the government will reward the employer once the physically challenged employee is regularized and is enrolled under the Employees Providend Fund (EPF) and the Employees State Insurance (ESI) by way of reimbursement of the employer’s contribution to the EPF and ESI for the first three years. The government will support creation of about 1,00,000 jobs every year for physically challenged persons with a salary limit of Rs. 25,000 per month. By shedding its own social responsibility to provide employment to such physically challenged, the government is thus taking recourse to such peculiar and cheap gimmicks.

The Arjun Sengupta Committee’s report on the social security scheme for unorganized workers is yet to see the light of the day and we do not know what is there in store there. The government has washed its hands off the matter by simply introducing another new scheme named ‘Aam Aadmi Bima Yojana (AABY)’ to provide death and disability insurance cover to the landless households through the LIC. Only the head of the family or one earning member per family would be insured and the Central Government will bear only 50% of the cost of premium, the rest being passed on to the state governments. What else is this, but mockery of social security for the aam aadmi?

Travesty of social justice

Who and which sectors are PC’s priorities? Not really the poor and their welfare. Otherwise, how could the social sector allocation on employment for the poor and unemployed, education, social security for unorganized workers etc just barely crossed the Rs. 50,000 mark, contrasted against the total subsidies granted to the rich in the form of direct tax exemptions to the corporate sector alone of Rs. 50,075 crore and Rs. 53,768 crore on export promotion schemes and Rs. 2,23,000 crore on account of customs and excise exemptions?

The proposed allocations for education and health in 2007-08 are Rs. 32,352 crore (increase of 34.2%) and Rs. 15,291 crore (increase of 21.9%) respectively. These constitute about 0.87 per cent and 0.41 per cent of GDP respectively. But the CMP declared by the UPA promised expenditure targets of 6 per cent of GDP on education and 3 per cent of GDP on health. The targets have been merrily missed by a big margin. Let us take the spend on education. Last year, the government spent about 4.2% of its total expenditure on education, which has now been increased to 5.1%. Given the crisis facing the country’s basic education system, where over 60% children drop out from schools by Class-VIII, only about 11% of the 17-23 year old youth have access to higher education and only 2-3% students are receiving technical education, does this spend take us anywhere near retrieving the situation?

Budget 2007-08 has proposed yet another cess for education. This time it is an additional 1% for secondary and higher education. The new levy is expected to yield Rs. 5,500 crore. It means that the two education cesses together are expected to net Rs. 16,000 crore. Against this, the plan spend on education is at around Rs. 29,000 crore. Thus 55% of the central government’s plan spending on education will now be financed entirely through the two cesses. Is it not tantamount to financing education for the poor with their own money and the government usurping the credit?

It is the same story in health sector too. The budgetary allocation for health and family welfare has increased from 2.1% of the total expenditure in 2006-07 to 2.4% this year. The outlay for Integrated Child Development Services (ICDS) has been increased by a mere 10 per cent to only Rs. 4,700 crore, when the National Family Health Survey-III revealed that over half of the Indian women are anaemic and nearly 47% of the children below the age of six in India are under-nourished and a Supreme Court directive calls for creation of 14 lakh Anganwadis by 2008 to address the needs of children in this age group. Nearly Rs. 10,000 crore are to be spent on the National Rural Health Mission, which is currently engaged in reorganizing the whole health delivery system. Dependence on World Bank funding for health sector has started showing up by the fact that allocation on Reproductive and Child Health Project has come down by about 17% to Rs. 196 crore due to drying up of such funding.

So far as subsidy for the under-privileged is concerned, the proposed outlay on food subsidy is up by only 6.2%, which implies actually a cut in real terms when inflation of 6.7% is taken into account.

Reforms galore on the liberalization trail

Here are some not-so-pronounced measures and concessions granted to hold aloft the banner of reforms:

· The financial sector reforms have been kept vehemently going. In the direction of banking sector reforms, the government proposes to acquire RBI’s equity holding in the SBI and a sum of Rs. 40,000 crore has been provided for the purpose. In order to mobilize the surplus from the agricultural sector as well as to streamline the penetration of bureaucratic capital into the rural economy, the Regional Rural Banks (RRBs) are being restructured by following the recommendations of the Rangarajan Committee.

· Following the mandates of the WTO protocol, the peak Customs Duty (CD) rate has been reduced from 12.5% to 10%. The rate has thus been brought nearer to the ASIAN level of 8% and it is expected that the target would be reached in the next year. CD on some other items also has been slashed.

· A host of measures have been announced to boost up the securities market.

· No additional tax has been levied on the rich or the industry. Rather further tax concessions have been granted on certain commodities. The total tax exemptions granted to the corporate sector alone in 2006-07 has been to the tune of Rs. 50,075 crore, as evidenced by the tax forgone statement submitted by the FM along with the budget. This is 44% more compared to the last year. After paying for all taxes, the proportion of the direct taxes paid by them as a percentage of the pre-tax profit is only 19%, whereas the actual rate of corporate tax as per the statute was 33.66% in 2006-07.

· The companies engaged in IT industry, which used to enjoy full tax exemption under Section 10A and 10B of the Income-tax Act, have been brought under the MAT scheme whereby they have to cough up a meagre 11.33% tax for the time being, for which they will get MAT credit for adjustment in future. This is nothing but deferring the tax exemptions. The average rate of gross profit and net profit of this sector is quite high – in the range of 75 to 85% with a nominal overhead of 5 to 10% and they were being allowed to go untaxed with such huge income. The present measure will take out only a small slice out of that to be compensated on a later year. Everything said and done, the FM has also categorically clarified that MAT will not be applicable for the companies housed in SEZs. And yet there is lot of hue and cry against this in the industry and media circles.

· Although there is no express mention of disinvestment in the budget statement, the fine print of the budget documents reveals that the government proposes to mop up revenue of the order of Rs. 1,651 crore by selling 5-10% shares of a few profitable PSUs.

· The rate of dividend distribution tax has been increased from 12.5% to 15%. The corporates can merrily avoid paying this tax by abstaining from declaring dividend. This will help them indirectly to find out a plea for not declaring dividend and utilize the undistributed dividend for investment in the share market for furthering profit.

· The municipalities have been permitted to raise funds from the market by issuing bonds. Thus the government has shirked its financial responsibility to provide civic amenities to the citizens and has passed on the whole buck to the market.

· As a step towards further capital account convertibility, the budget has proposed to permit individual investors to invest overseas through mutual funds route. This measure is likely to see asset management companies offering products that will invest in foreign stocks directly and thus domestic savings will be channelised to the foreign stock markets and be subjected to the vagaries of those markets.

Pampering the ‘Holy Cow’

NREGS may starve of funds, but Defence with a capital D cannot. Because development can wait, but purchase of arms can not. The FM may feel hard pressed to fund the social sector with a meagre Rs. 50,000 and odd crores, but he has been liberal in providing a hefty Rs. 96,000 crore by way of defence outlay. The increase is 7.86% over the last year’s outlay of Rs. 80,000.

Out of the total outlay on defence, the outlay on capital expenditure has been pegged at Rs. 41,922, which is just less than 50% of the total. This is meant for purchases of arms and ammunitions. In the background of successive incidents of scams with regard to defence purchases, such a huge allocation for defence related capital expenditure is bound to raise many an eyebrow. And of course, this increase in defence outlay has to be viewed from the angle of India government’s recent pro-US tilt in foreign policy and the Indo-US defence and nuclear pacts.

How about the common man?

In sum, the 2007-08 central budget is a big fraud on the common people of the country, where the anti-people reforms have been cleverly pushed through, while the poor have received a flak. The FM can allow five year income tax holiday for two, three and four star hotels in and around Delhi keeping the 2010 Commonwealth Games in mind, can offer Rs. 50,000 crore plus tax exemptions to the corporate sector, but cannot make provision for sufficient resources for upliftment of the poor or funding the social sectors.

Such a poor show at a time when the FM, according to his own admission, had sufficient elbow room in the form of 9.2% growth rate, 28% growth in revenue, 7.4% increase in per capita income, 32.4% savings and 33.8% investment rate, foreign exchange reserve of $180 billion and fiscal and revenue deficit at 3.7% and 2% of GDP. If he cannot do it now, when can he?

2007 marks the 150th year of India’s First War of Independence and the birth centenary year of Shahid-e-Azam Bhagat Singh. PC reminds us that this is also the centenary year of the Satyagraha Movement. He earmarks funds for the celebration of 1857 and Satyagraha only, by placing them in the hands of a few Gandhiite Institutions, but forgets to make any mention about Bhagat Singh. Ardent advocate of imperialist economic doctrines that he is, it is quite understandable that the FM would be loth to remember a die-hard anti-imperialist and a true patriot like Bhagat Singh.