01 March 1999

A Critique of the 1999 Budget

1 March 1999
The Times of India

A critique of the 1999 Budget


EVER since the programme of liberalisation was launched in 1991, a
certain mystique has surrounded the Union Budget. For finance
ministers, it is something akin to an alchemist's manual, a magical
document that will turn dust into gold. Thus we had Mr Yashwant
Sinha tell us on Saturday that ``the basic needs of our people for
food, shelter, health, education and employment will be met within a
decade from now''. If one is overcome by a sense of deja vu, it is
only because such astonishing claims have been made by every finance
minister in recent years, to no discernible effect.

But if the BJP-led government is guilty of sophistry, many of the
criticisms of the Opposition are equally facile. Just as all
finance ministers describe their Budgets as ``pro-poor'', opposition
leaders are quick to dub the same as ``anti-poor''. While there is
plenty in Budget 1999 that would fit this description, two points
are in order here. Neither previous Congress Budgets nor the
Budgets of the United Front (which the Left parties voted for on the
floor of the House) have been different in terms of expenditure.
Second, rather than focussing on human development as a policy
objective to be met by hiking allocations but keeping the basic
direction of the economy the same, debate needs to focus on the
structural constraints in the Indian economy that militate against
the satisfaction of basic needs.

Fiscal Fetish

A big obstacle in the way of rational discussion is the
fetishisation of the fiscal deficit. Indeed, one tends to forget
that the deficit is endogenous and reflects underlying trends. Far
from being an independent variable, budget deficits move in a
counter-cyclical fashion. When the economy is in recession and
output is low, budgets tend to be in deficit; during a boom, the
deficit falls or even turns into a surplus. In a developed economy
like the US, recessions lead to a fall in tax revenues and an
increase in government spending as `transfer payments' (on social
welfare) go up. But in India, it is primarily slack tax revenues
that put pressure on the fisc.

In Budget 1999, Mr Sinha has sought to finance the fiscal deficit by
increasing taxes. He has also tried to revive growth by giving a
fillip to housing and to the financial markets, via his concessions
to UTI, mutual fund and gold owners. Though markets have reacted
positively, investors will soon realise that what Keynes called
`animal spirits' are not enough to kickstart the economy. What is
needed is tax-funded higher government expenditure, especially on
the capital side. This Mr Sinha is unable to deliver.

The fact is that low tax revenues are written into the political
contract on which the Indian state is based. There are several
elements to this contract. Farmers must sell their crop cheap to
the state so that food for workers can be priced low and the
industrial wage bill held down. In return, the rural sector, or
rather the rural rich, cannot be taxed. Indeed, any attempt by the
Centre to force the issue will lead to conflict with state
governments, and the regional parties which dominate them. As if
the inability to tax the agricultural sector were not bad enough,
the fiscal deficit is further strained by cheap or free electricity
and water for wealthy farmers. Finally, in urban areas, the state
is too weak (or too unwilling) to ensure that mandated tax and
utility revenues from individuals and corporations actually accrue
to it; there is also the problem of business houses lobbying with
the government to get concessions and subsidies. The revelations of
Mr Mohan Guruswamy, who resigned as advisor to the finance minister
a few weeks ago, illustrate that the last factor is not an
insignificant one.

Capacity Utilisation

So long as growth -- at the `Hindu' rate, of course -- was taking
place on the basis of debt-financed public expenditure, these fiscal
constraints did not bite. But when the level of indebtedness
reached an unsustainable level, the constraint was translated into
cuts in public investment and attempts were made to ensure private
investment, Indian or foreign, filled the gap. Unfortunately,
investment has occurred in a limited cluster of industries. Despite
the generous fiscal concessions doled out to investors,
Infrastructure remains a bottleneck, as does the overall size of the

Today, Indian industry is in recession precisely because the
capacity created during the first wave of reforms has proved to be
unsustainable. Even if we do not accept Jozef Steindl's argument
that excess capacity is endemic to mature economies, it is obvious
that any fall in capacity utilisation rates tends to prolong
stagnation as the fear of excess capacity weighs heavily on the
investment decision of firms. In the US and Western Europe during
the post-War `golden age', governments circumvented this problem
from the demand side by increased expenditure, especially on the
military, financed by higher taxes. But in India, as we have seen
above, any such attempt will not be tenable. That is why Mr Sinha
has not been able to produce a more growth-oriented Budget.

Industrial Recovery

Mergers and acquisitions offer one way for the corporate sector to
weather the downturn. In fact, Mr Sinha's Budget even tries to
encourage this process. Indian firms are also not averse to using
the state to gain advantages over their rivals in order to buck the
recession. If Mr Guruswamy is to be believed, this process is going
on today as well. But ultimately, unless the size of the
`nation-market' expands -- either through domestic consumption or
exports -- any industrial recovery will only be temporary.

There is a way out but it is not possible to achieve that solution
merely by juggling with budgetary arithmetic. The economy must be
put on a new basis; one which treats the fulfilment of basic needs
as the starting point -- rather than an illusory derivative -- of
policy. In such a society, it is not the size of the budget deficit
which will be constitutionally guaranteed, as the Economic Survey
has advocated, but the citizen's fundamental right to education,
health, food, shelter and employment.

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