Monday, March 3, 2014

Union Budget 2014-15

Union Budget 2014-15 and the Myth of UPA’s ‘Populism’ -- Surajit Mazumdar

The Union Budget 2014-15 presented by the Finance Minister before Parliament on 17th February this year was the last budget to be presented in the 10 years of UPA rule.
General elections being round the corner no significant new measures were to be taken in this budget – that had to be left to the new Lok Sabha and government, in whose term would fall the major part of the coming financial year 2014-15 (1 April 2014 to 31 March 2015). However, the budget accounts were still significant because of what they revealed about the developments in the year coming to an end on 31 March 2014. For the second successive year, the revised estimates of total Central Government expenditures for 2013-14 were lower than what had been budgeted before the year started. The same had not only happened last year, the actual final figure of expenditure 2012-13 turned out to be even less than the revised estimates, at the time Union Budget 2013-14 was presented! The fiscal deficit to GDP ratios in these two years, at 4.9 and 4.6 per cent respectively, were also at their lowest levels in the period since UPA 2 assumed office. 
This big picture of expenditure being held back in the last two years flies in the face of theories of ‘political budget cycles’ which predict that governments tend to become ‘populist’ and profligate as elections approach. The real profligacy of the UPA government has been only in their claims of how much they have done for the ‘aam aadmi’ and for the development of the country. When it has come to putting money to back its talk, it has been stingy as hell. In such circumstances, the hue and cry from certain quarters about how the UPA’s populism has destroyed the fiscal climate – seen recently most notably in the context of the National Food Security Act - might appear bizarre. Most people making such charges are also rooting for a Narendra Modi led government to put the Indian economy back on track. What is really behind this?

The UPA’s Record: Ten Years of Fiscal Parsimony

Fiscal conservatism is one of the key tenets of neoliberalism. While maintaining a low fiscal deficit (the excess of expenditures over revenues of government) is one of the important objectives of conservative fiscal policy it is equally important for this to be achieved while keeping taxes low. For this combination to be possible, government expenditure must also be kept within limits.
The adoption of the liberalization strategy by the Indian state since 1991, when Manmohan Singh was Finance Minister, also elevated fiscal conservatism to the status of the ruling dogma guiding fiscal policy.  Every government since then has paid obeisance to it. One of the first acts of the UPA 1 Government signalling its commitment to it was the notification of the Fiscal Responsibility and Budget management (FRBM) Act passed by its predecessor Government. Its consistent adherence since then to the policy of keeping government expenditure in check is exemplified by the levels of the Central Government Expenditure to GDP ratio in the ten years of UPA rule (Table 1). This ratio, a measure of the Central Government’s share in the total annual expenditure of the economy, has through this period been kept below the level at the end of the Vajpayee led NDA government’s term (which itself was below the pre-1991 level). Of course, capital expenditure or public investment has faced a significant share of the squeeze in UPA’s times. It may be worthwhile remembering that this is in a background where public expenditure levels in India are very low when compared to both developed as well as developing countries.
Table 1: Central Government Expenditure as Percentage of GDP at Market Prices 
If we were to look at not the ratio of Central Government Expenditure to GDP but its actual levels adjusted for inflation (i.e. real expenditure), then the following picture emerges (summarized in Figure 1). The first two years of UPA 1 saw a pretty severe expenditure squeeze – the average annual real Central Government expenditures in 2004-05 and 2005-06 were below 2003-04 levels. Then followed a period lasting till 2010-11 during which expenditure in real terms grew pretty rapidly. A slowdown in the pace of that growth began in 2010-11 itself, and in the last three years real expenditure has virtually completely stagnated. In other words, in half the ten-year period that UPA has been in power - made up of the first two and the last three years of its rule - Central Government expenditures have remained completely frozen. It is only in the remaining half in between the two ends that expenditures increased.
Figure 1: Annual Rate of Growth of Central Government Expenditure at Constant 2004-05 prices
In order to understand how the increase of Central Government expenditure in the period from 2006-07 to 2011-12 was consistent with adherence to fiscal conservatism one needs to appreciate the following facts:
·       Till the global crisis erupted, the Indian economy for a five year period beginning in 2003-04 experienced very high and also extremely inegalitarian growth. Corporate profits as well as high-end incomes grew extremely rapidly. As a result of the rising share of such incomes in total income generated by the Indian economy, and not because of any increase in tax rates, the tax to GDP ratio also increased as can be seen in Table 2. Corporate taxes alone accounted for over 55 per cent of the increase in the tax-GDP ratio between 2003-04 and 2007-08. While some part of the Corporate and other income taxes were transferred to the states, the Central Government revenue situation also improved dramatically. As a result, expenditures could be stepped up even without reversing the trend of decline in the fiscal deficit-GDP ratio and it is only within those limits that it was increased. Indeed, in 2007-08 the fiscal deficit to GDP ratio at 2.5 per cent was at its lowest level since 1991.
·       The last year of the UPA 1 term saw the outbreak of the global crisis in response to which ‘fiscal stimuli’ became the flavour of the season the world over for a period of time. Even the staunchest of fiscal conservatives did not object to the initial stimuli though eventually the rising deficits and debt of governments led to a clarion call for ‘austerity’ measures whose effects are being faced by people across the world.  India under UPA followed the same course of a fiscal stimulus followed by a retreat from it. The stimulus meant that government expenditure growth was maintained for some time even after 2007-08. However, the major component of the stimulus took the form of tax concessions – typical of conservative fiscal policy. As a result, the tax to GDP ratio plummeted (see Table 2) and this more than any increase in the expenditure to GDP ratio led to a sharp rise in the fiscal deficit-GDP ratio.
·       The retreat from the stimulus, or ‘fiscal consolidation’, has been the dominant fiscal policy concern for most of UPA 2’s term. In contrast to what happened during the stimulus, however, in the retreat the curbing of government expenditure was clearly prioritized over tax mobilisation. Partly the result of this was the slowdown in growth in the last few years, which has intensified the revenue constraints. Tax-GDP ratios have thus remained lower than they were in 2007-08 while expenditures have been curbed to reduce the fiscal deficit. This contrast is exemplified by what is visible in the last two rows of Table 2. From 2007-08 to 2009-10, the central government expenditure to GDP ratio increased less than the parallel decline in tax to GDP ratios. However, while that increase has been more than undone by 2013-14, the tax-GDP ratios have recovered by only a fourth or less of their fall.
Table 2: Central Government Expenditure, Tax Revenue and Fiscal Deficit as Percentages of GDP at Current Market Prices
·       Since there is so much talk about populism, it is also instructive to see the expenditure heads that have been hit most by austerity measures. As is starkly visible in Table 3, the cornerstone of the expenditure control strategy has been cuts or restraints in precisely those expenditures with an important bearing on the lives of people – agriculture and rural development; fertilizer and food subsidies; and social services (under which come areas like health and education). In real terms the expenditure on these heads has been lower throughout the five years of UPA 2 than in the last year of UPA 1. The expenditure on rural development (which includes the MNREGA) has even in nominal terms been lower in the years thereafter than in 2008-09!
Table 3: Central Government Expenditure (Plan and Non-Plan) on Agriculture, Rural Development, Social Services and Food and Fertilizer Subsidies

Why is a Myth being Propagated?

The UPA Government can certainly be criticized for its subterfuge – for claiming what it has not done. Like the BJP’s Shining India campaign came flat in the 2004 elections, the people who have experience the reality of its policies are unlikely to buy the UPA’s claims no matter how much the statistics are juggled. The so-called ‘populism’ of the UPA will not be visible to them. However, the ‘critics’ of the UPA who are accusing it of fiscal recklessness are somehow managing to see what neither the statistics nor actual experience on the ground shows to be true –a government splurging crores of rupees on schemes bringing short-term benefits to millions of voters. These critics are certainly not people who are illiterate about money matters. On the contrary their singular obsession is with the process of making more and more money – the variety among them ranging from those who engage in scholarly ‘study’ of that process to those actually participating in it. Surely such people cannot be ignorant of the real picture. So then why do they say what they say?
The last two decades since ‘economic reforms’ were initiated have seen extreme economic polarization of an order not seen before in the period since independence. While the majority of Indians have been condemned to income stagnation and depression, a few large corporate houses and a rich upper-income segment have increased their stranglehold on the country’s income and wealth. In this they have been aided by the process of opening up of the Indian economy to foreign capital. Fiscal conservatism has been an able servant to this massive concentration and accumulation which has only whetted the appetite of its beneficiaries rather than satiated them. They are therefore greedy for more of the same even as the regime now faces a crisis both domestically and at the global level as a result of its own contradictions.
What this greedy minority would like is to climb their way out of the crisis by trampling even more on the interests of the rest – they would like more tax concessions for themselves; more handing over of national assets to them at low prices; more expenditure out of shrinking government revenues on the roads, highways and flyovers they need; and yet fiscal deficits to be kept low so that foreign investors are not scared away. The critics of the UPA’s ‘populism’ are simply the conscious or unconscious spokespeople of this desire.  What they are in effect saying is that the UPA has not done enough, meaning not been savage enough, on the expenditure compression front because of electoral compulsions. They are hoping that Narendra Modi can benefit from the discontent generated by the UPA’s ‘success’ in hurting the interests of the Indian people to do an even better job of the same! After all, he has a proven track record of knowing how the politics that takes human lives can be used to further the economics of high human cost.  For the time being, therefore, the only useful purpose that the UPA can serve for its true masters is to be the butt of their criticisms about ‘loose purse strings’ so that the appropriate climate is created for the belt-tightening to be imposed after the elections on those who in any case have very little.

Surajit Mazumdar is Associate Professor at Ambedkar University Delhi

No comments:

Post a Comment

Comments are subject to moderation. It may take some time to appear in the blog.