Home > Archives (2006 on) > 2014 > The Fiscal Game 2014 - 15

Mainstream, VOL LII No 30, July 19, 2014

The Fiscal Game 2014 - 15

Sunday 20 July 2014, by Kamal Nayan Kabra

Do the slew of Budget proposals tell a coherent story with its main characters and their roles defining their relativities vis-à-vis each other and in the process unravel the overall plot and the moral of the story? With an over-advertised play, the compulsion to satisfy everyone in the audience is surely pressing but the Drama Company, the actors, the story-writers, the financiers and so on, that is, each constituency, may tend to lend their hand in the actual performance. So the remaining months of the fiscal would see how the play proceeds and for whom the bell tolls. After all, the pulls and pressures of various origins and persuasion combine together to impact the reality on the ground and decide the audience response. Moreover, a Budget is mainly a loosely written play; different scenes and acts do not necessarily cohere. Thus what the audience is able to view is something which unfolds itself over the course of the show, partly following its own inner logic.

What matters most is to identify the main story and the secondary plots as also the side- shows. Actually one can see a long list of goodies and sops offered to different interest groups and sections of society. These may be the sections who are victims of the sins of omission and commission of our past policies. Or they may be the ones who nurse various structural and other passing grievances. Alternatively the beneficiaries of the proposed schemes may well be either the blue-eyed boys or the hobby horses of the regime. In the present Budget, most of these schemes and programmes carry minor/token allocations, may be because these are treated as the popular sales-points and hence do not deserve a reckonable role in either the characterisation or the overall positive socio-economic, macro-societal impact one may expect from the set of interventions mounted as parts of the agenda of NDA-III as parts of the Budget 2014-15. Actually a discernible degree of objectivity and concern with effectiveness rarely informs the administrative or governance processes in our kind of complex and ill-defined democratic polity facing periodic elections. As a matter of reality, delivered outcomes are way beyond the public agencies’ capability to produce pre-determined outcomes. Like in most cases our kind of political economy is torn between a variety of pulls and pressures and other unpredictable changes.

Then what do we select as major defining features of the Union Budget 2014-15? As a part of the Budget speech and outside it by way of various sorts of explanation/elaboration or justification, one has come across some revealing hints and clear expositions which merit some attention. As a result, on the one hand the rather low tax-GDP ratio (around 10 per cent) and its justification in terms of a government which would like to make do with as little taxation as possible and leave the people with huge disposable income (that is, in real terms—not much after the market forces imposed tax in the form of incessant inflation) free to determine their own pattern of resource utilisation. This is treated as some virtue for the great gain of dubious value, called growth of GDP it would help to attain. What it means is that irrespective of what the GDP consists of, what it sacrifices in order to obtain what it actually does, how heavy is its cost for the larger society and its coming generations and how few are the people who control, command and consume it, the GDP growth is supposed to wash all the sins of commission and omission. So strong is this growth orthodoxy that it is forgotten that, say, for example, during the last seven years or so over six per cent per annum growth could lock in no more than 0.5 per cent growth in the organised sector real employment, increased the number of billionaires twelve times and over-burdened the economy with massive current account deficit, leading to great depreciation of the Indian rupee and the consequent massive loss in real terms as a result of the huge size of our foreign trade which is as high as over 50 per cent of our GDP. The FM is on record showing his reluctance to expand the tax net and increase the tax ratio. This limitation of public spending in our kind of society is a major stumbling block preventing effective joint and shared working of the state and society.

This is accompanied by leaving even the debt market essentially for the benefit of the private, mainly the corporate, sector as a part of the policy of so-called fiscal prudence: it is taken to mean low Budget deficit, even if crying social needs, especially for the supply of common goods and services for the weak and the informal who are the main producers of our GDP, go unattended and lead to huge loss of direct and multiplier effect and block the future strength of the economy. One need not be reminded that the rich and powerful market economies, yes, market economies, have public spending of the size of between 40 to 60 per cent of the GDP. Without such a size the economy suffers gross inadequacies in many directions as the corpo-rates are neither inclined nor capable of discharging such massive and irreplaceable facilities and services. What appears to the common man a huge allocation, say, for education, health, water supply and so on are in per capita terms and given our massive unfinished agenda barely sufficent to scratch the surface. A clear point is that we have huge social tasks which the state, the sole capable agency, excuses itself of taking up owing to its ideological and power-play-related obsessions and the profit-seeking, black economy-spear-heading corporate sector is too greedy and myopic to undertake. The net result is: we have huge unfinished tasks which go by default. This year too it is a repeat of the old story.

The Budget this year too shows reluctance to expand either the tax rates and tax base or even go on to administer the fiscal processes and laws effectively and collect revenue from those who are flush with cash and wealth— the total amount of private wealth reported in our National Income statistics is about 2.6 per cent of our GDP. A country with about one-third of the GDP as its investment rate is able to employ just a tiny fraction of about 12 million fresh persons seeking work opportu-nities. Actually it succeeds in turning them away as unwanted entrants at the door. Thus we accept the spectacle of sacrificing 2.6 per cent of its investible resources by locking them up as valuables which make a draft on our precious foreign exchange and additionally distort the values, culture and ethos. What the Budget has done is to burden the common citizens by way of increasing the coverage and rates of tax imposts on the services without any distinction between the services used by the super rich or the ones used by the poor and weak mostly in times of utterly unavoidable compulsion.

 It is clear that the leadership of the economy and its growth process are now concentrated in the corporate hands that show scant regard for the social, as against crass selfish, ends, such as we would continue seeing in the form of huge expansion of the real estate and super- luxury housing sector, to name a few, while hovels continue to surround these skyscrapers. The quality of human life is a highly dispensable quantity in our policy-choices, as can be seen in the super-deluxe urban metropolitan facilities at huge public expense and the dirt, mud, mosquitoes and filth-infested rural streets and lanes. Thus the state is largely left as the night watchman and engaged in administering the administration in ways which are so costly as to make an ordinary citizen mount a wait for generations in order to make them reach anywhere near that kind of living. Austerity and a life-style in keeping with the availabilities to the aam aadmi are practically proscribed terms in our new lexicon.

It is in this context that one has to read the profuse tasks and responsibilities entrusted to PPP and FDI. That both invite more problems than they solve is a lesson of history which is rarely understood. Have our rulers shared with the wider public the amount of factor incomes which we transfer to the rest of the world, defining the gap between the GDP and GNP? The public funds which the private partner draws on and the demands for the viability gap fund which are made make a mockery of the argument that it is for resource supple-mentation that the private corporate sector is drawn upon. The manner in which PPP opens the floodgates of crony equations is something which the oil and natural gas story of invited private monopoly participation has brought to the fore quite vividly. It is forgotten that the companies sector is a net borrower from the household, public and the financial sector, often defaults on loan repayments and is the biggest source of bad loans which, following the dictum too big to fail, are never recovered from them. Its record of employment generation is nothing but a shameful story of adverse inclusion and deprivation of the people from their basic right to access livelihoods.

The extension of the huge MNC financial sector into our weak and struggling insurance sector is another instance of ideology and asymmetric globalisation dictating our policy- choices. Why should we expose a sensitive part of our financial sector to the speculative, highly leveraged financial sector? During the present financialised phase of the global economy, dominated by the 0.1 per cent lording over the rest of us, any expansion of the public savings entrusted to the plutocrats of the world would further weaken the general welfare and human rights of the common public. It is a greatly unjustified and condemnable trait of the present-day dominant global policy-thrust that the most disturbing and immoral feature of it, that is, worsening inequalities with hardly any functional justification and nothing but a negative set of consequences flowing from it, is rarely factored into the considerations which impel policy- choices. Even a social state deter-mining the use of about 50 to 60 per cent of the GDP, as is the case in most of the rich industria-lised countries, remains a weak palliative and hardly a substitute for a combination of social state, social enterprise and social control over the cultural and intellectual spheres in the framework of a robust plural democracy. Transfer of the people’s social security to the speculative domains guided by insatiable greed is a sure gateway to a plunge into the abyss of insecurity during the twilight of one’s life and uncertain and insecure childhood of those who may suffer the loss of parental care. Actually security and speculation are polar opposites and by throwing the people’s security-directed savings into the lap of the sector guided by infectious greed, a grave injustice is being perpetrated. Given the failure rate of insurance companies, what business anyone has to expose the people’s lifelong savings and old-age security to such risks?

 The opening up on the analogy of China is the most ridiculous one as they are able to work as the workshop of the world and amass massive current account surplus—large enough to be able to destabilise, should they decide, the biggest economies of the world. But after opening up have we been able to pay for our imports without incurring capital account liabilities? On the other hand, we have to beg, borrow and cajole the FIIs and other FDI suppliers in order to meet our current import bills and that too for the luxuries for the super rich. The reduction of the excise duty on all kinds of motor vehicles and white goods, later on strangely or oddly adding diamonds to the list of preferred goods for soft tax treatment—shows it is growth as such without a single minute’s thought about the social, moral and long-term direct effects and negative externalities of these decisions. It is true some changes in the import duty regime are going to give support to the domestic producers and thus help reduce our trade deficit. But the overall balance, owing to the ease with which externalisation of our black economy with liberal participation as co-partners by the political class as the new business partners of the black sector honchos, is unlikely to give a positive twist to our independent decision-making capability on the world market. Incidentally, the weak and black wealth-friendly set of rules notified and put into cold storage for fear of disturbing the so-called investor sentiment, the GAAR, has remained uncared for during the present Budget. No clear commitment to deal with the scourge of black wealth and rampant corruption and crony twists to the economic policies and administration are visible in the present Budget as though all the options of carrying on with business as usual are intact. True, with no forces fighting for the alternative, really inclusive, agenda making any electoral gains (whether anyone made any such bid or a concerted campaign is also far from clear) the scope or prospect for carrying forward such an agenda seems presently at least fairly weak.

The strength of the domestic economy to be able to operate without making space for the concerns and demands of the external agencies and giving pride of place to the concerns of the country’s millions is a sine qua non of indepen-dence and fair and equitable participation in the processes of globalisation. True, it would be foolish to close our doors on the rest of the world but to let any and every wind gush into our windows and dismantle our walls and prevent our roots to go deep enough to withstand the tempests originating anywhere and everywhere is nothing but a straight invitation to disaster. The simple point is the worry to win favourable ratings from the narrow-minded, self-serving rating agencies is first to follow the kibitzers that enhance our external vulnerability and then to remain caught in a permanent dush-chakravyuha. If the Swadeshi and Swabhiman commitment is a real force and is more powerful than the lobbying by the groups from Davos to Bengali Market, the whole question of FDI, whether in defence production or in E-commerce and single-brand retail, must be examined without blinkers. Actually so long as our weak external economic relations and the craze for Western-style industrialisation and modernisation survive, it seems the Swadeshi rhetoric for this regime may turn out to be a replay or the counterpart of the so-called socialistic pattern rhetoric of the fellow-travellers and Young Turks from the sundry splintered socialist groups which were so vocal but ineffective during the garibi hatao days. Can we do without many of such replays? True, absolute ideological purity and blind eye to the real solid concerns of the day are a luxury we can ill afford in a vastly and fast-changing world. But blowing with each wind like a reed can also be quite unhelpful. As the saying goes, adaptability—yes, but adoption or imitation lock, stock and barrel is surely self-defeating. The point is: various parts of the Budget have to be fitted together to see what does the totality look like. Do we have an aggregate sum which is larger than and, more important, different from the sum of the parts or it is something that hardly adds up symmetrically and consistently to any genuine local need-responding total or it does not even equal the arithmetic sum?

 The limits on state action spring not only from the tax conservatism which is reinforced by two additional factors as a matter of conscious choice. One is the bountiful tax sops given to the rich and high-net-worth individuals in terms of not only most liberal exemptions, rebates and concessions woven into the income tax, corporation tax and absence of any worthwhile tax on property, wealth in various forms including real estate of any magnitude without limit. Actually practically static revenue from the token wealth tax for any number of years now makes this tax a relic of the past and a mere symbol or a reminder that there used to be a time when wealth beyond a certain threshold too attracted tax. Even on the transfer of wealth from one generation to another, that is, when huge unearned wealth changes hands and the inheritance-based inequalities are perpetuated (something which can hardly find a moral or functional justification and leads to encouragement of sloth and asocial and anti-social tendencies), India’s rulers do not consider it proper and legitimate to make even a small token cut for the larger society.

In brief, on top the rather low level of tax rates and even weaker collection, we have a mechanism called the practice of incurring huge cost in terms of what the Finance Ministry describes as

Tax Expenditure

—that is, taxes that are formally imposed but at the time of tax collection formally and legally waived off to entities considered worthy of tax preferences. At over Rs 6 lakh crores this loss of revenue is an amount which can go a long way in changing the face of the Indian state and be a real game-changer. The government itself describes them as indirect subsidies but fails to even attempt to justify them. Many routine official committees have suggested the need to do away with these white elephants. These preferences apply to both direct taxes and excise and customs duties. In all, a whopping sum of over Rs 6 lakh crores—the single largest entry against any tax, of course, not collected but exempted—is the cost imposed on the nation by this largesse bestowed on the wealthiest and most anti-poor sections of society. If one were to do any exercise about the massive opportunity cost thus imposed on the weak and vulnerable and compare it against the goodies delivered to the man on the street, shockingly an enormous negative sum is most likely to show. This year’s Budget papers show that this entry is heavier than it was for the preceding year!

Thus it is clear that what we have is a renewed and freshly dressed-up replay of what was happening during NDA-I and NDA-II and UPA-I and UPA-II. The icing and decoration, the verbal selling points and something by way of identity marks cannot meet the accumulated challenges. True, it is hoped and believed that implementation is going to be the strong point in the present regime. It remains to be seen what does it mean, how far is it going to rid of rent collection and crony equations or cost and time overruns or resource shortfall and what all we have seen in plenty. A more basic question is : can the same recipe give a different nutrition? May be margi-nally if it is cooked better. The democratic struggles of the kind the country needs are going by sheer default. After all, in various ways almost every political outfit has shared power during the last more than two decades but we always have to suffer more of the same. A clear and consistent people-centric agenda with the cenral place to the masses in our rural areas, slums and informal/unorganised sectors and direct democratic mobilisation for its implementation have to be the starting-points of a transformative agenda. Hundreds and thousands of meetings with a clear articulation of such an agenda and firm resolve of the people to reject all those who fail to give topmost priority to such an agenda would surely galvanise the nation to a new strength and awakening. A weak and direction-less change can pave the way for a really path-finding exercise, if only the urge to change can be detected or injected in such attempts.

At the end of any examination of the exercises of the kind the 2014-15 Union Budget represents, there are always a set of nagging uncomfortable questions: can a democracy survive and its state remain a legitimate social institution when most people have neither an assured minimum today or the day after nor do they see any such prospect even for their children at least in their own life-time? More importantly, can we ever reach a stage in our social development when growing multi-dimensional inequalities, a necessary corollary of economic growth in the market and globalisation framework, is entrapping an ever larger number in intensified networks of vicious inequalities and the severe costs thus imposed? If Thomas Picketty makes such abundant sense to such an overwhelming body of professional and lay public opinion, showing the inevitability of growing inequalities in market economies, irrespective of the speed of economic growth, how can our experts and leaders who assign such a great weight to the objective of growth in fiscal and other policy-choices retain their credibility? The preceding and present governments have strong common bonds in terms of basic similarity of economic ideology, outlook and bonding with a particular combi-nation of interest groups, even though the supporting combination of top echelons has shifted its loyalty and support from one political combination to another in such a pronounced manner. Can the excluded majority continue blindfolded shuttling between these two, following in the steps of the top-slot people and yet expect a real breakthrough? It may sound simplistic but where does one see an escape?

A noted economist, the author was a Professor of Economic Development and Decentralised Planning holding the Malcolm S. Adiseshiah Chair at the Institute of Social Sciences, New Delhi.