Mainstream, VOL LIII, No 18, April 25, 2015
Union Budget 2015-16 : A Beautiful Carriage with Lame Horses
Saturday 25 April 2015, by
The following analysis of the union budget by the marxist/maoist thinker, kobad ghandy, was written this month and reached us last week for publication in this journal. He sent it from tihar jail where he is once again lodged in jail no. 3 (where he had stayed earlier before being transferred to jail no. 2, ward 5). It is now being published here for the benefit of our readers.
However grand a carriage, without robust horses it is useless—it cannot move even an inch forward. So also it is with the economy. Whatever may be the grand plans for investment/production, it will hit a brick wall if these are not accompanied by dynamic demand-pull.
The present Budget resembles a beautifully decked-up carriage, but pulled (nay dragged) by lame, sick horses. Decked-up it was—decorated with the highest growth rate (7.4 per cent) in the world; and stuffed with all sorts of goodies to boost economic reforms. But, as for the horses, an already sick demand-pull has been made lame in three of the four legs—starving the poor even further, heavily burdening the middle classes with taxation and inflation, and dras-tically reducing Plan expenditure. No doubt the fourth leg will get a big boost with enormous sops for the super-rich blackmarketeers and corporates. But can this grand carriage be effectively pulled by a sick horse, lame in three legs?
Unlikely!! Already industry has 30 per cent excess capacity. Investment will not happen unless demand picks up. But demand has been low for the last four years resulting in stoppage of investment. The agrarian crisis is deepening, reducing rural demand. Last year the rural wage fell drastically. The area under the rabi crop has fallen and the previous kharif crop production fell by seven per cent. Factory production has slowed and rising unemploy-ment combined with rising prices (specifically of essentials) is resulting in lower purchasing power—leading to an overall fall in demand.
1. 7.4 per cent Growth or Actual Decline?
Such was the scenario on the eve of the Budget; then how was this miraculous 7.4 per cent growth created? In fact, since 2011-12 the rate of growth of the GDP has fallen from an average of more than eight per cent in the previous eight years to between five and 5.5 per cent. Invest-ment in industry and infrastructure has dropped to less than a quarter of what it was in 2010-11 and growth of manufacturing has been stalled at close to zero for more than four years.
Then suddenly how have we become the fastest growing economy in the world? In fact in the current financial year (April-December 2014) the IIP (Index of Industrial Production) grew by a mere 2.1 per cent. And in the second quarter (October-December 2014) the growth was a mere 0.5 per cent, which is even lower than the average for the previous four years. Core sector growth in February 2015 fell to 1.4 per cent compared to 6.4 per cent in February 2014. Agricultural growth is to plunge from 3.8 per cent in 2013-14 to 1.1 per cent in 2014-15. Exports, in dollar terms, have grown by a meagre 2.4 per cent during April 2014 to January 2015 (as against 6.4 per cent in the previous year). But the external debt rose by a huge $ 15.5 billion in the July-December 2014 period, taking the figure to $ 462 billion. A study of the profitability of the 2941 major companies showed that profits for the quarter ending December 2014 declined by 16.9 per cent—worst in 15 months.
Finally, as recently as in January 2015, in the eight major core sector industries, growth has dropped to 1.8 per cnet (compared to 3.7 per cent in January 2014)—the lowest in 13 months, Manufacturing growth dropped for the second month in succession in February 2015 to a five-month low.
With manufacturing and industry in such a state of stagnation, it is quite natural that the rate of investment has been continuously falling, and is set to fall even further in the current financial year. Gross Fixed Capital Formation (that is, the rate of investment) as a percentage of the GDP has steadily fallen from 33.6 per cent in 2011-12 to 29.7 per cent in 2013-14; and is set to fall even futheer in the current year 2014-15 to 28.6 per cent.
The situation is so pathetic that one-in-three of the 500 largest corporate borrower companies do not have enough margins to even support their interest payments. The key drivers of corporate profitability, namely, investment, household consumption, and corporate dividend on spending continue to be weak.
And because of the state of these corporates, and also dubious lending by our PSU banks, most are deeply crisis-ridden with bad loans and restricted assets reaching a gigantic Rs 6,38,000 crores (that is, 11.6 per cent of the total advances)—a figure larger than the fiscal deficit. What is even worse, debt restructuring packages of 86 companies with loans of Rs 14,000 crores failed in 2013-14; compared to 12 cases for Rs 4300 in 2012-13; the situation in the current year is even worse.
Let alone industry and banking, even the rupee is in danger. Even with gigantic foreign funds being pumped into the stock-exchange and debt market, the value of the rupee keeps falling—it has now dropped to below Rs 63 to the dollar, and keeps falling!! This is particularly dangerous as not only have foreign inflows peaked, but also the trade deficit has been drastically reduced due to the crash in crude oil imports. So there should be no reason for the value of the rupee to fall.
Then where is there a single positive indicator in the economy, except for the booming stock exchange? The latter too is not due to a healthy Indian market but due to the vast inflow of speculative money from abroad. In fact, the situation of further decline in the past one year is all-encompassing. Then how has the government manufactured such high growth figures—the highest in the entire world!!!
It was achieved by a simple statistical manipulation by the CSO (Central Statistical Organisation) The CSO merely changed the method of calculation to get higher figures. So the previous year’s figure (2013-14) suddenly became 6.6 per cent compared to the 4.7 per cent declared in the last Budget. And this year’s figure should be actually well below last year’s 4.7 per cent as, even according to the CSO data, the GDP growth at current prices is over two per cent below last year’s figure—13.6 per cent in 2013-14 to 11.5 per cent in 2014-15. But it is portrayed to be 7.4 per cent. Many have questioned the veracity of this figure.
No doubt the present crisis is the result of the economic policies followed by the UPA Governments over the last ten years—in fact the policies of economic reforms initiated by Manmohan Singh way back in the early 1990s when he was the Finance Minister. Unfortu-nately the present BJP Government is merely continuing with the same Manmohan Singh policies. Instead of pursuing real swadeshi policies to build a powerful country, it is seeking a glorification of the past to compensate for a lack of swadeshi in the present.
What is needed is concrete policy wherein enhancing demand should be the basis for creating a strong foundation for growth and investment. If a strong demand was created, investment would automatically flow and one would not have to go all over the world looking for it.
The problem in this Budget is that it has left no stone unturned to sap further the already insignificant consumption within the country. And as for exports, its growth fell to an all-time low in this financial year, and is unlikely to increase in the future given the volatility of international markets. ’Make in India’ will remain a mere slogan if people do not have the money to buy what is made, nor international markets have the ability to absorb exports.
For ‘Make in India’ to be truely meaningful, the focus should have been on enhancing demand, by increasing the people’s purchasing power. Unfortunately, this Budget does exactly the opposite.
II. How Budget Saps Demand
By increasing the tax burden on the middle classes, and by slashing the subsidies/schemes for the poor, there will be a huge reduction in the purchasing power of both sections, which comprise over 95 per cent of our people. Imagine if this over one billion populace’s standard of living rose even a little, what an enormous demand it would create. And what happiness it would bring to every family, besides spurring manufacturing and growth.
But by taxing them further, raising the prices of essentials and drastically cutting down on schemes for the poor, it will bring nothing but pain all over the country. Unfortunately even this enormous amount of money extracted will not go to increase Plan expenditure—in fact this too has been drastically cut. In many countries it was huge government expenditure (even at the cost of raising the fiscal deficit) that boosted demand and stabilised economies in crisis. But, even this third leg for creating the demand-pull will also stagnate.
Instead of Plan expenditure much of this money has gone for sops to the big corporates and super-rich. But here too much of this elite expenditure goes in buying imported items, foreign trips etc. which will not help enhance demand within the country. Of course, due to their expenditure certain sectors of the economy will grow, like luxury cars etc.
Now let us look at how this Budget saps demand in three legs of the economy—the middle class, the poor and non-Plan expenditure.
(i)The Middle-class Squeeze
The middle classes, over the past few years, have already been hit by decresing job opportunities, wage/sacary/pension cuts, high levels of inflation, low interest rates on savings and rising service charges (electricity, water etc.). Now, over-and-above all this has come the new Budget squeeze.
Firstly, there has been no increase in the income-tax limit for the salaried. Given that there have been high rates of inflation on all essential commodities, this will result in a lowering of effective family income.
Secondly, due to the huge hike in indirect taxes, their real income will drop even further. The bulk of the increased burden of Rs 23,383 crore indirect taxes will fall on these middle classes. Excise duty on all items has been hiked from 12 per cent to 12.5 per cent and service tax from 12 per cent to 14 per cent, And this does not include the already big hikes in excise on petrol and diesel—increased by Rs 7.75 per litre and Rs 6.5 per litre since November 2014.
Besides all this, health expenses and sicknesses have gone up astronomically. Due to the high levels of pollution of soil/food, water, even air, diseases have gone up by leaps and bounds. One serious illness in a family is sufficient to deplete an entire life’s savings and even push lakhs into debt.
India has a large middle class, but with its income falling and sapped up in inflation and health expenses, its ability to enhance demand significantly has been stifled.
(ii) Poor Crushed Further
It we turn towards the poor, the situation is far worse with massive cuts being introduced in most welfare measures. Programmes under the Ministries of Agriculture, Labour and Employment, Rural Development, Social Justice, Minorities, Environment and Forests, and Culture have all been reduced. Here we present just a brief picture of some of the schemes that have been slashed:
It is children, women, Dalits, and tribals that have been worst hit. What can be more cruel than snatching away that morsel of food from a starving child’s mouth.
The two schemes that deal with malnutrition have been badly cut. The ICDS (Integrated Child Development Scheme) has been cut by half from Rs 16,000 crores to Rs 8000 crores. This will also affect the lives of lakhs of Anganwadi workers who are paid a pittance and have been agitating for a rise in wages. The Mid-day Meal Scheme has been reduced from Rs 8734 crores to Rs 7775 crores.
Related to this, the Women and Child Development Ministry’s allocation has been slashed by over half from Rs 21,193 crores last year to Rs 10,382 crores in the present Budget.
The allocation for the poorest of the poor—Dalit and tribal welfare—has been slashed. To ensure that Plan funds reach Dalits and adivasis, an executive policy of allocating 16.6 per cent of this for Dalits under the Scheduled Caste Sub-Plan (SCSP) and 8.6 per cent for tribals under the Tribal Sub-Plan (TSP) has been in place since the mid-1970s. However, the Budget for 2015-16 has allocated only 6.6 per cent for the welfare of Dalits and only 4.3 per cent for tribals. Various Dalit and tribal advocacy groups have expressed shock over this. Going according to the constitutionally accepted Sub-Plans, the Dalits have lost out Rs 46,386 crores and tribals Rs 20,034 crores. One does not know whether even these insignificant amounts will be spent as in the current financial year it only spent 37 per cent of the allocated amount.
These sections have been doubly hit by steps to wind up the MGNREGA. A lot of the MGNREGA funds would have assisted these poorest sections. It was badly cut in the first BJP Budget and has been kept at the same figure of Rs 34,000 crores in this Budget (from Rs 40,000 crores in 2009-10). This figure too is unlikely to be met, as the government has made the Aadhar card mandatory to access the MGNREGA funds.
In India illnesses have increased by leaps and bounds given that 43 per cent of our childrn are malnourished (UNICEF), people’s resistance is poor and they are so easily susceptible to diseases. Yet India’s health care expenditure is one of the lowest in the world—spending a mere 4.1 per cent of the GDP as compared to Brazil’s nine per cent. No other country in the world spends 6.5 times on defence what it spends on health. Given the horrifying health conditions it was expected the health budget would be increased from the current Rs 30,000 crores to at least Rs 50,000 crores. But this Budget raised the figure by a mere Rs 3000 crores (which will not even cover the inflation). This is the result of the powerful pharmaceutical and health care companies (mostly foreign) which are reeking in crores from people’s illnesses. No wonder of the 145 billionaires in India ($ 1 billion net worth), the maximum—27—are in the pharmaceutical and health care business, that is, 19 per cent.
Also, in the sphere of education with privatisation proceeding full-speed ahead, the government has cut allocation by as much as 17 per cent. The allocation for the Sarva Shiksha Abhiyan has been cut from Rs 28,635 crores to Rs 22,000 crores. School education has been reduced by Rs 8000 crores and higher education by Rs 4000 crores. The Rashtriya Madhyamik Shiksha Abhiyan has been slashed by three per cent, and the Ministry of Health and Family Welfare by 13 per cent.
All such steps, and many more, do not augur well for demand-creation.
Now let us turn to the third leg for demand- creation—Plan expenditure.
(iii) Drastic Cut in Plan Expenditure
There are two types of government expenditure—that which creates assets and drives the economy forward; and that which merely consumes without producing anything. The first comprises Plan expenditure; the second comprises expenses on items like the bureau- cracy, politicians, police, army etc. and also subsidies. No doubt, both produce demand, but the latter merely saps other’s tax money, without producing anything tangible. Though the latter is a necessary expenditure, the smaller the figure, the more vibrant the economy. Unfortunately, of these the government merely cuts subsidies to the poor, while continuing with much of the wasteful expenditure and subsidies to the rich.
One of the major reasons for the collapse of the East European and Soviet economies was a bloated state apparatus which devoured but created nothing. Unfortunately India seems to be heading in the same direction, wherein even much of the Plan expenditure is frittered away in high levels of corruption.
In the current Budget there has been an unprecedented cut in the Plan expenditure from Rs 5.75 lakh crores in the last Budget to a mere Rs 4.65 lakh crores for 2015-16. Not only this, even in the current year the government only spent Rs 4.67 lakh crores of the Rs 5.75 lakh crores allocated—a mere 80 per cent of the allocation. This is not surprising, as the gross tax revenue collected by the government in 2014-15 hs fallen short of the Budget estimates by a huge Rs 1.13 lakh crores—this is parimarily due to the failure of the government to tap the vast amounts of the black money floating around.
Over and above this, while the Finance Commission has taken the positive step by enhancing by 10 per cent (32 per cent to 42 per cent) the transfer of the Centre’s funds to the States, this Budget has severely cut the Centre’s expenditure on the States’ schemes. Central assistance to the States is to be cut by Rs 75,000 crores in 2015-16 from what was allocated in 2014-15. Take, for example, the crucial Rashtriya Krishi Vikas Yojana (RKVY) which was, till now, fully Centrally funded to boost agricultural production. In the current Budget the Centre’s allocation has been slashed by over 50 per cent from Rs 9954 crores in the last Budget to Rs 4500 crores for 2015-16. Agriculture is already in crisis with farmers‘ suicides reaching levels never seen in independent India. With such step-motherly treatment, the situation can only get worse.
So with falling demand all around and a likely big decline in agriculture this year, where will the demand-push come from to give a boost to growth? No doubt the Modi Government has sought to encourage production through the ‘Make-in-India’ slogan. But, for this, the focus should be more on enhancing demand rather than on investment. With demand stag-nant or, in fact, falling, investments will find no outlet. On the other hand, if demand grows investments will automatically flow into these sectors.
So, for example, investments keep flowing into luxury items (that is, five-star hotels, tourism, property, luxury cars etc.) for which the market is booming due to the growth of the super-rich’s wealth and the vast black money. Let us turn to this sector and the Budget’s approach.
III. Sops to the Super-Rich
It’s not that the super-rich are in need of sops as their wealth has been growing at a faster rate than any other country in the world. India has the seventh largest number of such people in the world. This is nearly double that of a rich/developed country like France and equal to that of Germany. Also, the Ultra High Net Worth Individuals (UHNWI, with a wealth of over $ 300 million) has reached the figure of 1652 and keeps growing. So, what is the need of granting these handful of people more and more concessions?
Firstly, the bulk of the black money generated is by these people. This is a gigantic revenue loss to the government and country as it is not taxed. The above figures mentioned are related only to the white money. Even on this the present Budget has abolished the wealth tax. Then, the corporate tax, which was anyhow low, was reduced by five per cent to 25 per cent, giving these corporate magnates a windfall of Rs 20,000 crores in the year.
Then the government has exempted FIIs (Foreign Institutional Investors) from MAT (Minimum Alternate Tax). As many as 100 FIIs owe $ 10 billion (Rs 60,000 crores) tax in MAT. Given that the FIIs are making huge profits, removing the 20 per cent MAT is a big de facto subsidy (freebie) to them each year. Over and above this, the Finance Minister has assured them that he will revisit the GAAR (General Anti-Avoidance Rule). Also, all the methods of generating black money, like P-Notes, Mauritius tax haven etc. have not been touched. Furthermore, besides all these sops, the govern-ment has once again given gigantic Rs 5.5 lakh crore freebies to the big corporates—that is, an amount far exceeding the total Plan expenditure of the government. In addition, it has given a huge write-off in customs duty on gold, diamonds and jewellery of Rs 76,000 crores.
No doubt this enormous amount of black money and wealth of the super-rich create a demand for luxury goods and services. For example, luxury car sales have risen eight-fold since 2007. But, this market would be exceed-ingly limited, not only because the numbers are very few, but a lot of this money is siphoned abroad, goes on foreign trips, purchase of imported goods etc. Besides, unlike other countries, a large amount of wealth is parked in property and gold which have no productive value. For example, the UHNW individuals invest nearly half their wealth in property—the highest in the world.
An economy cannot be built by boosting the income and demand of a mere minuscule percentage of the population, it must involve the bulk of our people—
the Real India
—and only then will ‘Make in India’ be a success.
IV. Advance of Agriculture and MSMEs Key to Growth
The transition from an agrarian economy to an advanced economy has been achieved through-out the world by large-scale industrialisation. Over two-thirds of our people still live in rural areas where there are 12 crore marginal and small holdings sustaining about 75 crore people who eke out a hand-to-mouth existence. With another 10 crore living off semi-medium holdings, it is this huge populace coupled with crores of unemployed/semi-employed in the urban areas who are waiting to be absorbed by development.
This can only be achieved by labour-intensive industrialisation and making the agrarian economy more viable. This cannot be achieved by the big corporates and financial sectors which are highly automated utilising insignifi-cant labour. The key to real development entails absorbing the massive unemployed/under- employed population displaced from agriculture into industry.
To absorb this huge workforce it is the MSMEs (micro, small, and medium enterprises) that need to be promoted as the first priority. Rather than give fat subsidies (Rs 5 lakh crores) to the big corporates, it is these that need attention as they are barely able to break-even and therefore squeeze labour. Though these MSMEs are starved of funds (93 per cent of the MSME units are dependent on self-finance), and despite the economic slowdown, these recorded a growth of 10 per cent in 2013-14, contributing eight per cent to the GDP. These employ over eight crore people, accounting for 45 per cent of the manufacturing output and 40 per cent of exports.
Though these comprise such an important aspect of the economy, the government completely neglects them and favours the powerful corporates and multinationals. Even PSU banks refuse to provide them with credit, with all loans siphoned off by the big corporates, a large amount of which has turned into bad debts. With over Rs 2 lakh crores turning bad money, the PSU banks are on the verge of collapse. Yet, they continue to lend these corporates and ignore the MSMEs. A recent example is the SBI’s (State Bank of India’s) $ 1 billion loan to Adani when he already has $ 11 billion in loans unpaid—that too granted for a project in Australia said to be unviable. Nearly Rs 1 lakh crore to just one corporate could have supported thousands of MSMEs providing lakhs of jobs. While small unpaid loans of farmers of MSME/individuals result in immediate seizure of property by the banks, lakhs of crores of unpaid loans of corporates are merely written-off or ‘restructured’ at great loss to the nation, not touching their huge personal wealth.
But it is not sufficient to promote industry, the main focus must be to provide secure jobs with proper wages—for it would be this huge mass of people that would provide a demand for the goods produced. But, let alone this unorganised sector, even workers in the organised sector have been badly hit by the government policies over the years. And now the present government is planning to change labour laws, Provident Fund and pension fund schemes to hit them even further.
According to the Annual Survey of Industries between 2005-06 and 2010-11, organised workers’ wages rose by merely 1.5 per cent annually—that is, real wages fell drastically, given the high levels of inflation.
What is even worse, there has been massive contractualisation of the workforce. According to the same Survey (Economic and Political Weekly, January 28, 2014), in factories employing more than 5000 workers, almost half were through contractors. In fact more than 80 per cent of all workers employed in the organised manu-facturing sector had no written contracts, or had contracts that were valid for less than a year. In this, it is the government that has set the lead for the private sector to follow. We have seen this done on a big scale in the railways, resulting in poor service and increasing accidents. Another example is the Bharat Electronics Limited (BEL)—about two decades back it had a unionised workforce of over 13,000; today the number is less than 2000, outsourcing most of its work. Such a change is to be found in most large industries and multinationals. One has witnessed the conflict at Maruti because of this. It is a positive step that the New Delhi Government has sought permanency of their contractual workers. The anti-labour policies of successive governments in the Capital is apparent from the fact that the Minimum Wage Advisory Board has not met since 1995—a full two decades; but the babus have been collecting their salaries.
And if we turn to agriculture, the situation is even worse where over three lakh farmers have committed suicide in the last 15 years; and the trend is increasing. In fact in Maharashtra this year there has been a massive 40 per cent increase in the August 2014-February 2015 period over the previous year, that is, 1373 suicides or seven per day!!! Worse, the suicides have spread from Vidarbha to also encompass Marathwada, which has seen an increase of 85 per cent. Surprisingly, these also include large landholders. But it is just not the cotton belts that have been affected. Today the arrears to sugarcane farmers by the mills are over Rs 15,000 crores, of which Rs 3652 crores are since 2012. While the mills are controlled by big corporates and politicians and mint crores, they are not willing to pay farmers their dues, pushing them to suicide.
How drop in demand affects manufacturing is brought out by the latest data of SIAM (Society of Indian Automobile Manufacturers). Referring to rural demand, it said: “Erratic monsoon, lower rural wages and drying up of funds under the NREGA has meant the demand for two-wheelers has tapered off in rural areas.” It states, in addition, that a slowing economy has led to drying up of job opportunities for rural migrant workers, especially in sectors like construction and manufacturing. Rural wages in India too registered an average annual growth of 3.8 per cent in November 2014—the lowest since July 2005.
As a result of all this, motorcycle sales declined for the fifth straight month, falling by 8.2 per cent in Februry 2015 alone. Domestic sales of tractors fell by 10 per cent between April 2014 and January 2015, and by as much as 30 per cent in the last three months. Sales by entry-level cars too dropped by eight per cent between April 2014 and February 2015.
No ‘make in India’ can be successful unless people have money to purchase the goods made.
Today, besides government employees, the bulk of our people live off agriculture and MSMEs. If these do not develop and just the big corporates/TNCs develop, will the country advance? If the latter corner all the bank credits (and write-offs) as well as subsidies (freebies), what will happen to the rest of the nation? Where and how will demand be created to evolve a fertile soil for investment to sprout? In the national interest, the vast sums being gifted by governments and PSU banks to the big corporates need to be diverted to agriculture and MSMEs. Only then will there be real growth in the country. Let us give the carriage robust horses.
(April 6, 2015)