Home > 2016 > Union Budget 2016-17: Growth or Retrogression?

Mainstream, VOL LIV No 15 New Delhi April 2, 2016

Union Budget 2016-17: Growth or Retrogression?

Monday 4 April 2016, by Kobad Ghandy

The following is the latest article written by Kobad Ghandy, the noted Marxist-Masist thinker, now lodged in Tihar Jail 3. He sent it to Mainstream for publication. We are accordingly doing so for the benefit of our readers.

For all the hype of 7.5 per cent growth in this year’s Economic Review (2015-16), the real situation of the economy is precarious. The rural economy is in dire straits, manufacturing is in the doldrums, banks are heading towards bankruptcy, the rupee is crashing, exports are contracting as never before and sky-rocketing inflation is eating into real wages.

Farm growth has plunged to one per cent. Industrial production (IIP) is either contracting or is stagnant. Banks have been getting huge infusions of government funds to prevent bankruptcy due to corporate defaults. The rupee crashed to a 28-month low. And exports in 2015 contracted by 18.5 per cent—the worst since 1952-53.

Now, what does this latest Budget do to pull the economy out of the mess? In the reportage on the day after the Budget, it appeared there was a radically new approach with focus on the farm and social sectors. The corporate world displayed its anguish with the stock-exchange crashing. But the reality soon came out: the very next day the stock-markets boomed, indicating the big-business’ pleasure. Apparently media rhetoric, with five State elections due, was exactly the opposite from the reality.

In fact the Budget analysis has turned boring for two reasons. Firstly, with economic reforms, no matter which party is in power, they have a three-point formula. What varies is the mere emphasis in these three points. These are: huge sops to the super-rich; increasing tax burdens on the middle classes; and big cuts in subsidies/expenditure on the poor and social welfare. Secondly, the Budget never gives the real picture, but only estimates, as nowadays most departments spend much less than the budgeted figure, and even of what is spent a large amount is frittered away in corruption. Anyhow, it gives a direction to the economy.

This Budget strictly sticks to the three-point formula. So here instead of confining myself to a mere Budget analysis, I will try and put forth an alternative which could result in robust growth compared to the lethargy of the past two decades under economic reforms. But first let us take a look at this Budget.

Sugar-coated Bullets for Farmers and Social Sectors

The rural infrastructure is crumbling, tractor sales have slumped and farm incomes are shrinking. Yet the allocation to agriculture was actually raised by 30 per cent while it was portrayed in the Budget to have doubled. The Agriculutre Ministry’s expenditure of Rs 45,000 crores was padded with a figure of Rs 15,000 crores interest subsidy which already existed with the Finance Ministry and was now transferred. And with the expenditure on rural development stagnating at 1.5 per cent of the GDP, the Budget did not address the serious issue of the farmers’ plight, which has resulted in a record-breaking 10,000 farmers’ suicides last year. And as for the PM’s statement of doubling farm incomes by 2022, this was mocked at by the Marathwada farmers who have seen the spate of suicides continuing with nearly 200 in the first two months of this year. The Marath-wada farmers said: ”Yes, farm incomes will double as the present incomes are zero and double is zero.” In fact the Budget has sought to reduce farm incomes by increasing input costs by reducing the fertiliser subsidy by Rs 2000 crores and reducing output prices by cutting the food subsidy by a huge Rs 5000 crores.

Now if we turn to social welfare, both health and education are in a pathetic state. The outlay has been the same for the last two years at one per cent of the GDP for health and 0.7 per cent of the GDP for education.

India has one of the worst health conditions in the world. According to the government’s own reports, 52 per cent of all households face severe malnutrition, and 6.5 crore people are pushed into poverty every year because of catastrophic expenses on healthcare. The booming corporate hospital business is an indication of the fortunes being minted from the people’s life savings.

In spite of these horrifying conditions, the Budget cut expenditure on senior citizens by 50 per cent and for women and child welfare (ICDS) by Rs 1000 crores. Expenditure on the most deprived sections was Rs 1375 crores less. The only hike was a 150 per cent increase in the Swachh Bharat campaign which needs to focus on treatment of sewage to improve hygiene. At present 30,000 million litres of sewage a day flow into our rivers.

In spite of India being the most diseased country in the world, public expenditure on healthcare is the lowest. While India spends a mere one per cent of the GDP on healthcare, China spends 3.1 per cent and South Africa 4.3 per cent of the GDP. In fact developed countries, which have eradicated most infectious diseases and have a fraction of our diseases, spend seven to 10 per cent of the GDP on healthcare. Even though the US spends as much as 8.1 per cent of the GDP on healthcare, in the ongoing Democratic primaries raising social welfare is one of the main issues of Bernie Sanders. And even of this budgeted figure, in the last financial year by end-Spetember, only four per cent of the Budget amount had been spent.

If one turns to education, the situation is even worse with the government following the WTO dictates to cut funding/scholarships and towards privatisation. No wonder last year by end-September, only 34 per cent of the Budget was spent. Again India with high levels of illiteracy and semi-literacy should be spending the maxmum. Even here in this Capital city in Tihar, a big proportion of the inmates are illiterate. But then education is massive business if one sees the Vyapam scam which has claimed over 40 lives, the Kota suicides and numerous other mafias operating in the entrance, passing and certification processes. Besides, why spend on education, as those ill-equipped with the tools of thinking are best for manipulation in electoral politics?—so goes the present hysteria against JNU.

This low expenditure on healthcare and education was sought to be cut further—through the back door—by squeezing the State govern-ments’ finances. Both these items are on the concurrent list, where a bulk of the expenditure is by the State governments. Central taxes have to be divided between the Centre and States as per the Finance Commission. In the last two years the government has shifted a huge 12 per cent of collections from taxes to cess/surcharge collection depriving the States of a massive Rs 2 lakh crores. As it is the States are short of funds and besides paying their employees, health and education are the major expenses.

Besides health and education, another major social welfare expense is to the SCs and STs—Dalits and tribals. According to the Scheduled Caste Sub-Plan (SCSP) and Tribal Sub-Plan, drawn up in the late 1970s, the SCs and STs should be allocated from the Plan outlay amounts equal to their percentage in the population—that is, 16.6 per cent and 8.6 per cent respectively. In this Budget the shortfall was a gigantic Rs 74,000 crores. Instead of getting 25 per cent of the Plan outlay, it was a mere 11 per cent.

Finally, let us turn to the middle classes, who have lost at least Rs 25,000 crores and were likely to lose an additional equivalent amount if the Provident Fund Tax had not been withdrawn under trade union pressure. A sum of Rs 20,600 crores will be extracted through an increase of indirect taxes on a host of items including mobiles, laptops, garments, air travel etc., while Rs 5000 crores will come from an increase in service tax. The government hesi-tantly withdrew the EPF tax, but its intentions were clear: to rob even the savings of the middle classes while not touching (as we shall see) the illicit and vulgar earnings of the super-rich.

So, we see an already acutely impoverished nation has been pushed deeper and deeper into poverty and sickness resulting in deaths, debts and suicides all over the country. It is the veritable spider and fly story where the spider (the government) weaves its net (the Budget) wide to entrap the flies the maximum and suck their blood. Lakhs and lakhs will perish as a result and crores will be debilitated through sickness and disease.

But there is a small section who have gained enormously from this Budget—one could say the top five per cent, particularly the super-rich and Central Government employees. Now, let us turn to this aspect of the Budget.

Unbelievable Bonanza for the Super-Rich

While seeking every possible method to tax the poor and middle classes, the levels in sops to the super-rich in the Budget are probably exceeding the levels of tribute extracted by the British in colonial times. The budgets have found all sorts of schemes, overt and covert, to grant sops, subsidies, exemptions, write-offs etc. to these modern-day robber-barons. And like in the colonial times, a lot of funds are siphoned abroad through legal and illegal means like hawala, P-Notes, under-invoicing/over-invoicing etc. etc.—and by, most importantly, turning a blind eye to the huge black-money generation taking place. We will deal with the black money later. Let us first see the gifts to the super-rich in this Budget.

The biggest gift in each successive budget comes under the category “tax foregone” hidden in a small corner of the voluminous Economic Survey. The current year’s figure is a mind-boggling Rs 6 lakh crores, an increase of seven per cent over the previous year. The size of this figure can be estimated from the fct that it amounts to 42 per cent of the total government revenue of Rs 15.6 lakh crores. These exemptions, mostly to the corporate sector, de facto reduce the official corporate tax rate from 30 per cent to 22 per cent; and some favourites like the Ambanis are said to have been paying roughly two per cent. At a time when the government claims it has no money for small subsidies for food and fertilisers for the starving poor farmers, why does it “forego” such a gigantic amount?

Another huge amount uncollected is the undisputed tax arrears of another gigantic Rs 5.6 lakh crores, 50 per cent by the corporates. Instead of heavily penalising these defaulters, this Budget encouraged them by reducing the penalty on these amounts by one-third. When the tax authorities harass the honest taxpayers, why do they turn a blind eye to such defaulters, the bulk of whom owe large sums?

Another huge fraud on the people of our country is the gigantic bad debts owed by the big corporates to the Public Sector Banks (PSBs). Arun Jaitley recently said in Parliament that the bad debts (euphamistically called non-performing assets) came to a huge Rs 3.6 lakh crores at end-February—this figure had increased by a massive 29 per cent or Rs 1 lakh crore in just nine months to December 31, 2015. In fact the Supreme Court ordered the RBI to give it the names of the biggest defaulters, who lead “lavish lifestyles” after The Indian Express disclosed that Rs 1.14 lakh crores of bad debts had been written-off by the PSBs between FY 2013 and FY 2015. The sum of Rs 3.6 lakh crores is obviously what remains after these write-offs, and can be presumed will also be written off. The Vijay Mallya episode, where he is allowed to flee the country though he owes Rs 9000 crores to the PSBs, is only the tip of the iceberg. It is the Bank-Politician-Corporate nexus which is allowing such loot of the country with each getting a share of the spoils. With such an approach to these looters, already the banks are predicting that bad debts will further double to Rs 7.1 lakh crores by March 2017. If a middle-class person does not pay her/his car loan instalment in time the banks are known to forcibly seize her/his car, but the luxury yachts, palaces etc. of the super-rich are untouched. [A recent example was the arrest of 75-year-old retired Wing Commander C.K. Sharma (the OROP leader) for supposedly siphoning off a mere Rs 14 lakhs—that too on an unproven private complaint and not any official organi-sation.] On the contrary these loans are classified as ‘bad’ and the debt written off, resulting in huge losses to the banks. These huge losses are made good by massive infusion of government funds euphamestically called ‘recapitalisation’—a massive Rs 25,000 crores gifted last year and another Rs 25,000 crores in this year’s Budget. And the bank-bosses, instead of seizing the assets of these tycoons, were begging for more from the government. The employees of Kingfisher Airlines, who have not been paid their Rs 100 crore dues by Mallya, put it succinctly: “We knew a little about the rotten system of our country but thanks to people like you, the real scenario of our country is so helpless that it evokes nothing less than suicidal tendencies in the common man who regularly and sincerely pays tax with pride only to be looted by people like you in collusion with politicians/banks who are custodians of our hard-earned money.”

Of the above three items if we even consider a conservative 50 per cent of the latter two items, a phenomenal Rs 10 lakh crores was de facto gifted to the super-rich in the Budget. And this is merely considering three items in the Budget, ignoring the numerous other minor concessions given, like the big tax relief to the builders’ lobby, reduction in direct taxes etc. But even all these pale into insignificance if one considers the gigantic sums lost to the country through black-money generation, the benefits of which go chiefly to the super-rich, politicians and officials and their hangers’ on—barely one per cent of India’s population. Here I am not including those who may avoid paying some tax as they feel the government anyhow is wasting their money through corrupt practices, wasteful expenditure and luxurious living.

The Black Bomb and the Total Tribute

According to a report presented by the National Institute of Public Finance and Policy (NIPFP) to the then Finance Minister in 2013, the black money generated every year amounts 75 per cent of the GDP. This means a gigantic Rs 120 lakh crores (roughly) of black money is generated year-in and year-out. While the BJP came to power promising action on this, they have done little. And in this Budget, instead of seeking confiscation of this vast wealth, they offer an amnesty, knowing full well all earlier amnesty schemes have failed miserably. If the government was able to get even half this sum and tax it at an average of 25 per cent, that would rake in a gigantic revenue of Rs 15 lakh crores yearly. This would mean that the total tax revenue of the government would double—giving sufficient funds to wipe out the fiscal deficit, reduce borrowings and significantly raise expenditures on agriculture/rural development, manufac-turing, health and education—the four prime focus areas for the development of our country. This huge sum is a veritable black bomb exploding on our people, taking the lives of thousands, nay lakhs, of our people, sucking their blood.

But if one considers the total revenue lost to the super-rich and their hangers’ on every year, the figure would in addition include the earlier Rs 10 lakh crores, giving a grand total of Rs 25 lakh crores. In other words, nearly one-fifth of our entire GDP is being frittered away into individual pockets instead of being used for the country’s development.

In colonial times the British would heavily tax our people and drain that wealth for the development of England destroying the Indian economy and people, impoverishing the entire nation. The salt tax, for example, was a symbol of this loot, extracted from every individual (even the poorest must buy salt), which the freedom fighters fought against. Today, this Rs 25 lakh crores is no less than what the British extracted, but instead of going to Britain, it goes into the coffers of individuals and foreign investors. Instead of one British Empire you get numerous mini-empires of the Ambanis, Tatas, Adanis, Mallyas etc. etc. The effect is the same—the country and its people are pushed backward.

And when one needs to keep such a vast impoverished mass in control, mere religious rhetoric will not do: it needs a steel frame backing the government and controlling the people. This is the Central Government employees that got the biggest wage increase ever. The government had little money for the impoverished farmers but it gave a massive bonus to those employees who are already very well-off.

Pampering the Steel Frame

In this Budget the 35 lakh Central Government employees distributed into 56 departments (including railways but excluding defence) have been given a massive rise in both wages and allowances of Rs 65,300 crores. Of this, the allowances are much larger giving the employees the advantage of these being not taxable. Now the total wage bill for the 35 lakh families will be a massive Rs 1.8 lakh crores, a figure nearly equal to all the subsidies for 80 crores of the population. Over-and-above this sum, a large section of these employees mint fortunes through corruption. Any individual who has to deal with any of these departments knows the level of harassment and humiliation she/he has to face to get even a minor work done!

It is this steel frame together with those at the State Government levels, who act as the main bulwark not only of promoting the views of the government but also defending it in every way.

Now, before presenting an alternative economic policy let us take a brief look at the taxation system, which is heavily loaded against the poor and middle classes.

The Taxation Policy

There are two forms of tax: direct taxes and indirect taxes. The former is on individuals and companies, the latter on commodities and services. The first taxes the rich and middle classes, the second extracts the maximum from the masses.

India, with extremes of the poor and rich, should have Iarger direct taxes and lower indirect taxes. Secondly, taxes should be relatively high in a backward country to be able to fill the development gap. Here too it is just the opposite: India has one of the lowest tax-to-GDP ratios in the world—this would be quite obvious given the vast scale of the black economy.

India’s tax-to-GDP ratio is a mere 16.7 per cent, compared to China’s 19.4 per cent, the US’ 25.4 per cent, Brazil’s 34 per cent, Russia’s 35 per cent and France’s 45 per cent. Not only is the ratio the lowest, but India’s GDP too is exceedingly low—one-fifth of China’s.

Now, if we turn to direct taxes, we find that India has one of the lowest in the world here as well. The highest slab on the individual tax in India is 34.6 per cent, compared to China’s 45 per cent, the US’ 40-56 per cent, the UK’s 45 per cent. So also the corporate tax in India is 30 per cent (de facto 22 per cent), compared to China’s 25 per cent, and the US’ 35 to 47 per cent.

In the Economic Survey, even after the low budgeted figures in 2015-16, there was a gigantic shortfall of Rs 45,000 crores of direct tax collection, but a huge excess of indirect tax of Rs 55,000 crores over the Budget estimates. The Union Budget 2016-17 continues the trend of proposing to mobilise additional revenue worth Rs 20,670 crores through indirect taxes, while foregoing Rs 1060 crores in direct taxes due to reduction in corporate tax.

It has been argued that by reducing the high tax levels black income will come down. It has been proved that there is no such co-relation, in fact it has gone up as there is no end to the greed of those in the upper echelons. No real development and growth is possible with such a skewed taxation policy. And over-and-above this the huge black economy, that is not touched by tax, drives the final hail into the coffin of development.

Now let us see what could be done to work out a true development model instead of mere talk of ‘development’.

Path to a Robust Economy

First some facts that need to be considered and kept in mind while chalking out a plan.

A major factor while planning our economy is to get a clear picture of the state of the world economy and its impact on India. The second aspect to understand is the internal dynamics of the Indian economy and how this retards real growth and development.

So let us look at these two points first—from which an alternative would logically follow.

First, the global economy is in its seventh year of sluggish recovery. If we keep in mind that in the last 50 years a global recession has on an average hit every eighth year and that since last year the basic indicators are all down, one can expect a recession anytime. In fact recessionary conditions have already hit the Indian economy—drastic drop in exports; crash in commodity prices (except oil) like steel, agricultural products etc.; falling currency levels etc. Also with a relaxation in quantitative easing and a rise in interest rates in the US, dollars are fleeing the emerging markets including India. In such a scenario it would be foolish to be dependent on foreign investments and markets, but more sensible to rely on our own internal strengths.

Now if we turn to the second point, there are three aspects to observe.

First, though we are a population of 130 crores, barely 10 crores would be drawn into the market for commodities. And this figure keeps declining due to the above budgetary policies as also labour policies and expenditures on diseases. The rest of the masses’ major income would go on food, basic necessities and medicines. So, as only a small section is drawn into the economy, we find we are still a $ 2 trillion economy while China, with a similar population, is five times ours. Though both came on their own about the same time, China has reached a level of development equalling the West, but India continues to be a backward country like the ones in Africa.

Secondly, even of this population, due to stagnation of agriculture and industry, employ-ment opportunities are few, and even of the limited jobs available, the bulk are contractual giving poor incomes. As a result the major purchasing power mainly lies with the creamy layer of the population. The huge amounts of black money too lie with this section. That is why it is mainly the luxury market (and health sector) which is booming.

Thirdly, today, in the structure of the economy, a major factor in market expansion is not through wages but through wealth creation—like rise in property prices, gold prices, stock exchange etc.—and the black market economy. So, the focus becomes creating wealth through speculation and services and not through asset creation. This leaves an economy hollow, particularly a backward one.

Now let us turn to a possible solution.

A major aspect of this change would entail turning our vast population from being a liability to being an asset. By focussing on the development of agriculture and industry, incomes of farmers and labourers can rise subs-tantially and we can turn the country from being a service/speculative economy into an asset-creating economy. From being a hollow country, we can become a strong country with real development. This is particularly important at a time when the world economy is heading for a deep recession, even worse than the 2008-09 one. To continue depending on foreign invest-ments and markets, at such times, will be suicidal.

But such a change will not come on its own, it would require an entire re-orientation of the economy and budgeting. The primary step must be to divert the huge tribute to the super-rich back to our country and people. As, for 200 years of sucking our hinterland dry it would require substantial investment to put it on its feet again. This would primarily entail putting an end to the gigantic Rs 25 lakhs tribute to the super-rich and their hangers’ on, and investing that in productive assets and in healthcare and education. By productive assets one means not only manufacturing, but in soil, rivers, lakes, forests, coasts, environment etc. etc. If this was done, overnight India could turn from a backward country into a rich one.

Meanwhile the RBI has put out the latest data of industrial production for January 2016: the manufactuing sector contracted for the third successive month—by 1.5 per cent; the capital goods sector shrunk by 20.4 per cent and that of consumer non-durables by 3.1 per cent. It is time for the policy-makers to wake up to the terminal decline that our economy is heading to. Merely padding up the GDP growth figures, like the Greeks did, will not change the reality. The Greek economy crashed, there was a run on the banks. And their currency crumbled, they had to mortgage themselves to the EU.

(March 13, 2016)