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Saturday, March 17, 2012

Downward slide in the summer of our discontent ----Sitaram Yechury

An opportunity has been forsaken to strengthen our economic fundamentals while improving the lives of the people, increasing the divide between India Shining and India Suffering.

While the people were hoping for relief in the current budget, the Finance Minister was faced with the task of reversing the slowing growth rate and raging inflation. He had a choice in this budget. He, however, chose a path that is going to worsen the situation both for the economy and for the people. In the process, he also chose the wrong quotation for his speech from “immortal Shakespeare's Hamlet.”

The appropriate quote for him in this situation would have been the well-known “To be, or not to be – that is the question;/ Whether ‘tis nobler in the mind to suffer/The slings and arrows of outrageous fortune,/Or to take arms against a sea of troubles,/ And by opposing end them?”

Illusory assumptions

He chose not to end the people's growing economic burdens by continuing to embrace the neo-liberal philosophy that treats concessions to India Inc. and the rich as being incentives for growth and subsidies for the poor as a burden on the economy.

Apart from giving direct tax concessions of Rs.4,500 crore, the Finance Minister, in his speech, said: “I propose certain measures to allow corporates to access lower cost funds and to promote higher level of investments in several sectors.” This neo-liberal prescription is based on illusory assumptions: more availability of cheaper funds will lead to higher levels of investment and therefore, to higher growth rates. Missing in this logic is the vital link between higher investment and higher growth — the capacity to consume what is produced by these higher investments, i.e., the purchasing power of the people. It is precisely this link that is seriously eroded further by these budget proposals. If the purchasing power of the people does not grow, then the periodic “bubbles” created by this trajectory will continue bursting at regular intervals. The world is familiar with this continuing four-year long global recession.

However, in order to achieve the former, the budget reduces the withholding tax on interest payments on external commercial borrowings from 20 to five per cent for three years for several important sectors. The security transaction tax has been reduced. Restrictions on Venture Capital Funds have been removed, tax on Indian companies repatriating dividends from foreign subsidiaries has been halved and the cascading effect of the dividend distribution tax has been removed.

Likewise, many other measures like enhancement of investment linked deduction of capital expenditure etc. have been introduced. All this is being done with the urge to boost investor confidence and attract higher foreign financial flows. This trajectory has been adopted despite the World Bank's recent warning that the “rich countries had little monetary or fiscal ammunition available to stem any vicious circle of continuing recession”. The Finance Minister's strategy is thus bound to fail and in the process, it is the people who will have to bear further burdens.

Social sector

The Finance Minister, however, has made many bombastic claims of increasing expenditures in the social sector. Many of these sound hollow given the fact that the revised estimates show a substantial reduction in the spending of actual allocations made in last year's budget. Even flagship programmes such as the Mahatma Gandhi Rural Employment Guarantee Act has seen a huge shortfall in spending, of over Rs.9,000 crore. Similarly, the claims of raising the allocations for SC/ST Sub-Plans conceal the actual fact that they do not meet the required allocations of 16.5 and 8.2 per cent of the plan expenditure respectively. The current amounts are only seven and four per cent respectively.

Simultaneously, in an effort to contain the burgeoning fiscal deficit, indirect taxes have been hiked across the board by a whopping Rs.45,940 crore. Direct tax concessions benefit the rich while indirect taxes burden the working people. The aam admi is subjected to a double whammy as indirect taxes hikes also contribute to the inflationary spiral directly. Thus, when people were looking for some relief, they are now to be subjected to further burdens. There are also direct attacks on the livelihoods of working people. The Employees Provident Fund interest rate has been reduced from 9.5 to 8.25 per cent. For crores of employees, this fund is their only fallback economic security option.

Along with reduction in subsidies (nearly Rs.25,000 crore on fuel and Rs.6,000 crore on fertilizers) and massive disinvestment of the public sector (Rs.30,000 crore), these are all being justified in the name of fiscal consolidation. True, fiscal profligacy must be checked. But how? Look at the numbers.

The total fiscal deficit now stands at Rs.5,21,980 crore or 5.9 per cent of GDP. The budget documents show that in the same year, the total tax revenue foregone (i.e., voluntarily not collected by the government) amounts to Rs.5,29,432 crore. If these legitimate amounts were, instead, collected, then there would be no fiscal deficit at all!

Internationally, a three per cent fiscal deficit is considered healthy. This works out to over Rs.2.5 lakh crore, given our current GDP. If legitimate taxes were collected instead of doling out concessions to India Inc. and the rich, and this amount spent through public investments for building our much needed infrastructure, we could have generated huge additional employment and the consequent growth of domestic demand would have put India on the course of a sustainable healthy inclusive growth pattern.

This was the choice that the Finance Minister had. He, however, could not escape Hamlet's dilemma. Not only has an opportunity been forsaken for strengthening our economic fundamentals while improving people's lives, the exact opposite has been done, which will only increase the hiatus between the two Indias — shining and suffering. The Finance Minister said India was on the “brink of resurgence.” In reality, it is heading for a downward slide.

(Sitaram Yechury is CPI(M) Polit Bureau member and Member, Rajya Sabha.)

The Hindu

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