Union Power
EDITORIAL
The Union Budget for 2012-13 signals three issues of significance about the UPA government’s understanding of the economy and its capacity for economic management. Firstly, that the government has lost control over public finances and its ability to shape the way the economy evolves. Secondly, even as growth decelerates rapidly, the government fails to come up with a credible economic revival plan. And finally, despite the rhetoric of inclusion, government has reaffirmed its commitment to neo-liberalism by according to global and domestic private capital the central role as drivers’ of investment and therefore of growth.
An economic situation with high inflation, a declining rate of growth as a result of a slowdown in investment and a rising trade deficit, unless reversed, would necessarily lead to a fall in jobs and wages contributing to a fall in consumption and output leading to a further widening of income inequalities along with a lower rate of growth. What the government is unwilling to face up to is how bankrupt its growth model is.
There is little doubt that the RBI’s anti-inflation policy has been a failure. High interest rates that have raised the cost of capital are at least partially responsible for the investment slowdown but have been much less effective in tempering consumption growth. This implies that despite high inflation of wage and essential goods, consumption did not decline but has continued, out of sheer necessity or even distress further implying the fact that the present phase of inflation has disproportionately impacted the working class.
In 2011-12 the budget deficit has shot up to 5.9% of GDP from 4.9%. Despite the government’s claim that this is due to a rise in public expenditure, the primary cause for the growing budgetary deficit is the inability of government to raise sufficient tax revenue. In fact by the government’s own admission it has failed to collect personal income and corporate taxes to the extent of Rs. 32,000 crores in 2011-12 as compared to the budget estimates made in February 2011. Year on year the UPA government has handed out tax reliefs and concessions wherein the revenue forgone has come to be nearly 75 paise of every rupee collected in taxes and as a proportion of GDP, the revenue forgone exceeds the budget deficit. Further, the present budget has created tax imbalances that favour the rich and place an excessively large and increasing burden on the working class. The UPA government has passed on substantial personal income tax breaks to those in the upper income bracket. These tax breaks have come along with an across the board 2% increase in the service tax and extention of service taxes to just about every sphere of economic activity. Significantly, all healthcare services in the private sector are covered by Service Tax. With 75% of health services nationwide in the private sector, this places a clear and direct additional cost on working class. With a commitment to ‘fiscal prudence’, government promises to cut the subsidy bill to less than 2% of GDP. The reduction of subsidies on fuel, prices of food and other essential commodities will push inflation up further. Despite claims of increase in money wages and inflation being triggered by wage inflation, the RBI admits that this wage increase is limited to a salaried section that has now been further appeased by the income tax break.
The budget seeks to directly attack working class earnings through the reduction in the allocation for the Mahatma Gandhi National Rural Employment Scheme from Rs. 40,000 crores in 2011-12 to Rs. 33,000 crores for 2012-13. By reducing the allocation government has signaled that it is not the government’s task to foster job creation. Further, the allocation for National Rural Livelihood Mission signals that promotion of self-employment for the desperately poor is the government’s answer for an inclusive growth strategy.
Government expenditure on health and education, if deflated for inflation, has remained virtually frozen. There are no additional provisions for workers’ social security. For a government that expresses commitment to building a ‘knowledge economy’ the core nutrition programmes of ICDS and the mid-day meal remain under funded. The budgetary support for the current, and woefully inadequate, National Food Security Bill before parliament is also underfunded. Hence, the ‘knowledge economy’ is for the few, while hunger, malnutrition and ill-health must be the case for the many.
The real meddling of course is in the government’s efforts to prime the stock market. The lowering of the Securitises Transaction Tax is unwarranted. And the additional personal income tax-break up to Rs. 50,000 in the stock market investment is bait to middle-income households to indulge in speculation, and supplant volatile foreign portfolio investment. This attempt to draw small investors into the stock market comes at a time when only household savings appear to be sustaining while rates of growth of both private corporate and government savings are declining rapidly is insidious.
The Finance Minister places paramount emphasis on economic revival through “domestic demand driven growth recovery”. Cutbacks in income support and social security expenditure, increases in indirect taxes and subsidy-fed private investment cannot boost effective demand and will contribute to declining job creation and therefore impose an additional downward pressure on wages. Persistent inflation will continue to squeeze the share of wages and further erode real wages. We are left today with a tired government promoting a growth model in ruin and politically cornered, choosing the easy way out of squeezing the middle and working class in the name of fiscal caution.
Continue reading at March 2012