The Finance Minister has failed the common man

Last Updated: Mon, Feb 28, 2011 14:07 hrs
Pranab unveils budget, dismisses policy drift worries

The budget is likely to reduce the real incomes of wage earners and the self-employed, writes renowned economist Jayati Ghosh

The dramatic increase initially in all the stock markets indices, once investors had absorbed the implications of the Budget announcements, already said it all.

This is a Budget with very strong income distribution implications: very clearly favouring the upper-income categories of the population, and likely to reduce the real incomes of wage earners and the self-employed.

Let's look at the various Budget announcements from the point of view of the ordinary working person.

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What are the main issues that matter to him/her today?

First of all, the rampant inflation, particularly in the price of food items, which is eroding real incomes very sharply and making it difficult for households to make ends meet.

Second, the difficulty in finding productive employment, such that more and more people are reduced to very low paid and insecure jobs, or fragile forms of petty self-employment that provide inadequate livelihood.

Third, poor conditions of supply of some essential public services, especially in health and education, which force people to use expensive and often inadequate private providers.

Fourth, poor physical infrastructure and even worse conditions of maintenance of such infrastructure, that make normal life difficult, reduce income earning possibilities and affect conditions of human development.

On inflation, this Budget will definitely add to the cost-push pressures that have already led to rapid increases in prices in the past two years.

To control food prices, it was essential to focus on measures that will increase food supply and expand distribution, as well as to ensure that marketing margins and speculative activity do not go up by providing more resources for public distribution. But, despite much talk in the Finance Minister's Budget Speech, the amounts set aside for this are minuscule, while the other measures will actually add to inflation.

Indirect taxes have been increased, even on previously exempt items of mass consumption, which have been brought under the VAT (Value Added Tax) regime.

The Finance Minister has announced the intention to abandon subsidies on kerosene and fertiliser, in favour of cash transfers to a designated category of beneficiaries. This means first of all an increase in the market prices of these goods, with uncertain later monetary transfers for a subset of consumers only.

Possibly the biggest disappointment with respect to controlling prices relates to import duties and excise taxes on petroleum products.

Since these prices have recently been deregulated (itself a problematic move in a period of extreme global price volatility), they respond to global prices which are high and increasing because of international factors. This means that government tax revenues (which are on ad valorem rates) keep increasing as global prices increase.

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To lessen the burden on the people, it was widely expected that the government would at the very minimum reduce its own tax rates, since it is anyway getting windfall revenue gains from the high world prices. But this has not been done, and fuel prices are therefore likely to keep increasing.

Since oil is a universal intermediate that enters into all other prices, this will obviously have a further impact on inflation.

So, on controlling inflation that affects common people, this Budget is unsatisfactory.

Officials argue that the control of the fiscal deficit and the moves to fiscal consolidation will help to contain inflation - but this is a tenuous argument.

In any case, the attempt to control the fiscal deficit by restraining expenditure has other adverse effects, which relate to the second issue that matters for the ordinary citizen: the chances for gainful employment.

Cutting public spending has negative effects on other economic activities because it operates to reduce demand for them. This in turn affects both employment prospects - so here too, there is little to cheer about.

The inadequacy of public services in health and education is very well-known, but they are also strongly related to the fact that the government simply does not provide enough resources for quality service provision. Total social expenditure (on plan and non-plan accounts) is projected to increase by less than Rs 3500 crores, which amounts to a decline in real terms (relative to projected inflation) as well as a drop in terms of share of GDP compared to the current year (from 2 per cent to 1.8 per cent).

If per capita real spending is considered, the decline is especially sharp. So, here too, at least in terms of budgetary outlays, we cannot expect better social services in the coming year.

Physical infrastructure ultimately depends on the capital spending of the government - but the Budget anticipates that capital expenditure as a share of GDP will fall from the already low 1.7 per cent of GDP in the current year to only 1.2 per cent of GDP!

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This would be one of the lowest such ratios in an economy that is already lagging significantly behind other countries like China in this regard. The UPA government is obviously hoping that the private sector will meet the slack, though the evidence so far suggests that this is not likely to happen.

So why are the stock markets and foreign investors celebrating?

Because it turns out that, even though this Budget may not contain much for common people, it provides many benefits to domestic and foreign companies as well as richer groups in society.

There is the clear statement of intent to work for fiscal consolidation, which is generally welcomed by finance.

There are various reductions in direct taxes, both corporate and personal income taxes.

There are lots of tax sops to foreign investors, especially for infrastructure bonds.

There are incentives that will further fuel the current housing bubble.

There are other goodies to encourage private investors, who are seen as the only important engine of growth.

So the income distribution impacts of this Budget will definitely be adverse.

It is surprising that the central government does not seem to be conscious of how this can in turn affect society and politics.

The current turmoil in the Middle East as well as other developing regions should be sending a strong message that very unequal and apparently unjust economic policies create their own backlash. The lack of such awareness in the government is therefore bad news not just for itself, but for the entire population.

Renowned economist Jayati Ghosh is the Professor of Economics at the Jawaharlal Nehru University in New Delhi. She is also a member of the National Knowledge Commission set up by the Indian Prime Minister.

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