IPSG NEWSLETTER May 1997



BUDGET BACHAO!

Growth with Poverty Alleviation and Defence Spending
at the Core of India's Fiscal Policy


by Dr. Raj Mishra

In the political drama that unfolded in Delhi this April, the budgetary proposals tabled in the Indian parliament by the former Finance Minister P.Chidambaram quickly occupied centre-stage. The circumstances leading to Sitaram Kesri's withdrawal of support and the ouster of Deve Gowda are still shrouded in confusion. What is known is that the safety of the budget remained the central theme in New Delhi's confused political manipulations from the day Kesri struck through Gujral's first cabinet meeting, which had to formally adopt the budget as its own.

But what is this budget and what are its provisions that are so indispensable? From the outset, the budget received universal acclaim from the big industrial houses and opinion-makers of India as well as from the international banks (IMF and the World Bank) and western governments. There have also been some voices of complaint pleading for higher allocations in social services and changes to certain tax proposals.

Is it merely coincidence that Deve Gowda's ouster took place in the midst of the budget debate? An examination of the fiscal policy of the Indian state in the context of the requirements of Indian economy at this time throws light on the main economic and political tendencies in India.

"Growth with Poverty Alleviation"

It has been said again and again that the 1997-98 budget is good because it will foster "growth" and "alleviate poverty". It is implicit that this "growth" is supposed to come from the free play of the private sector (in the production and distribution of goods and services) while "poverty alleviation" will be the role of the government.

Presenting growth and poverty alleviation as separate entities has an important objective. The growth of the economy is supposed to be about expansion (of goods, services, and returns on investment) while poverty alleviation relates to the welfare of people - who may or may not be victims of this growth.

But the experience of the last 20 years worldwide has demonstrated that this kind of growth in the form of liberalisation and privatisation inevitably creates more poverty in its wake. One of the main aims of the current fiscal policy is to ensure that the poor (both those inherited from the past, and those who may become poor in course of the anticipated growth) should not become an obstacle to further growth.

Consequently, the government will establish mechanisms to "mitigate poverty" so that the private sector will not have to be shackled by any such considerations. This is not some unique thesis of the Indian finance ministry - it is the mantra of finance ministers around the world and especially in the developing countries where it is sanctioned and promoted by the international lending organisations and the big powers.

Infrastructure Bottleneck

This year's fiscal policy has been crafted to deal with specific problems that have arisen in the Indian economy in the recent past. During the last year, India's industrial output and exports slowed down and bottlenecks in power, transport and communications have reached critical proportions. By all estimates, it is agreed that significant investment in infrastructure is urgently needed - but infrastructure is not a very profitable sector.

Chidambaram's budget tries to create conditions for the infusion of a large quantity of capital in such a way that it will primarily benefit private investors and preserve high profitability (for domestic capitalists in particular). The budget proposes to selectively alter tariffs and taxes to facilitate the consolidation of available capital and its flow from unprofitable sectors to more profitable sectors.

It is envisaged that a large quantum of capital can be generated through the divestment of certain state-owned enterprises coupled with reduction in taxes and tariffs. In addition, the budget seeks the release of contraband "black money" through tax amnesties and concession measures and from the controlled inflow of foreign capital. The funds from divestment are meant to be balanced against the tax concessions which in turn will spur consumption as well as investment. The influx of "black money" for bona-fide investments will ease the need for capital in certain sectors. Lastly, various measures proposed for the penetration of foreign capital into infrastructure, banking and insurance will have state guarantees for minimum rates of return. Domestic capitalists are happy that they can continue to put their capital in the relatively protected consumer goods and services sectors which traditionally offer a high rate of return. The international loan-sharks are happy about the scope for their penetration into India through direct and joint investments and a guaranteed rate of return.

Uneven Development

One complicating factor in this budget is that these fiscal policies will result in an uneven rate of development in different regions of India and different sectors of the economy . This also seems to be at the root of the sharp conflicts in the ranks of different business groups, both domestic and foreign, and has possibly translated into the open political dog-fights between the different political parties propping up the United Front government.

Furthermore, the gap between agriculture and industry has been widening as the former tends to have a lower rate of return. The current budget contains proposals (subsidies) to help capitalism make further penetration into rural areas by helping the reluctant business houses and big land owners to invest their resources in agriculture. A number of incentive schemes have been proposed to streamline the provision of subsidised inputs (fertilizer, irrigation, power) including a subsidised work force in rural areas. It is anticipated that these measures will lead to the generation of extra surplus value in the agrarian sector which can be turned to investment through agricultural taxes.

Various political and economic interests around the country are clashing on these policies, some wanting more allocations and others wanting to transfer the resources to other sectors. Quite a few parties in parliament consider the money spent in the agrarian sector as a political requirement to maintain rural vote banks, while others would prefer to have the maximum resources diverted to industry and commerce. To what extent this kind of conflict has played a role in the ouster of Deve Gowda will become clear in the weeks and months ahead.

The fiscal policies in Chidambaram's budget have as their core concern the necessity for finding large amount of capital for investment so that Indian capitalists can emerge out of their present crisis, become modern and compete globally. It is not a coincidence that the chieftains of Indian industry were closely involved in the choice and installation of the Gujral government, a fact openly admitted by Gujral himself when he went to the meeting of the Confederation of Indian Industry (CII) as his first official act after his swearing-in.

Poverty Alleviation - A Growth Sector

The "poverty alleviation" schemes which include the Public Distribution System (PDS), Jawahar Rojgar Yojana and so on, have a twin significance in the formulation of the fiscal policy. On the one hand, they perpetuate the pro-poor image of the government and on the other, they enable certain private interests (such as contractors and distributors) to amass wealth through direct handouts from the state. Over the years, these schemes have kept the poor in a perpetually vulnerable condition, but even the paltry sums of money spent on them have yielded big dividends for the forces wielding power.

At a time when new arrangements have been worked out favouring the wealthiest strata of Indian society, the way in which the government has adopted a "pro-poor" label is testimony to the crucial role played by these poverty alleviation schemes. Indian history shows that this sector can neither grow nor shrink without seriously jeopardising the delicate political balance and unleashing a revolution. This kind of poverty alleviation has to remain a central tenet of India's fiscal policy as long as the "left-center" coalition politics prevail. Chidambaram's budget had done an excellent job of packaging this "poverty alleviation" sector into the budget proposal in a way that few can rival.

Growth in Defence Sector

The third element of the 1997-98 fiscal budget is the allocation for the armed forces, which has increased by about 25% compared to the 1996-97 budget. This is important because Defence is traditionally one of the most profitable sectors in any capitalist economy. In economic terms, the increased allotment of expenditures for this sector is necessary to maintain its level of profitability. Secondly, given the conditions of abject poverty and deprivation surrounding the few islands of wealth in India, any relaxation in the level of security forces at the disposal of the rulers could prove detrimental to the continued existence of these wealthy few.

Foreign threats are generally pointed to when one talks of the defence outlay, but it will be futile to discuss foreign threats without looking at the requirement of domestic interests poised to benefit from such perceptions. During the last Republic Day parade in Delhi, India staged its largest display yet of military hardware available for export. More outlays in the Defence sector will be necessary for India to emerge as a major arms merchant. The current budget proposals fulfill these requirements through the enhancement of the capital and spending allocations.

Such being the compulsions of the Indian economy and Indian business houses, it is no surprise that budget provisions could well be at the heart of the current political dogfight. Only time will reveal which of the varied economic interests will reap the benefits of the new arrangements Gujral has struck with the regional chieftains and Kesri. What is certain though is that the people of India are clearly out of this equation. No matter what unfolds in this budget drama, nothing will fall onto their laps.

While anyone genuinely fighting for increased resources for poverty alleviation must be sympathised with, it will be an error for people to be preoccupied with the fiscal provisions of this budget. Attention must necessarily be focused on the political content. It is the political power of the big business houses which enables them to allocate resources and craft fiscal policies to serve their narrow aims. It is the pursuit of these narrow aims that has made Indian capitalism run wild with assassinations, corruption scandals, and no-confidence votes. According to them, "growth" is only intended to benefit one group of people while everyone else must make do with "poverty alleviation".

And it is also not accidental that the same budget that envisages an increased need for "poverty alleviation" should also take the precaution of allocating funds to strengthen the state security apparatus. For if "poverty alleviation" should fall short of its objectives, how else will this economic and political status-quo be defended against the wrath of the people?