Budget As An Instrument Of Ideology

More on The Union Budget 2023-24

Anup K Sinha

The Union Budget is an important statement as well as a reflection of the main objectives of government policy. The government earns revenue from taxes and fees. It also has the power to borrow from non-government sources like the public, the banking sector, and even the central bank. In India the central bank is the Reserve Bank of India (RBI). Borrowing from the central bank creates new money in the economic system, while the other ways of borrowing do not. Ideological compulsions are reflected in who is taxed and by how much, and what kinds of goods are taxed and to what degree. This is where the class character of the state comes in. Are taxes imposed adequately on the rich so as to have a more equal post-tax distribution of income? Are goods that are used more by ordinary working class and middle class people left alone or taxed minimally? Similarly, on the expenditure side the priorities of the government are even more clearly evident from the pattern of spending chosen by the government. What kind of social security programmes are supported? To what extent the safety of the poor and vulnerable are addressed and improved? These are the key questions that ought to be gleaned from the budget. The rest are pure numbers, with which the corporate media usually becomes obsessed.

Any one viewing the budget presentation by finance ministers in the Indian parliament would think that the economy was extremely healthy and strong. Steady growth was the only major concern of the government of the day. This attitude is always reiterated by corporate India’s reactions to the budget. After all, whatever be one’s troubles, who would dare to oppose the government? On the other hand, the parliamentary opposition always claims that the budget is useless and anti-poor, even though they themselves may not have any concrete proposal for truly inclusive democratic development for the nation. It becomes something of an absurd drama: both reactions in the parliament as well reactions in the media and the business world. It is irrelevant which party is in government and which party is in the opposition. The scene is the same. In a way, the thrust of policies is the same too: creating a favourable ambience for large private capital to flourish with the blessings of the state.

Change and Continuity in India’s Fiscal Policy
India’s fiscal policy has evolved over the years, but since the advent of economic reforms in the early 1990s, the crux of budgets have remained the same: how to contain the deficit so as to minimise spending, without making serious efforts to generate more revenue. With the advent of the current government in New Delhi, spending for the poor and deprived has reduced discernably. The government is however very eager to put forward schemes and projects, without much substance, that help project a pro-poor stance. In short, as far as economic ideology is concerned, the Indian state’s fiscal stance has remained the same since 1991 even though political changes have taken place in terms of who runs the union government. It is in this light, the critical comments on the most important document of economic policy must be constructed. Despite so many “pro-poor schemes” announced repeatedly in budget after budget, the degree of economic inequality in the distribution of wealth and income have shot up. The nation has still to go miles in terms of affordable housing, health care, quality and universal education, environmental conservation, and last but not the least, employment opportunities.

However, within this ideological structure of facilitating capital, there is a cycle that can be noticed. Every five years when the parliamentary election approaches, there is a plethora of feel-good schemes that seem to be of concern for the welfare of the poor, is announced. This is in anticipation of votes. The corporate media takes it up in full throttle to convince viewers how sympathetic the government is towards the poor. It works to some extent in terms of its objective. This year though, as we shall see below, the government has been quite blatant about reducing its pro-poor spending. This time the NDA does not seem to care about votes.It appears they have supreme confidence about coming back to power in 2024. It is becoming clearer day by day, that this union government does not require improvements in the welfare of the poor to survive politically. The opiate of religious fervour and communal intolerance will suffice.

The one number that is most talked about in India’s budget is the fiscal deficit, which is the extent of fresh government borrowing. There are different economic views on the significance of the fiscal deficit, but most conservative economists at the IMF and the World Bank would nudge governments to keep it around 4 per cent of national income at the most. The last few years, because of the pandemic, almost every country of the world was forced to expand its fiscal deficit by spending more. India’s fiscal deficit was budgeted to be 6.4 per cent of gross domestic product (GDP) and the revised estimates have pegged it at the budgeted estimates for 2022-23. The budget estimates for fiscal deficit this year that is 2023-24, is projected to be 5.9 per cent of GDP. This number is not sacrosanct as the extent of borrowing may be justified to the extent that resources garnered by borrowing contribute to the development of the nation. Future tax revenues for higher incomes can be used to repay the government’s debt.

The revenue deficit, which is a measure of the difference between current spending and earnings was budgeted last year to be 2.6 per cent, ended the year at 2.9 per cent, and is projected to be 1.7 per cent in the coming year. The revenue deficit is where the flab of government spending lies. It also reflects some essential current spending that go into the social sector maintenance funds. It deserves close scrutiny as to which expenditures are being cut, the socially useful ones, or the largesse distributed to bureaucracy, or subsidies to large farmers, or targeted benefits for poor farmers.

The budget does reflect that it has maintained the fiscal discipline in keeping expenditures under control. However, this ‘discipline’ might be contested in the broader framework of what budgetary expenditures can do in terms of improving welfare and how borrowings can be paid back, or taxes increased on the rich and the super-rich. No budgetary number is cast in stone: it is the context and the will of the government that matters.

On spending and taxes
Ideally, the government’s budget can be used to create an ambience for inclusive growth. Consider India’s population and rank all individuals according to income, from the richest to the poorest in descending order. Take the top 20 per cent. They are very comfortable to say the least.They run the nation, they are the professionals and businessmen and the thought leaders and influencers of public opinion. They do not need government support to survive and prosper. Now take the poorest 40 per cent. They are desperately poor and deprived, and even if a few are above the poverty line their position is precarious in the sense that they can slip back into poverty at the slightest perturbation. They require government support for education, health, shelter, livelihoods, economic security and insurance. Historical data from other nations suggests that a nation must spend at least 6 per cent of its GDP continuously for a decade, on education and health-care, for poverty to be reduced by half. India has hardly ever crossed the 3 per cent mark since 1947.

There is still the middle 40 per cent left. This is a huge number, over 500 million strong. This middle India has some modicum of education and is extremely innovative, energetic and street-smart. However, their dynamic energy is restricted by the lack of physical infrastructure – an affordable and adequate access to electricity, housing, telecommunications, ports, highways and financial services. This portfolio of assets is patchy, and unevenly available. The lack of physical infrastructure diverts the energy of these people towards illegal activities like crime and smuggling, and also these people become the foot soldiers of the major political parties of India. The great lumpen-proletariat of India. That is how they make a living.

From the government’s point of view, the resource requirement could be very large. The best strategy would be to allow private capital to build infrastructure, with the state putting in some capital as a partner, and providing a clear-cut regulatory framework to guide and control investments. On the other hand, as far as the bottom 40 per cent are concerned the state has to provide the basic framework to develop fundamental capabilities like education and health. Financial resources would not be forthcoming in these sectors from private capital because the ability to pay of the bottom 40 pr cent is severely limited. Social returns are high in these sectors, but private profitability is extremely low. Hence the state has to provide the resources. Ideally, even for the state, the short term returns to capital would be low. it is best to use tax revenues (and not borrowed resources) to fund the social sector. Taxes, unlike borrowings, do not have to be returned. The affluent have to share in the building of a stable market economy by paying more taxes.

Fiscal Policy and Development
Indeed, this has been the general pattern of development finance in most economies that are now economically affluent. The capitalist state funds the building of a highly productive work force and middle class. The rest of the economy is essentially built by private capital – first the infrastructure duly guided and steered by the state. Then the market for consumer goods develops in a sustained way, and the income of the economy increases as it moves to a mature capitalist phase. In India it has been the opposite. Governments, from independence to contemporary times, have always neglected the welfare of the bottom 40 per cent and concentrated on making the top 20 per cent richer, with some resources used to create physical infrastructure. In fact India’s budgets have always displayed an aversion to raise taxes, and a hesitation to switch expenditure significantly to the social sector: an economy characterized by low taxes, high borrowing, low social sector expenditure, with big capital and a subservient bureaucracy skimming off much of the public resources for private gains.

In this light one can see that India’s tax collections have been low compared to the wealth and income enjoyed by the top 10 per cent of the population. During 1997 and 2022, the average tax revenue to GDP ratio was only 7.3 per cent. Most European countries have a tax-GDP ratio well above 40 per cent. There is a lot of space for India to augment tax revenues and keep borrowings under control. Tax revenues could be used economically best for building social capital in education and health.

As far as social sector spending is concerned, this year’s budget appears contrary to the past. Despite this being a pre-election year, the Modi government has dared to reduce spending in key areas such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNERGA). For the third time in a row this year, capital investment allocations have grown while there has been a reduction in social sector spending. Indeed, this year (2023-24) the budgetary allocation for the social sector has dipped below 20 per cent of government expenditure for the first time since 2009. The social sector not only provides employment opportunities, it also creates long-term human capabilities through education and health. Going a step further to view the picture emerging for particular heads of accounts, it appears that employment and income generation for the poor would be held back significantly, as the allocation for the Mahatma Gandhi National Rural Employment Guarantee Act scheme has been cut from a revised estimate of Rs 89400 crore for 2022-23 to a budgeted amount of Rs 60,000 for 2023-24, reflecting a massive cut. Similarly, there have cuts in food subsidies and spends for rural development benefiting poor farmers. Food grain entitlements for the poor have been reduced too. The budgetary allocations for health, education, and other social safety measures have fallen, or are about the same this year as the last.

On the other hand, capital expenditure has increased by a whopping 33 per cent in this year’s budget. Yet the fiscal deficit has been capped at 5.9 per cent. This clearly indicates that there are lots of spending cuts on the anvil when one goes through the fine print of the budget. This is supposed to be the highest ever spending on capital. The objective is to create jobs and attract more of private investments. Yet all this is happening at a time when private investment has been extremely shy of investing especially when demand has been low. Employment opportunities are scarce and those with employment have been hammered by high retail inflation rates, well higher than 6 per cent. This year the budget has assumed a 10.5 per cent nominal growth of GDP. If the inflation rate continues to hover above 6 per cent, then the real rate of growth will be only around 4.5 per cent. This is not going to be above 6 per cent as predicted by international bodies. Large capital spending has historically been associated with high inflation rates. No reason why inflation will come down this year in a significant way. The roots of high inflation are supply chain disruptions and international market uncertainties as in the crude oil market. These do not seem to be melting away in the short run.

One thing is clear about the development vision of the government: the rich have to be given continuous incentives and sops, like this year’s tax relief for the highest bracket of individual income earners. On the other hand, the plummeting allocations for the poor continue unabated. The Modi administration’s priority is to have anauthoritarian government that promotes growth without bothering too much for human development. It is a model of unaimed opulence. In the times of high inflation, job losses, and slowdown in economic growth, the poor have much to be anxious about. In a way the Modi government represents a continuity with earlier governments’ strategies: growth first, equity later. It will cause a lot of suffering; both economic and social. The new India has a great deal of similarity with the old India that was evolving since independence. There are a few key differences too: the new India is a lot less caring about human suffering, much less tolerant of differences, and much less global in terms of identity. Capitalism is here with jackboots and all.

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Vol 55, No. 37, Mar 12 - 18, 2023