Indian Express :19 March 2012
The national budget for the financial year 2012-’13 mirrors the paralysis within the United Progressive Alliance coalition and government.
It is a shocking theatre of conflict between the Indian sociology and Anglo-Saxon theories, of the contradictions between the intents of the finance minister and the contents of the budget, and of the minister’s confusion about what to do and what not to do in the light of his doubts about what the UPA government itself can and cannot.
Take first an example of the conflict between Indian sociology and Anglo-Saxon economics in the budget. Like every Union finance minister since 1991, Pranab Mukherjee has also attempted to solicit more subscribers for corporate stocks — a vital element of Anglo-Saxon financial capitalism. He has given a deduction up to Rs 50,000 for those who subscribe for stocks. The punters in stock markets who had had to pay short term capital gains tax a decade ago, were exempted and left with a small STT to bear. The corporates, FIIs, and also the government would like the households in India to move away from banks to stocks. But Indian households, like the Japanese and German households, refuse to. In Germany, less than 7 per cent of households own stocks, against 55 per cent in the United States, and 11 per cent in Japan. Most Germans and Japanese prefer bank accounts to stocks. The Anglo-Saxon economists consider that inefficient.
Indian households are similar to German and Japanese households in seeking safety first. The Economic Survey of India 2012 submitted by the Union finance minister to Parliament the day before his budget testifies to how the Indian households trust banks more, despite the rise of Sensex from 1,000 in 1990 to over 18,000 now, topping 20,000, at times. The total savings of Indian households in banks was 34 per cent of GDP in 1990. It rose to 47 per cent in 2000-’01. This further rose to 58 per cent in 2006-’07. It continues to rise and stands at present at 67 per cent, thus doubling in two decades. During this period, when the Sensex rose by 20 times, Indian households had largely kept away from stocks. The share of stocks in Indian savings was some 7 per cent in 1992 thanks to Harshad Mehta. It crashed to 1.7 per cent in 1999. It rose to 4 per cent in 2000 thanks to Ketan Parekh. It crashed again to almost 1 per cent in 2004-05. It again rose to 8 per cent thanks to the global subprime scam. Now it has again crashed to some 3 per cent. So scams, more than tax sops, seem to have enticed the households to stocks. Yet, the budget is again enticing the households to stocks.
The budget is undeniably noble in words, but equally short on numbers. The bad numbers undo the declared intents of the Union finance minister and work to the opposite of the laudable objectives declared. Here is an example. Pranab Mukherjee says that a principal objective of the budget is to ‘focus on domestic demand driven growth for recovery’. With the world in turmoil, he has rightly turned ‘swadeshi’ to look to domestic strength as the alternative. But his budget contradicts his vows in the budget speech. The result is he miserably fails to activate domestic forces. If he has to spur domestic demand, he would have cut taxes and let people have more money to spend. But here he has raised the taxes and robbed the people. He puts into consumers’ pocket a paltry sum of `4,500 crore by direct taxes cut, but picks their pockets almost by a huge amount of `46,000 crore by raising indirect taxes. Even he cannot deny that this will erode, not promote, domestic demand.
Pranab Mukherjee’s expectation of ‘lower inflation and higher savings’ in the coming year is a contradiction in terms. In theory, other things remaining the same, a rise in savings, means lower demand and lower consumption. If, however, a budget releases inflationary forces by high rise in indirect taxes, as the present budget promises to, the same goods will sell at higher prices — causing fall in both consumption and savings.
Rise in indirect taxes will cause price rise and reduce savings. And with the price rise, not just savings, but real consumption also will fall. The Economic Survey 2012 notes that inflationary tendencies during 2010-’11 caused reduction in household savings. It does not stop here. The projected gargantuan government borrowings of `4,70,000 crore for 2012-’13 will suck away liquidity and up interest rates. The minister himself has provided for a huge interest burden for the budget year. Already banks are borrowing heavily from the Reserve Bank of India. If the high interest rates now rise further, that will also bring down consumption. Allowing FIIs to invest in government and corporate bonds cannot greatly ease the liquidity. In sum, the budget promises lower, not higher, savings and consumption, the very opposite of what the minister has declared. The domestic demand theme of the minister is thus a non-starter.
Unable to contain the huge revenue deficit, Pranab Mukherjee seems to have turned to chartered accountants for ideas to make his balance sheet appear more elegant. The innovation of ‘effective revenue deficit’ in the minister’s budget speech bears the stamp of some questionable multinational accounting firm. Effective revenue deficit is to be arrived at by deducting from ‘the revenue deficit’ all grants made — not only to state governments and constitutional authorities, but also to non-governmental organisations — for creation of capital assets not owned and held by the government. This innovation is being legalised by law now. Thanks to this window-dressing, from the revenue deficit of `3,50,000 crore, the grants for capital assets of `1,65,000 crore are deducted to arrive at the effective revenue deficit of `1,85,000 crore for 2012-’13 — thus optically moderating revenue deficit of 3.5 per cent of GDP to 1.8 per cent effective revenue deficit.
Yet, the Union finance minister’s effort is not without positive elements. The bold retrospective law to tax the Hutch-Vodafone deal, the novel idea of holding company for the financial arms of government and the proposal for direct delivery of subsidies and many more. Pranab Mukherjee’s show finally ends as a comedy with his promise to bring a white paper on black money! It is now three years since the UPA-II government had promised by the president’s address to Parliament after the 2009 Lok Sabha elections that it would bring back Indian monies stashed abroad. Now, after three years, the Union finance minister says he will bring a white paper on the issue. Isn’t it a comedy?
(Views expressed in the column are the author’s own)
S Gurumurthy is a well-known commentator on political and economic issues.
