was expected of the new government's budget. It is after all the first
really serious policy statement of the new government, since the National
Common Minimum Programme (NCMP) is more a wish-list of proposed policies
and programmes. Also, as the Finance Minister admitted in the opening
sentences of his Budget speech, the people of Indian have clearly and
unambiguously expressed a desire for change in government - and, it
should have been added, in economic strategy.
the budget speech was filled with many references to agriculture, education,
health and employment. And some measures do indicate a commitment to
change in certain areas. For example, Mr. Chidambaram stuck by the decision
to impose a 2 per cent cess on taxes, so as to mobilise about Rs. 4,000
crore for education, and also indicated a desire to revive public sector
enterprises, both the ailing and the healthy ones, through specific
measures. The Rural Infrastructure Development Fund has been revived.
The intention to double agricultural credit in three years is not a
budgetary measure, but is still important. The tax on services has been
increased and widened.
In addition, the Finance Minister has made a special allocation of Rs.
10,000 crore in terms of budgetary support for the Central Plan, supposedly
to implement the NCMP. But this amount is really nothing compared to
the huge need for funds required to go even some way towards fulfilling
the promises already made. Nor does it indicate a very dramatic change
The actual budgetary allocations for crucial programmes such as rural
employment schemes and Antyodaya Anna Yojana are no higher than had
already been provided for in the Interim Budget of the previous government.
Most of the additional plan allocation for the CMP is likely to go towards
education. Other claims are being realised simply by aggregating existing
expenditures on a range of employment and rural development schemes
and placing them under the NCMP allocation for the Planning Commission.
Even in other schemes which are important, such as rural sanitation
and drinking water, the increases in outlay are relatively modest, in
the Rs.40-100 crore range. This is not likely to inspire much confidence
in the claim of redirecting economic policy.
Meanwhile, in a surprise move, the government has chosen to allocate
an additional Rs. 12,000 crores for defence, by increasing the defence
budget from Rs. 65,000 to Rs. 77, 000 crores over the remaining months
of the financial year. It is being argued that this represents a rollover
of unspent funds and committed order from the previous year. But still
this huge increase in allocation seems unwarranted at a time when the
security situation can hardly be described as critical and when problems
such as an agrarian crisis, rising unemployment and persisting hunger
and malnutrition are serious. It turns out that the additional allocation
for defence exceeds the total additional expenditure allocated for the
NCMP, which sends out wrong signals about the priorities of the government.
Finally, despite claims of strengthening the hands of the state government's
which must necessarily play an important role in implementing the CMP,
no major effort has been made to correct the fiscal squeeze being faced
by the states. The Finance Minister highlighted the plan to reduce interest
rates paid by the states on borrowing from the centre from 10.5 to 9
per cent. What was not mentioned was that the Centre today is still
effectively a usurious moneylender to the states. It borrows in many
cases at interest rates which vary between 4 and 6 per cent, and then
lends to the states at 10 per cent.
There was much more scope to reduce the state governments' interest
payments. Also, something urgently needs to be done about the overhang
of past debt. The Planning Commission had recommended that the non-small
savings part of state governments' debt to the centre should be written
off, but no such measure has been taken.
These inadequate moves on the development front have been accompanied
by policies that still stick with the liberalisation agenda of the previous
government. Foreign Direct Investment caps have been raised substantially
in telecom, civil aviation and insurance. Foreign Institutional Investors
have been provided a range of concessions. Banks are to be encouraged
to increase their speculative exposure to the stock market. And privatisation
is to be persisted with in the name of “piggy-backing” on new share
issues by profit-making companies like the NTPC.
The biggest disappointment is in the allocation for rural employment
schemes. One of the most important promises of the UPA government -
and a declared priority in the National Common Minimum Programme - was
the offer of employment guarantee in the rural areas. The UPA government
has even promised to promulgate legislation to guarantee 100 days of
employment in public programmes at the minimum wage, to one member of
every rural household.
It has been clear for some time now that rural employment generation
has been one of the critical casualties of the reforms. The annual growth
of all forms of rural employment (that is principal or subsidiary occupation)
was less than 0.6 per cent per annum between 1993-94 and 1999-00, compared
to 1.7 per cent per annum between 1983 and 1993-94. The daily status
unemployment rate in rural India as a whole increased from 5.63 per
cent in 1993-94 to 7.21 per cent in 1999-00, and was more than 15 per
cent in some states.
Most of this was because of the absolute decline in agricultural employment,
which had very negative impact since agriculture still accounts for
just under two-thirds of rural employment. But even non-agricultural
employment growth was slower than before.
Some of this was because of the decline in public spending on rural
employment programmes since the mid-nineties. As a percentage of GDP,
expenditure on both rural wage employment programmes and special programmes
for rural development declined from the mid-1990s. The total central
allocation for rural wage employment programmes was already only 0.4
per cent of GDP in 1995-6, but it declined further to a minuscule 0.13
percent of GDP in 2000-1. Special expenditure on rural development (the
IRDP and its later incarnation the Swarnajayanti Gram Swarojgar Yojana)
In such a context, it was only to be expected that the first Annual
Budget presented by this government would reflect this goal by substantially
increasing the allocation for rural employment programmes. Of course,
it could not be expected that from the start there would be a huge increase
in such allocation. The estimated maximal cost of such a guarantee varies
between Rs. 40,000 and Rs. 60,000, depending upon the proportion of
rural households that would opt for the scheme (likely to be between
one-third and two-fifths).
Obviously, this amount should not be budgeted unless the programme is
already in place in a substantial part of the country. But certainly
it was assumed that there would be some large increase in allocation
as a signal of the importance that the new government places on this
This is what makes the actual allocations mentioned in the Budget so
disappointing. The budget has not made any extra allocations for 2004-5,
over the amount of Rs. 6100 crores that was already announced in the
interim budget of the previous government. And this actually represents
a substantial decline compared to the Rs. 9640 crores that were spent
in the previous year.
What is worse is that this smaller amount of money is now to be redirected
to “priority” areas rather than being continued in places where they
already existed, which would have provided some continuity and stability
of expectation among rural workers. The Finance Minister in his Budget
Speech announced a new Food for Work programme in 150 districts classified
as most backward and identified as areas in immediate need of such a
programme. This programme is to be funded by cutting down allocations
under the existing rural development programmes.
This reflects the typical neo-liberal economic thinking, whereby “targeting”
actually becomes a euphemism for cutting down and reducing the aggregate
availability, which has already created so much harm in the Public Distribution
System for food and in the provision of other public services. To introduce
this in the first major economic policy statement of a government that
is supposedly committed to universal rural employment guarantee, makes
a mockery of the whole exercise.
Indeed, the current allocations will have to be substantially increased
by several multiples, if the promise made in the NCMP is to be kept
in any meaningful manner. To some extent, the unfortunate weather conditions
- the combination of floods and drought that are currently affecting
the countryside - have already made this inevitable, since public relief
works will have to be started almost immediately in many states. But
any real attempt to improve employment conditions in rural India must
accept that there has to be a very large increase in the budgetary allocations
towards this, if necessary through supplementary demands.
These do not have to be only in the form of public works, although of
course they are important. But there are many potential activities which
can have important effects on supply conditions, productivity and sustainability
of rural economic activities, in both agriculture and non-agriculture.
In addition to constructing and maintaining roads and other connectivity
(which has thus far been the most popular form of activity in such schemes)
there are other activities such as building and maintaining bundhs,
minor irrigation works, clearing out and desilting ponds and rivers,
also have very positive short run and long run effects on production
conditions and can also improve the sustainability of cultivation patterns
generally, implying important social gains.
In addition, there is a huge range of social services that must be performed,
which are now systematically underprovided across rural India. These
include activities such as those performed by workers in educational
and health institutions who provide maintenance and support, the provision
of mid-day meals in schools, sanitation services, and the like.
The point is also to ensure that financing for such activities is chiefly
the responsibility of the central government, even though it must be
implemented by state government and below them by panchayats. It is
important to make sure that the central government does not try to wriggle
out of this crucial financial promise.
In part, the government's inability to move ahead further is because
of its sticking with the irrational obsession with cutting the fiscal
deficit. The Finance Minister is proud of the fact that he has been
able to keep the fiscal deficit at 4.4 per cent of GDP as compared with
4.8 per cent in 2003-04. The fact of the matter is that a comfortable
food supply and strong foreign exchange situation provides an opportunity
to raise output and employment growth without triggering inflation,
even if this involves deficit spending.
In fact, if the government had simply stuck to the deficit projection
of 4.8 per cent of GDP in the Interim Budget (which have had no adverse
macroeconomic consequences) this would have released more than Rs. 10,000
crores. This could have been effectively used in rural employment schemes
and other necessary expenditures.
As it happens, even the current estimate of 4.4 per cent fiscal deficit
to GDP ratio depends on extremely optimistic projections of tax revenue
growth because of tax buoyancy and collection of tax arrears. If this
remains unrealised, as is likely, the actual revenue and expenditure
figures would show up a much higher deficit.
So all in all, this is a disappointing budget, despite its rhetoric.
It is disappointing particularly because this was the first major opportunity
for the new central government to tell the people that it would respect
their mandate and keep to its own promises made during and after the
elections. The challenge now will be to ensure that, despite the evident
fiscal caution, overall economic policies are still redirected in favour
of the working people of this country.