Aspects of India's Economy Nos. 36 & 37: The Real State of India's Economy

The Real State of India's Economy
VI. Who Benefits from Suppression of Public Sector Investment

Of course, these distortions were present even in 1991, but they have been vastly aggravated through the operation of the new economic policies, which have concentrated wealth in fewer hands, suppressed agricultural growth, dismantled licensing and regulation of industry, slowed industrial growth, unleashed rapid growth in 'services', slashed public sector investment, and slashed developmental expenditure by the Centre and the states.

	1990-91	2002-03
Gross fiscal deficit	9.4	10.1
Revenue deficit	4.2	6.7
Tax Revenue	15.4	14.9
Interest payments	4.4	6.5

Capital outlay as % of total expenditure	13.1	9.6
Interest payments as % of revenue receipts	23.6	34
Revenue deficit as % of gross fiscal deficit	44.6	66.7
-- RBI, Annual Report 2002-03.

The IMF and foreign speculators in the Indian stock market demand reduction in Government borrowing. The Government has thus tried to achieve its fiscal targets by slashing capital expenditure — ie, that expenditure which creates lasting productive assets. Central Plan outlay has fallen from 1.6 per cent of GDP in 1990-91 to 0.8 per cent in 2002-03; and Central assistance for state and Union territory Plans has fallen from 1.2 per cent of GDP to 0.9 per cent of GDP.

This has rebounded, since lower investment leads to lower growth, which in turn leads to less tax revenue. The RBI notes: "The overarching priority attached to reduction of expenditure to meet deficit targets has accentuated the erosion of capital outlays with serious implications for expanding the productive capacity of the economy."

At the same time, the Government has implemented the demand of the imperialist countries and their institutions, that it slash customs duties. These have now fallen from 3.6 per cent of GDP in 1990-91 to 1.8 per cent in 2002-03.

Both lower investment and slashed customs duties have resulted in tax revenues falling as a percentage of GDP. The revenue deficit, that is, the portion of Government borrowing that creates no lasting assets, but goes just to meet current expenditure, has risen from 4.2 per cent of GDP to 6.7 per cent. Two-thirds of Government borrowing goes to meet current expenditure.

Now, whereas the reduction of public sector investment is in this way itself a major reason for increased Government borrowing (since the resulting slowdown in growth leads to lower tax revenues), the pressure thereafter to reduce Government borrowing is used as an argument for a massive cut-price sale of Government assets. The Government plans by such logic to raise Rs 13,365 crore (Rs 133.65 billion) in this fashion in March 2004 alone, and another Rs 16,000 crore (Rs 160 billion) in 2004-05 — ensuring a massive bonanza to foreign institutional investors and other speculators on the Indian share markets. This is the logic of the imperialist institutions' demand for a cut in the fiscal deficit.