Aspects of India's Economy No. 38

Maintaining Continuity in the Face of Mounting Popular Discontent
The UPA Government's Economic Policies

The following article was written in September 2004. We are publishing it despite the delay in bringing out this issue of Aspects, because much of it remains relevant. — Editor.

In Aspects no.s 36 & 37, we described the real condition of the Indian people, 57 years after the formal transfer of power. Their condition was already disturbing in 1991, when the Congress rulers initiated a programme of so-called reforms under IMF-World Bank direction. Now, after 13 years of 'reform', it is desperate. The 'reforms' have depressed productive activity, multiplied all sorts of parasitic activities, and stripped vast numbers of their employment as well as the bare minimum of nutrition.

Let us leave aside the statistics, for the moment. Innumerable events bear witness to the gravity of the situation. A spate of starvation deaths has been reported over the past few months from West Bengal, Orissa, Maharashtra, and Andhra Pradesh. Hundreds of peasant suicides are taking place in Andhra Pradesh, Maharashtra, Karnataka, Punjab, and Kerala; they are starting to occur in U.P., Chhattisgarh and Gujarat. So insecure and fragile is the livelihood of peasants that politicians of all hues are able to whip them into a frenzy over the inter-state distribution of river waters. So widespread is unemployment that when advertisements appear for a few thousand jobs in the railways, hundreds of thousands travel across the country to apply, with college graduates lining up in the hope of getting jobs as railway gangmen. Wherever recruitment takes place for the army, such large and frantic crowds of job-seekers gather that the authorities routinely open fire on them, resulting in a number of deaths.

In truth, the country is in a state of economic emergency. But it is an emergency which can be ignored by the rulers as long as the vast majority of those caught in its grip are unorganised (and we include in this category even those who are in what is called the 'organised' sector of the economy, but who are not represented by organisations under their own democratic control).

A section of society no doubt has thriven during this period. In 1990-91, the production of passenger cars was about two lakh (200,000) a year; it is now reportedly a million. While that sort of growth may excite large private investors, it represents only a tiny slice of the Indian reality: according to the Census, just six per cent of urban households and two per cent of rural households own a car (indeed, two-fifths of rural households do not own even a bicycle). Just four per cent of the country has telephones. Yet the tiny section that has thriven in this period controls the major media, through which it relentlessly projects its own prosperity as if it were the prosperity of the country.

A shock to the ruling class
No doubt, the more astute members of this elite could not have believed their own propaganda that India as a whole was 'shining'. But apparently they did believe in their power to make people buy this propaganda. It was thus a shock to them, and to the foreign interests to which they are linked, that the people did not buy it. The election results of May 2004 proved wrong the media machinery, including the brood of pollsters and pundits bred by the last decade of television. The BJP, which arrogantly had made the supposedly 'shining' economic performance the centrepiece of its campaign, was in a state of disarray. Indeed even the Congress party, the supposed winner, seemed nonplussed and unprepared for being hoisted into office.

Of course the Congress was hardly in a position to trumpet its 'victory'. In the 2004 parliamentary election, its own vote-share actually declined since the previous election, and was the same as the BJP's. Where it did well it benefited from having been out of power. In the states where the Congress was in power at the time of the general elections, it received the same treatment meted out by the electorate to the BJP. So it was wiped out in Kerala and Punjab, and did poorly in Karnataka and Maharashtra. It also lost in states where it had been in power till very recently, such as Chhattisgarh, M.P., and Rajasthan. For the Congress state governments had followed economic policies identical to those of the BJP (indeed, those policies had first been introduced by the Congress). And the Telugu Desam in Andhra Pradesh and the AIADMK in Tamil Nadu eagerly embraced the same economic policies; both were treated to drubbings at the polls. Since they were alliance partners of the BJP, their performance doomed the alliance itself.

Thus the election results — whether in states ruled by the BJP and its allies, or in those ruled by the Congress — clearly reflected the widespread discontent and anger of the people with the economic policies being pursued by political parties of various hues. This anger cast its shadow over the various state governments that remained in office after their candidates for the Parliamentary election had been defeated, as well as over newly-elected state governments. They scrambled to make concessions to that anger. The Tamil Nadu, A.P., and Maharashtra state governments announced that electricity would be provided free to agriculture. The Tamil Nadu government removed the income ceiling it had placed on those entitled to get essential commodities under PDS; revoked the punishment and dismissals imposed on Government employees who had gone on strike; and extended the free bus pass scheme to all students. The new Congress government in A.P. promptly announced Rs one lakh (Rs 100,000) assistance to the families of peasant suicides; waiving of Rs 1,100 crore (Rs 11 billion) of power arrears of farmers; free treatment at government hospitals; and various schemes for scheduled castes, scheduled tribes, weaker sections, rural artisans, and so on. The Kerala government waived interest and penal interest on bank loans to peasants for one year; exempted tea and coffee growers from taxes; and regularised the appointment of 11,000 teachers. The Karnataka government announced that 7.6 million families below poverty line would get 20 kg of rice and 5 kg of wheat at Rs 3 per kg. The Maharashtra government declared Rs 1,000/hectare compensation to farmers suffering more than 50 per cent crop loss, upto a maximum of Rs 2,000; set up a fund for financial assistance to the families of peasant suicides; announced it would bear the interest on the agricultural loans of small and marginal farmers; waived 50 percent of loans pending with handloom cooperatives; waived fees for treatment received by disabled persons in Government hospitals; announced a Rs 223 crore (Rs 2.23 billion) scheme for the tribal talukas of Nandurbar district, where starvation deaths had occurred; and declared a moratorium on the servicing of peasant debt to private moneylenders.

The same shadow fell over the new government at the Centre, too. The new Prime Minister, Manmohan Singh, had been the very initiator of IMF-ordered 'structural adjustment'. His new finance minister, P. Chidambaram, had implemented during his earlier stint the most destructive measures of liberalisation, dismantling the public distribution system, slashing direct taxes and delivering a bonanza to holders of black money. Yet both gentlemen could now be heard mouthing sympathy for the rural poor, disavowing mindless privatisation, and calling for a 'human face' for the 'reforms'. In his first statement as Prime Minister-designate, Manmohan Singh pledged to "give a model of economic development to the world and our people which creates opportunities for the poor and the downtrodden to participate in economic development". In his first press conference he pointedly declared that "India must shine for the poor, it must shine for the Scheduled Castes, the Scheduled Tribes, other backward classes and the minorities. India must shine in the cities and the villages." His finance minister began his Budget speech by declaring that the election had been "a vote for change". And the media now celebrated the change in economic policies as proof that the country's electoral process gave voice to voiceless millions, the real sovereigns of the land.

However, the actual measures adopted by the new Government have nothing to do with such rhetoric. They are entirely in line with the policies of the NDA rulers who were so recently booted out by the electorate. The vote was for change; the social and political order nevertheless ensured continuity. As we shall see below, on almost all the major issues which came to the fore during the earlier regime, such as increasing investment in agriculture, generating employment, and providing a minimum of food to all, the new rulers are scarcely distinguishable from their predecessors. The entire series of developments indeed reiterate the undemocratic character of the country's 'parliamentary democracy'.

Let us look at the Budget, still the most important statement of the Government's economic policies. In the finance minister's Budget speech, "education and health", "agriculture and the rural economy", the "assault on poverty and unemployment", and so on, occupy pride of place. However, this rhetoric is cynical. In terms of expenditures, there are just two major differences from the Interim Budget presented by the preceding NDA government in February.

Pittance towards the Common Minimum Programme
First, an additional Rs 12,000 crore (Rs 120 billion) has been handed over to the Planning Commission. The Planning Commission, after completing a review of the proposals from various ministries, has allocated the amount toward the objectives of the Common Minimum Programme — employment generation, education, midday meals, health, agriculture, and so on. This is grandly referred to by the Finance Minister as "Plan reorientation". The sum actually amounts to just 2.5 per cent of budgeted total expenditure of the Centre for the year 2004-05, and just 0.4 per cent of the projected GDP for the year. Evidently, even if it gets spent (regarding which there is some doubt — see below), and spent with great wisdom, it can have only negligible impact on what we have termed above a national economic emergency in people's conditions of life and labour. Apart from this 2.5 per cent spending hike, there is virtually no change in any of the allocations made in the Interim Budget (of the previous government) for the sectors regarding which the new government's Common Minimum Programme shed so many tears — employment, agriculture, education, health, and so on.

There is no difficulty in finding ways to spend additional funds. When the Planning Commission asked the ministries of agriculture, health, education, rural development and so on to draw up estimates of their immediate requirements to be funded from the additional amount, their initial demands totalled around Rs 50,000 crore (Rs 500 billion). These had to be pruned drastically in order to fit into the small funds available; but even the pruned figure was reportedly much too high, and had to be slashed further and further. The agriculture ministry initially had demanded Rs 6,000 crore (Rs 60 billion) additional funds; this was scaled down to Rs 2,000 crore (Rs 20 billion); and finally to Rs 540 crore (Rs 5.4 billion). (Business Standard, 6/9/04)

The NDA government was removed because vast millions were in desperate straits: they were starving because they did not have the money to buy food, committing suicide because they could not service their debts, rioting for lack of jobs or for fear they would not get irrigation water. A new set of rulers attains office on the shoulders of these desperate people, throws them an additional 2.5 percent in expenditure for the entire gamut of their basic needs, and proceeds to parade this trivial sum as proof of its concern for the deprived.

Outdoing the NDA in weapons purchases
The second major change in expenditures is the sharp hike in the single most objectionable head of expenditure, namely, the military. The new figure is double the amount spent last year, and Rs 11,000 crore (Rs 110 billion) more than what the NDA government had allocated in the Interim Budget. Had the hike been spent on soldiers' wages, it would have at least boosted overall demand in the economy a little; but instead the entire hike is in capital expenditure — that is, largely the purchase of weaponry, much of which is to be imported. With this hike the capital expenditure of the military in 2004-05 goes up to Rs 33,483 crore (Rs 334.83 billion). By contrast, capital expenditure in the Central Plan (ie not including Central Assistance for state plans) is a mere Rs 26,217 crore (Rs 262.17 billion).

The comparison is stark: The UPA Government trumpets the additional Rs 120 billion toward the whole range of basic human needs as a great boon to the people; whereas it hands over an additional Rs 110 billion to foreign arms manufacturers casually, without comment, and not a single parliamentary party, the CPI and CPI(M) included, dares to raise an objection. We are told that the Rs 120 billion for basic human needs cannot be allocated to specific heads of expenditure right now; it requires a detailed review by the Planning Commission, by which time only a few months will remain of the fiscal year. This might mean that part of the sum may remain unspent. However, the Rs 110 billion for weapons requires no review, it has already been allocated; indeed the finance minister does not feel it necessary to offer any explanation for the hike.¹

Agriculture continues to be starved
On the other hand, across the entire range of allocations for agriculture, agro and rural industries, environment and forests, health, education, labour welfare, rural housing, land resources, small scale industries, drinking water, rural roads, welfare of scheduled castes and scheduled tribes, and water resources, the increases are trivial. For example, Chidambaram has announced the following three schemes that — if properly funded — could have great significance, and generate direct and indirect employment for hundreds of millions: a "massive scheme to repair, renovate and restore all the water bodies that are directly linked to agriculture"; a "nationwide water harvesting scheme"; and a Fund for the Regeneration of Traditional Industries (such industries, it should be noted, are the second biggest source of employment after agriculture). Each of these projects is awarded exactly the same trivial sum, namely, Rs 100 crore (Rs one billion).

There has been a steady decline in investment in agriculture, primarily as a result of the cutbacks in public sector investment (see Aspects no.s 36 & 37, pp 75-76). This is one of the important reasons for the stagnation in yields, indebtedness, and the wave of suicides of peasants. Moreover, Government agricultural research programmes and public sector extension services to crop agriculture and animal husbandry, however inadequate they were earlier, have by now collapsed with the budget cuts of the Centre and states during the last decade. Chidambaram's Budget has continued the starvation of the agriculture and livestock sectors.

In his Budget speech Chidambaram shifts the focus from public sector investment to farm insurance, livestock insurance, and an instruction to banks to double the flow of agricultural credit in three years. In other words, a continued reliance on the peasants themselves to carry out investment and manage risks. Such programmes obviously cannot substitute the steep decline in public sector investment in irrigation, or public sector extension services.
At any rate, the allocations for the insurance schemes are laughably small. The sum allocated for the National Agricultural Insurance Scheme, which insures yield or crop, has been slashed from last year's Rs 638 crore (Rs 6.38 billion) to Rs 350 crore (Rs 3.5 billion) in 2004-05. Chidambaram also mentions a pilot scheme insuring farm income, which was started last year in 19 districts nationwide; but he has cut the allocation for that from Rs 56 crore (Rs 56 million) to Rs 32 crore (Rs 320 million)!

Also the promise of 'doubling' agricultural credit in three years is less impressive than it seems. First, it is not an allocation, but a mere instruction to the banks, which the banks may ignore, as they have done so often in the past. Secondly, if input costs rise the real value of that 'doubling' will fall. If one goes by official figures, the flow of credit to agriculture rose more than 50 per cent during the last three years, even without the benefit of any Common Minimum Programme. And yet, as we know, these were the years when the peasant debt crisis exploded. Banks inflate figures for agricultural lending in a number of ways — for example, by treating the rolling-over of an existing loan as a fresh loan. Finally, and most importantly, a number of studies have shown that today bank/cooperative credit to agriculture covers just 15-20 per cent of the sum required for current expenses; the remainder is provided largely by usurers, traders, landlords, and so on. Long-term lending — that is, for investment — has done even worse than short-term lending, and has declined as a percentage of bank lending to agriculture.

There is a further disturbing signal of the new government's policy towards agriculture. First, in the Budget speech, and in the preceding Economic Survey, the UPA government makes clear that it agrees with the preceding NDA government that India is "self-sufficient" in wheat and paddy, and that Indian farmers should turn to other activities. "The time has come to encourage our farmers to diversify into areas such as horticulture, floriculture and oilseeds," says Chidambaram. This is false: the truth is that the production of foodgrains has stagnated in recent years, and the per capita consumption of foodgrains has dropped sharply. The Government can only claim "self-sufficiency" because people are too poor to eat their fill. "Diversifying" away from foodgrains under such conditions will only make food even less accessible to the poor, and create a market in India for multinational grain traders. (see Aspects no.s 36 & 37, pp.122, 148)

Sharp cut in rural employment funds
Most startling is the steep cut in spending on rural employment: from Rs 9640 crore (Rs 96.4 billion) in 2003-04 to a budgeted Rs 6620 crore (Rs 66.2 billion) for 2004-05. This contradicts the solemn pledge in the CMP to immediately enact a law to guarantee 100 days of rural employment to each poor household.

As we have stressed in Aspects no.s 36 & 37, there is a nationwide acute crisis of both employment and nutrition: official data indicate that there is zero growth in agricultural employment, and there are widespread reports of starvation deaths. Certain areas, including Rajasthan and Andhra Pradesh, have had inadequate rainfall, others have had ill-timed rains, and yet other areas have suffered terrible flooding. Even in regions of good rains there is large-scale rural unemployment for much of the year. Thus last year's higher allocation was itself paltry compared to the massive requirement. Indeed far from cutting the allocation, it should have been multiplied many times over.

From the expenditure and achievement of last year's rural employment programmes (Rs 96.40 billion, 764.5 million man-days of employment generated), we can see that the rough cost of such programmes is Rs 126 per man-day of employment generated. Assuming that costs per man-day remain at the same level as last year, the allocation of Rs 6,620 crore (Rs 66.2 billion) will generate just 525 million man-days. Let alone address the promises in the CMP, this is sharply lower than under even the previous Congress government in which Manmohan Singh was finance minister. In 1995-96, Centrally-funded rural employment schemes generated 1,242 million man-days. Thus, far from launching any massive rural employment programme, the UPA government is planning to generate just two-fifths of the level achieved in the mid-1990s. (See Table below)

Mandays of employment generated under Centrally-funded rural employment scheme

1995-96	1,242 mn
1998-99	792 mn
1999-2000	457 mn
2001-02	523 mn
2002-03	605 mn
2003-04	764 mn
Source: Economic Survey, various issues

What are the signals regarding employment schemes in future budgets? The official number of rural poor in 1999-2000 was 193.2 million (a gross under-estimate, as pointed out in Aspects no.s 36 & 37), which works out to roughly 34 million families. If as the CMP promises, 100 days' employment is to be provided to just one member of each of these families, a total of 3400 million man-days of employment would have to be generated. Even if we suppose that the cost per man-day can be contained at last year's level, the expenditure required would be Rs 42,840 crore (Rs 428.4 billion).

No doubt it is possible to bring down the cost by taking up more labour-intensive projects. By opting for such schemes, the cost per man-day could be brought down. The National Advisory Council which has drawn up a draft for a National Rural Employment Guarantee Act (NREGA) has estimated that the cost could be Rs 100 per man-day. Still the amount required to generate 3,400 million man-days would be Rs 34,000 crore (Rs 340 billion). The NREGA drafting committee envisions the gradual stepping-up of the coverage of the employment guarantee scheme, so that at the end of four years coverage would be nationwide and the scheme would cost around Rs 40,000 crore (Rs 400 billion).

Of all the schemes related to promises in the CMP, the rural employment scheme is the one to watch carefully. Not only have the CPI, CPI(M), NGO leaders and assorted liberal figures decided to make the NREGA their showpiece; the presence of Sonia Gandhi on the National Advisory Council is significant. The Congress, too, is aware of the heightened popular discontent at the prevailing economic policies. It needs to produce some anti-poverty scheme that it can trumpet in the next election, and it is toying with the idea of using the NREGA for this purpose. Thus there are indications that the NREGA will be passed in one form or the other, which in turn would mean sizeably larger funds for rural employment than in the present budget.

However, the proposed NREGA is already facing opposition within the Government. The head of the Planning Commission, Montek Singh Ahluwalia, has questioned the projections of funds required for the scheme by announcing that "the feasibility of embarking on such a commitment will have to be examined on the basis of ... the overall resources picture and demands of other sectors". In plain English, Ahluwalia — today the Prime Minister's mouthpiece on economic policy — says there is no money for the national employment guarantee scheme. The Finance Ministry too has stated that it is "difficult to make the kind of financial commitment that the Act entails". A number of influential business columnists have attacked the scheme, concocting wild estimates of the potential cost.

By the next budget (2005-06) the Government's actual course of action will become clear, at which point we will comment on the scheme in more detail. (In particular, while it is absolutely correct to demand funds for rural employment, we should be clear that such a scheme in the present set-up cannot bring about a rural transformation and the elimination of rural poverty, as some of the NREGA's proponents are extravagantly claiming.) The current year's allocation, at any rate, is ridiculously small.

As for urban employment, the Budget has no positive measures, but deals yet another blow to the small-scale sector, which already has its back to the wall. In the past a large number of items were reserved for production in the small-scale sector; hundreds of items have been de-reserved in the past few years, and the present Budget de-reserves another 85.

Still abiding by IMF policy
The crux of the matter is that any major boost to public sector investment in agriculture or even the restoration of welfare expenditures to pre-1991 levels would require large additional funds, many multiples of the Rs 12,000 crore (Rs 120 billion) with which the Government has washed its hands of the commitments in the Common Minimum Programme. Within the present economic set-up, such funds may be raised by one of the following methods: increased taxation (which in turn may be direct or indirect, ie largely from the rich and middle classes, or largely from the poor); diversion of funds from some other head or heads of expenditure; or a higher fiscal deficit (ie, borrowing).

The fact is, the Budget contains virtually no provision for increased direct taxation. Meagre funds (Rs 5,000 crore, or Rs 50 billion) are to be raised for education through a two per cent cess on direct and indirect taxes (this means if one is paying an income tax of 10,000, one will now have to pay an additional Rs 200, which will go to education). As we shall see below, the taxation of gains in the share market (essentially speculative gains) has been drastically reduced. As for indirect taxes, the finance minister has promised to bring customs duties down even further, to the levels of ASEAN countries (thus continuing a policy which helps to replace domestic industrial and agricultural activity with imports). All this ensures that taxes are not going to yield massive additional funds for either investment or welfare.

Secondly, as mentioned above, the most important head of expenditure that is entirely parasitic and could have been slashed without any harmful consequences, namely, the military budget, has instead been hiked steeply. There is also an 18 per cent hike in spending on police (but the provision for improving conditions of prisoners in jails has been cut to half last year's budgeted level).

Finally, the finance minister has disavowed the third option for raising resources — that is, borrowing — by deciding to embrace the NDA government's reactionary Fiscal Responsibility and Budget Management (FRBM) Act , 2003. The FRBM requires that the Government reduce its fiscal deficit (ie, its borrowing) by 0.3 per cent of GDP every year, and its revenue deficit by 0.5 percent of GDP. Thus the Government has budgeted for a reduction in fiscal deficit from 4.8 per cent of the GDP in 2003-04 to 4.4 per cent in 2004-05. This has placed a straitjacket on total expenditure, which has been kept at almost the same level as last year; as a proportion of GDP it is projected to fall. India is not currently in any IMF structural adjustment programme, yet the UPA government behaves as if it is in one: such is the coercive political hold of imperialism over the Indian State.

In other words, the UPA's Budget has made it amply clear that no funds will be forthcoming for any major programme of investment or welfare. In which case the policies cannot be significantly different from those of the NDA.

Worse may be in store: even such revenues as the Budget expects to raise may not come through. Although the Government has not hiked the tax rates, revenue from corporate taxes is budgeted to shoot up 40 percent; from income tax, 27 percent; and from excise 18 percent. If corporate tax revenues were to grow instead by only 21 per cent (their average growth rate for the previous decade), there would be a shortfall of over Rs 12,200 crore (Rs 122 billion); if they were to grow by 30 per cent, the shortfall would still be over Rs 6,500 crore (Rs 65 billion).

The Government has also budgeted very optimistically for the recovery of all Rs 18,000 crores (Rs 180 billion) of undisputed arrears of income and excise taxes. Here too, going by past record, there is plenty of scope for large shortfalls.

Evidently, it is likely that the Budget's revenue targets will not be met. In that case the first cuts will be made in the Rs 12,000 crore dedicated to the CMP objectives.

Inadequate funds for education
No doubt the allocation for elementary education has been raised considerably, from Rs 5,455 crore (Rs 54.55 billion) last year to Rs 9,237 crore (Rs 92.37 billion) in 2004-05. However, this is still measly compared to the requirement. In 1999, the Tapas Majumdar Committee calculated that it would require an additional Rs 13,700 crore (Rs 137 billion) a year for the next 10 years merely to bring all out-of-school children to the formal school system — let alone the large sums required to develop and improve the formal school system itself. The allocation for secondary and higher education is only 10 per cent higher than last year's expenditure.

Washing its hands of responsibility for important sectors
Instead of making expenditures in certain critical areas, the Budget touts loans and insurance schemes for those affected. Let us look at what this implies in the areas of higher education and health.

Higher education has been in dire straits for some time now as a result of the cutbacks in Government expenditure. Most parts of the country have witnessed sharp fee-hikes and cutbacks in facilities provided to students. Private colleges are proliferating in fields such as medicine and engineering catering to those who can afford to shell out lakhs of rupees. In line with this trend, the Budget does not revive funds for higher education, but merely relaxes the conditions for loans for higher education. While this should warm the hearts and pockets of private entrepreneurs in the field of education, it is meaningless for the poor, who are hardly going to contract large debts for education when they have difficulty meeting their current expenditures.

The state of public health is appalling. To take just one example: according to a study by the Centre for Health and Allied Themes, only two out of five primary health centres have the critical staff, and the vast majority lack paediatricians, obstetric care drugs, and delivery services. Unsurprisingly, India's maternal mortality ratio actually rose during the 1990s. The main reason for this state of affairs is straightforward: the public sector incurs less than a-fifth of all expenditure on health. The poor are thrown to the wolves of the private sector, or receive no treatment at all. Forty per cent of those entering hospitals are driven into debt to pay their fees. State governments, squeezed by the giant interest payments they must make to the Centre, have slashed their health expenditures from seven per cent of total expenditures to just 5.5 per cent during the 1990s. Yet the Union Budget has allocated the Department of Health just five per cent more this year than it spent last year — not enough to keep up with inflation. The finance minister mentions that "Access to medical care is not easily available to the poor", but what does he propose? Only an increase in the coverage of subsidised health insurance. To obtain this even the poor, after getting themselves certified as poor, would still have to shell out some premiums. At any rate the details of the scheme are irrelevant: Chidambaram hopes to increase the coverage to one million families — perhaps a half percentage point of the population.

The underlying approach in each of these cases is that the State is unwilling to carry out the necessary investments, but searches for token 'market-based' schemes aimed at a small proportion of the affected population. We saw the same in regard to agriculture above.

Continuing the policy of semi-starvation
As we saw in Aspects no.s 36 & 37, three-fourths of the population gets below the medically recommended daily minimum of calories, and almost half the population shows visible signs of malnutrition. The reason for this is that they lack purchasing power and, in many cases, access to foodgrains (since many ration shops have been closed down during the past decade). So it is vital that the public distribution system (PDS), which has been systematically undermined during the last decade and particularly since Chidambaram's last stint as finance minister in 1997, be revived. That requires the following: (i) universal access to the PDS (removing the division the Government has erected between those deemed "Below Poverty Line" and "Above Poverty Line", which serves only to drive out millions of poor people from the rationing system); (ii) increased allocations and reduction of prices to levels at which the poor can afford to buy grains; and (iii) employment-generating programmes that ensure that those who at present cannot afford even the reduced prices get wages (with which they can buy grain) or get paid in grain.

The urgency of these measures is underlined by the starvation deaths taking place in many parts of the country. For example, according to a study by the family welfare and tribal welfare ministries, 1,020 children in five tribal districts of Maharashtra died of malnutrition in April-May 2004; and 9,000 children in the state's tribal districts died between April 2003 and June 2004. (Indeed, a Government-commissioned study conducted by Drs Abhay and Rani Bang claims that there is massive under-reporting of child mortality in Maharashtra: the study puts the annual figure for deaths of children from all causes at 227,000.) It is likely that systematic studies in several other states would reveal a similarly grave situation.

However, there is no measure in the Budget to remedy this situation. Instead, the allocation for the food subsidy is kept at last year's level. The NDA government introduced the Antyodaya Anna Yojana, which is meant to provide only the "poorest of the poor" with foodgrains at Rs 2/kg. The coverage of this dwarf scheme has been slightly increased, from 15 million families to 20 million families. In fact, the NDA's Interim Budget of February 2004 had already taken this step. At any rate, the additional coverage is so meagre that it is of little importance.

In place of reviving the PDS by making rations cheaper and extending the reach of ration shops, the Budget speaks of introducing a "food stamp" scheme. This is a clear signal of dangerous intent. Under such a scheme, the poor would be given food stamps which they could use to buy food at any store. Obviously, in its full form, this scheme would make the network of ration shops unnecessary. The logical next step would be the winding up of public procurement of foodgrains. The leading expert on India's PDS points out that "In all countries in which food stamps have been introduced, there has been a sharp fall in the number of recipients of food subsidy". Stores are free not to participate in the scheme, and hence many consumers may not be able to make use of the stamps. Moreover, as prices rise the value of the stamps does not, further reducing the actual amount of food received — in Sri Lanka, for example, the real value of subsidy per capita fell by two-thirds. (Madhura Swaminathan, "Targeted food stamps", Hindu, 3/8/04)

Reassuring foreign capital
Thus the UPA government has restrained budgetary expenditure in the face of an economy starved of investment and demand. It has slashed rural employment schemes and frozen food subsidy in the face of mass unemployment and malnutrition. It has refused to hike direct tax rates and actually reduced import duties. In all these ways the UPA government has sent out a clear positive signal to international capital, which was anxious in the days immediately after the fall of the NDA government lest the electoral verdict have any impact. The UPA's message is that international capital need not worry: The policies of the last 13 years, which have caused such hardship that the electorate has voted out each of the three governments that implemented these policies (the Congress, the United Front, and the National Democratic Alliance), will continue.

But the UPA has sent even more direct signals to foreign capital: by declaring it will open up insurance, telecom and civil aviation even further to foreign investment; by pandering to foreign speculative capital; and by pressing ahead with privatisation in the face of widespread popular resentment against it.

What is the justification for the Government's decision to increase the limits on levels of foreign investment in the insurance, telecom and civil aviation sectors (from 26 per cent to 49 per cent in insurance, from 49 per cent to 74 per cent in telecom, and from 26 per cent to 49 per cent in civil aviation)? Chidambaram's claim is that "There is an urgent need for infusing huge amounts of capital in these sectors", and that foreign investment will "add a competitive edge". First, it is particularly laughable today to cite the scarcity of capital as a reason for inviting foreign investment. Indian public sector banks have been flush with funds for several years, and have been unable to find industries that want to borrow for investment. The deputy governor of the RBI pointed out recently that the RBI had absorbed Rs 100,000 crore (Rs one trillion) of idle resources from the banks. Instead the banks have been using the funds for speculation in the capital markets, or have been lending to well-heeled consumers to buy houses or cars.

Moreover, the earlier decision to open these sectors to foreign investment has yielded none of the promised benefits. Proponents of the opening of the insurance sector claimed that the new private sector firms, most of them joint ventures with foreign giants, would greatly increase the number of people taking insurance, and thus multiply the funds from premium payments (officials even claimed that funds "would go up by at least six to eight times" within five years — Times of India, 28/11/98). These giant funds could then be invested in long-term infrastructure projects, giving a boost to the entire economy. In this way the entry of foreign firms in insurance would lead to rapid economic progress.

Nothing of the sort has happened. The entry of foreign firms has not increased the pool of financial savings available for long-term infrastructural investment. Total insurance premiums (life and general) in 2002-03 were about Rs 26,000 crore (Rs 260 billion), of which about Rs 2,300 crore (Rs 23 billion) was raised by private sector firms. Foreign joint ventures are not mobilising the promised billions of dollars of premium, but are merely skimming off the cream of the customers that earlier went to public sector insurance firms. In life insurance, for example, the average premium paid per policy in the public sector is Rs 4,000, whereas in the private sector it is over Rs 10,000. In general insurance, private firms have grabbed a share of the profit-making sectors of fire and engineering, while more of the public sector firms' business is in the loss-making motor and health insurance sectors. As the cream of their clients migrate to the private sector, the public sector firms will then find it that much harder to reach out to rural areas, weaker sections, and other under-insured sectors. Note that when the finance minister introduces schemes like senior citizens' pension, universal health insurance, or agricultural insurance, it is only the public sector firms that are compelled to implement them.

In telecom, foreign firms and private Indian firms have brought in no new technology that was unavailable to the Indian public sector. Nor has there been any shortage of funds in the telecom sector to fund its own expansion. However, in the past decade private firms have focussed on the profitable urban areas and have shown that they are completely uninterested in serving the rural areas, resulting in the slowing down of the spread of network there.² Allowing private investment in telecom indeed has merely reduced the revenues of the public sector firms, which in the past were used to cross-subsidise the spread of telephone services to rural areas. More foreign investment would continue along the same lines, with two added negative points: first, foreign firms would remit a large part of their profits abroad; and secondly, they would provide one more platform for countries such as the U.S. to eavesdrop on communications in this country.

Broadly the same picture is true for civil aviation. Again, there is no new technology that foreign firms will be introducing in this sector. They will merely grab a bigger share of the profits in a profitable activity, and remit these profits out of the country.

Gains for speculative capital
Speculative capital's political hold over the country was never more visible than during the last few months. FIIs poured an unprecedented $10.9 billion into the Indian share market during 2003-04 ($ four billion of that in October-December 2003 alone). This was not because of the performance of the Indian economy, but because they saw the scope to make speculative profits here in the given conditions of the world economy. The turnover of the share market (ie the total buying and selling) rose by 265 percent. The prices of heavily traded shares nearly doubled: the average of Bombay Stock Exchange Sensitive Index (Sensex) of share prices rose from 3037 in April 2003 to 5954 in January 2004. However, for reasons again unconnected to the Indian economy, this trend cooled in April 2004, and May 2004 saw the exit of $457 million of FII funds. The average of the BSE Sensex fell to 5205 in May. Several other Asian share markets saw similar falls. Nevertheless the media interpreted the drop in the Indian share market as a reaction to the election results.

The stock market boom had no benefit for the economy as a whole, since hectic trading merely redistributes wealth among the players in the market. If the boom had led to companies issuing fresh shares, and thereby funding fresh industrial investment, that would have been a benefit; but that did not happen, and there was only a handful of such issues, raising a negligible sum.

In brief, the prosperity of the share market was neither the outcome of a booming real economy, nor did it benefit the real economy. And the 'success' of the giant disinvestments carried out by the Government via the share market was merely the looting of public assets. Hence the concern which the powerful print and electronic media whip up for the 'health of the stock markets' is merely their concern for the prosperity of speculators, domestic and foreign.

On May 17, on the eve of the formation of a Congress-led government with the support of the CPI and CPI(M), the Bombay Stock Exchange plummeted 564 points, its sharpest loss ever. Trading had to be stopped twice during the day, so steep were the falls. It appears that while there were other factors at work in the cooling of the share market in May, the dramatic collapse on May 17 was engineered by market manipulators.

Such is the political dominance of the speculators that, in his very first statement upon being invited by the President to form a government, Manmohan Singh rushed to soothe the share market. His government, he assured speculators, "recognised the importance of a healthy capital market and there was no reason for anyone to panic". Hardly had the new government been formed than the finance minister flew down to Mumbai to meet speculators. He promised them that many initiatives would be taken in the Budget to boost the share market. "He said we should expect a few 'sexy' things in the Budget", said one broker. (Business Standard, 4/6/04)

Indeed, the Budget fulfils the finance minister's promise. Banks have been allowed greater scope to fund trading in share markets. FIIs were earlier not allowed to invest more than $one billion in debt funds; that ceiling has been raised to $1.75 billion. Most importantly, the tax on long-term capital gains in share trading has been scrapped altogether, and that on short-term capital gains has been reduced to 10 per cent. This is a stunning tax give-away. Wages above Rs one lakh are taxed at the rate of 20 and 30 per cent; but speculative income is taxed at a much lower rate!³

The media and various political parties did not mention this grand largesse. Instead the media focused on Chidambaram's proposal for a new securities turnover tax (STT), which was portrayed as a death-blow to the share market. The STT was a small tax to be levied on the buying of shares, at the rate of 0.15 per cent of the value of the shares. Thus a person who bought shares for, say, Rs 100,000, would have to pay Rs 150 as transaction tax. Evidently, for a person who bought shares in order to hold on to them, in anticipation of dividends or long-term capital gains, this would be a negligible amount. However, a certain class of speculators buy and sell continuously without taking delivery of the shares. Typically, if a speculator anticipates that the price of a share will rise, he buys it at the present price; but before he has obtained delivery of the share itself, the price has risen, and he sells it again at the higher price. The difference between his buying and selling prices is his profit. Similarly, if he anticipates the price of a share will fall, he sells it even if he does not own any shares of that company. When the price falls, he buys the share; the difference between his selling price and his buying price is his profit. Innumerable trades of this type take place every day among brokers. Obviously, some actual deliveries have to take place to square up the positions of different brokers at the end of the day, but deliveries make up the lesser part — perhaps 30 per cent — of the total trades.

Now, if each such trade were taxed, those engaging in hectic speculation would pay the overwhelming bulk of the tax. Of course, the rate proposed by Chidambaram was so low that it would not curb speculation, but merely earn a little money for the Government. However, an orchestrated uproar against the tax began immediately among share traders and the media, and within two weeks Chidambaram drastically revised his proposal. The tax would now be paid at 0.15 percent only on actual physical deliveries, and would be shared by the buyer and seller. In the case of trades where delivery was not carried out, the rate of tax would be one-tenth of that, ie 0.015 percent. The revenue loss on account of this change is put variously at between Rs 4,000 and Rs 6,000 crore (Rs 40 and 60 billion).

The share market and the media greeted this with hurrahs. And in the entire drama, the giveaway on capital gains tax was effectively covered up.

Opposition to privatisation
Almost nowhere in the world has privatisation been popular. The question for governments carrying out privatisation has always been how to overcome both worker resistance and popular resentment. World Bank studies routinely discuss such resistance and opposition as important hurdles to successfully implementing privatisation. In India, not one political party has attempted to campaign in favour of privatisation during elections, not even the BJP, which was selling its claim of 'India shining'. The defeat of the NDA government, which advanced privatisation further than any other regime, merely confirmed what politicians already knew. (A large survey conducted by the Centre for the Study of Developing Societies in June 2004 confirms the acceleration of public opinion against privatisation since 1996. — Hindu, 13/6/04)

So it was not merely the opposition of the CPI and CPI(M), but the strength of public resentment, that prevented the Congress from openly espousing privatisation upon assuming office. In the last few years privatisation has begun to touch people's lives even more directly than before. Private firms have entered not only electricity generation but even distribution, and consumers have been feeling the pinch. The attempt to privatise NALCO has sparked statewide opposition in Orissa. Private higher education has become a highly profitable activity for all sorts of racketeers, giving birth to widespread resentment among students. The privatisation of water resources has started — a French firm has been awarded the project of treating the water of the Ganga for supply to South and East Delhi colonies. An attempt to privatise a river in Chhattisgarh faced an agitation by local organisations. Private firms, in some cases foreign ones, are being granted mining leases on public land, even forest land, leading to clashes with the local people. Public sector extension services to agriculture have disappeared; instead corporate firms are setting up advisory-cum-sales centres to promote their products in certain pockets of commercial agriculture.

Corporate sector's huge stake in privatisation
Even as the privatisation programme is unpopular, it is of enormous importance to the foreign and domestic corporate sector. For privatisation yields large gains to the corporate sector even in a recession-ridden economy, as long as public sector assets are sold to them at very low prices. Such prices would be much below the replacement value of such assets or the price that would be justified by the revenues they could generate. They are a virtually risk-free bonanza: indeed, the buyer of one of Air-India's Centaur hotels re-sold it almost immediately, at a fat profit. Corrupt, 'crony' deals are a necessary part of the process.

This has been true for every disinvestment carried out in India, beginning with the very first round in 1991-92, which was celebrated as a great success at the time. In that year, the reserve prices (the prices below which bids in the auction were not to be entertained) were set very low, far below what would be justified by the value of these companies' assets. The Comptroller and Auditor General found that a handful of buyers were able to manipulate the auction to buy at prices much lower than even the reserve price, resulting in a loss of Rs 3,442 crore (Rs 34.42 billion). This is indeed how privatisation has been carried out worldwide, and in India. Thus the Committee on Disinvestment of Shares in Public Sector Enterprises headed by the then-RBI governor C. Rangarajan admitted in 1993, "There has been virtually universal criticism of underpricing of shares wherever disinvestment has taken place." Nevertheless the Committee recommended massive disinvestment.

The list of disinvested firms is a roster of the most profitable public sector units, including the stars of the petroleum sector. In a few cases, such as IPCL — a very profitable company which had won international awards for its technical standards and efficiency —, the Government deliberately mismanaged the company to bring down the profits for some years in order to justify the sell-off. The proceeds of the sales were used merely to meet a part of the Government's fiscal deficit. While these proceeds slightly reduced the need for Government borrowing, the amount saved by the Government in interest payments was much smaller than the amount it lost in revenues from the firms it disinvested. (Study by Soham Baksi, 1998, cited in C.P. Chandrashekhar and Jayati Ghosh, The Market that Failed, p. 96)

Foreign investors had been looking forward to a bonanza with the return of the NDA to power (which itself was seen as a near-certainty). It is easy to see why. Between 1991 and 2003, over 12 years, around Rs 28,000 crore (Rs 280 billion) had been raised through disinvestment; whereas in 2003-04 alone, the figure was 14,500 crore (Rs 145 billion), which was higher than even the budgeted figure. Almost all of this was raised in the last quarter of the year, at very depressed prices set by the Government. (None other than the minister for disinvestment, Arun Shourie, declared that he knew a cartel of investors was driving down the prices of public sector units in preparation for the disinvestment; but he steadfastly refused to divulge the names of the members of this cartel.) A large share of these issues was snapped up by foreign institutional investors (FIIs), and the powerful foreign investor Warren Buffett is reported to have used various fronts to acquire a major stake in the share issue of the Oil and Natural Gas Corporation (ONGC). The ONGC issue alone raised Rs 10,542 crore (Rs 105.42 billion), making it the biggest offering ever on the Indian capital market.

Common Minimum Programme of privatisation
The wording of the passages in the Common Minimum Programme dealing with the public sector is tricky. What follows is an attempt at deciphering its real meaning.

1. "The UPA government is committed to a strong and effective public sector.... But for this, there is need for selectivity and a strategic focus" That is: Some companies falling outside that "strategic focus" will be sold off or closed down.

2. "Generally, profit-making companies will not be privatised" (emphasis added). That is: Some profit-making companies will be privatised.

3. "All privatisation will be considered on a transparent and consultative case-by-case basis." That is: All those who object will be allowed to have their say before privatisation takes place regardless of their objections.

4. "The UPA will retain existing 'navaratna' companies in the public sector, while these companies raise resources from the capital market." That is: Those profit-making firms which are not to be sold outright in the present phase will issue fresh shares on the share market in the name of 'raising resources'. Since these shares will be bought by private investors, the percentage shares held by the Government in those firms will come down — ie, there will be backdoor privatisation.

5. "While every effort will be made to modernise and restructure sick public sector companies and revive sick industry, chronically loss-making companies will either be sold-off or closed after workers have got their legitimate dues and compensation." That is: Some PSUs will simply be closed down and their workers will be thrown out of work.

1) It has maintained continuity with the previous NDA government in several crucial respects. For example, the NDA government's sale of the Centaur Hotel to Tulip Hotels was riddled with improprieties, and the Comptroller and Auditor General had concluded that the Government had suffered a loss of Rs 146 crore (Rs 1.46 billion) on the deal. The new finance minister admitted in Parliament that there were several questionable aspects to the deal. Yet he failed to appoint an inquiry into it or into any other privatisation carried out by the previous government.

2) There is ample evidence that Sterlite, the new owners of Balco, violated the agreement made at the time the Government sold them 51 per cent of the shares for Rs 550 crore (Rs 5.5 billion). For example, hundreds of workers were harassed, transferred punitively, and forced to accept 'voluntary' retirement payments. Upon receiving these complaints, the Vajpayee government had appointed a fact-finding committee to go into these complaints and present a report to it. The committee's report has not yet been received. Yet the UPA government intends to sell another 44 per cent of the shares to Sterlite, overruling the demand of Balco workers that the committee's report first be submitted and made public.

3) The Government has concluded a licence agreement with a joint venture between the Norwegian firm Maersk and the Container Corporation for setting up a third terminal at the Jawaharlal Nehru Port (at Nhava Sheva, just outside Mumbai). This is in the face of opposition from not only workers but shipping agents' firms. The latter point out that Maersk, being a shipping firm as well as the owner of the terminal, would acquire monopoly powers. (Before the election, Sharad Pawar convened a press conference to attack the proposed deal. Now a minister in the UPA government, he is silent on the issue.)

4) Manmohan Singh early on declared that public sector firms would be given the "freedom" to raise money from the market by issuing shares — an underhand way of carrying out privatisation. Indeed, National Thermal Power Corporation (NTPC) is to issue fresh shares equivalent to 5.25 per cent of the existing shares, and the Government is to sell an equivalent amount of its holding in NTPC. NTPC's profits were a giant Rs 5,261 crore (Rs 52.61 billion) in 2003-04, and it paid a dividend of Rs 1,082 crore (Rs 10.82 billion) to the Government — its 10th consecutive year of dividend payment. The Government has accounted in its 2004-05 Budget for Rs 4,000 crore (Rs 40 billion) of revenues from disinvestment. Subsequently the Government plans a similar share issue of Power Finance Corporation (PFC).

5) The heavy industries and public enterprises ministry has asked for permission to close seven public sector companies. The Government is soon to constitute a Board for Reconstruction of Public Sector Enterprises which would advise on the course to be taken in the case of each firm — disinvestment, outright sale or closure.

6) Most important of all is the impending outright privatisation of Mumbai and Delhi airports. Since one of the requirements is that the bidders have experience in running airports, it is certain that a foreign firm will be part of the consortium that wins the bid. The foreign investor can hold up to 49 per cent of the equity; a minimum of 25 per cent is to be held by the Indian partner; and the Airports Authority of India (AAI) will hold the remaining 26 per cent. While the CMP had assured that "Generally, profit-making companies will not be privatised", the AAI does not fit the bill. It had a net profit of Rs 448 crore (Rs 4.48 billion, or around $100 million) last year. Such profits have attracted a rush of bidders. Among the foreign firms in the running are Singapore Changi airport, Methven Corporation, Hochtief airport, Macquairie Bank-Aeroports de Paris, Fraport AG, Airports Company South Africa, Malaysia Airport, and Flughafen Munchen. Mumbai and Delhi airports accounted for some 70 per cent of the AAI's profits; with Chennai, the three account for 80 per cent. Thus the development of the entire network of airports in the country depends on them. Only nine of the country's 70 operational airports are profit-making. Once the main profit-earning airports are privatised, the remainder will deteriorate for lack of funds.

The excuse for privatising the airports is that private parties will inject the large funds (Rs 4000 crore) needed for modernisation them. This is not credible. The AAI has over the years set aside from its profits Rs 2,300 crore (Rs 23 billion) as reserves and surplus. The remaining sum could be borrowed from the banks; given AAI's large profits, there would be no difficulty in servicing the loan. In fact the private firms which are bidding for the privatisations would also be likely to borrow from Indian banks.

It is clear from the above account that, while by and large people tried to express their anger against the economic policies through their votes in the last general election, and thus gave the Indian ruling classes and their imperialist patrons an unpleasant shock, the country's ruling classes and their political institutions managed to adapt to this situation. The parties earlier in office at the Centre, and in some of the states, were removed from office; the new faces in power promised a "human face" to the economic policies; but in fact the same policies continued, with merely cosmetic changes. All those struggling for genuine change need to be rid of any illusions about the character of the present rulers.

1. The full figure of the defence budget, including pensions and ministry spending, is Rs 89,136 crore (Rs 891.36 billion). To this we can add Rs 6,359 crore (Rs 63.59 billion) of other military expenditures hidden in the budget of the home ministry (Border Security Force, Indo-Tibetan Border Police, Assam Rifles, Special Service Bureau, Civil Defence, Home Guards, Indo-Bangla Border Works, Indo-Pak Border Works) and the ministry of road transport (Border Roads Development Board). After the Agni missile tests and the 1998 nuclear tests, the Departments of Space and Atomic Energy are officially acknowledged to be working for the military. We can conservatively take half their combined budgets as actually military expenditure; this comes to Rs 3600 crore (Rs 36 billion). Adding all these sums gives us a figure of Rs 99,095 crore (nearly Rs one lakh crore, or Rs one trillion) — ie, over three per cent of the projected GDP for 2004-05, and over Rs 4,500 per family of five.] (back)

2. The public sector BSNL has installed almost all of the 12.2 million rural phones, whereas private firms have abandoned the task altogether, with certain private firms actually removing some of the existing Village Public Telephones. While an estimated $ five billion has been invested in India's telecom sector during the last decade, this investment has gone almost exclusively to serving the already connected — largely in mobile services for those who already have land lines. Thus it is estimated that just four percent of the country is 'connected'. Regional inequality is stark: Almost half of the telecom circles in India — relatively backward regions — have telecom densities that are just half the national average. — Business Standard, 30/8/04 and 20/7/04. (back)

3. Of course, many FIIs operating in India are already free of tax, as they are registered as Mauritian companies. India and Mauritius have concluded a treaty whereby a company from one country will not be taxed in the other country, on the argument that this would be 'double taxation', ie the company would be paying taxes in both countries. However, Mauritius does not have any capital gains tax. Indeed, the Indian government created the treaty specially for the benefit of foreign investors in India. Thus many FIIs operating in India, while actually headquartered in the US or other imperialist countries, have set up operations on paper in Mauritius, and thus pay no tax on capital gains at all. (Similarly, foreign direct investment in India from Mauritius is tax-free. This explains why Mauritius is by far the largest investing country in India — between January 1991 and March 2004, it accounted for $ eight billion, more than double of the next largest, the US.) The cost to the Indian treasury is in tens of billions of rupees. This massive fraud has been repeatedly exposed, but the specially created loophole through which it operates has been upheld by the Supreme Court of India.

So glaring is the Mauritian racket that the Government has been under pressure for years to wind it up. The Common Minimum Programme mentions that "Misuse of double taxation agreements will be stopped." The Government has taken no explicit step to end such misuse to date; however, assuming it plans to take some step in that direction, it has first reduced the taxation on capital gains so drastically that even if it applies to the 'Mauritian' FIIs, the revenues from the tax may not be much. (back)


No. 38, December 2004