No.s 39 & 40, June 2005

No.s 39 & 40
(June 2005):

Examining the Current Boom

Budget 2005-06:
I. Social Services Spending Increases on a Low Base

The new government was widely expected to allocate more to social services. The Common Minimum Programme of the UPA released in May 2004 set a five-year target of raising public expenditure on health to three per cent of GDP, and on education to six per cent of GDP. The situation of health expenditure is particularly appalling – combined state and Central expenditure is in fact just 1 per cent of GDP (not 1.5 per cent as officially claimed), and this ratio has shown a slight fall over the 'reform' period. Nearly one in ten children born in India dies before the age of five. The cause of the bulk of deaths is malnutrition and common infectious diseases that do not require state-of-the-art medicines. Not only has reduction in the infant mortality ratio slowed down during the period of 'reform', but the maternal mortality ratio has actually increased. While the World Bank has been pushing privatisation of the health sector under deceptive titles such as “promoting private-public partnership” (see, for example, World Bank, Country Strategy for India, September 2004), in fact India’s public sector is already far too small, accounting for less than one-sixth of spending on health in the country.

Spending by the Centre and states on education accounts for just three per cent of GDP (this, too, shows a slight fall over the `reform’ period). Let us look at elementary education, since the Government is washing its hands of responsibility for all secondary and higher education. Even official documents admit that about one-fifth of school-age children do not go to school; and less than half of those who do complete Class VIII. The Gross Enrolment Ratio for upper primary education (Standards VI-VIII), which grew steadily from 1951 to 1991, appears to have actually fallen since then.1 Moreover, the official claim that India has achieved 65 per cent literacy is dubious, since recent surveys indicate that even many of those in school are unable to read and write. (For example, 10 per cent of government school students in Maharashtra between Class II and Class VII are unable to read, write or do arithmetic2 , and 25 per cent of schoolchildren in a nationwide sample could not write a sentence at the age of 14.3) One can expect little more from poorly equipped schools and teachers: Just a quarter of schools all-India have the required textbooks, workbooks, teachers’ handbooks and teachers’ aids.4 Such is the condition of a country which boasts that it is now a “knowledge economy”.

The Union Budget for 2005-06 has been talked of as a major step towards the fulfilment of all the promises of the Common Minimum Programme. Indeed there are significant increases in some sectors. However, even the increased allocations are paltry compared to the requirement. Quite apart from which, as we shall discuss later, it is meaningless to talk of a Budget fulfilling social sector requirements if it does not also promote productive activity in the economy; for the health and well-being of people crucially depends on the latter.

Table 1: Union Budget Social Services (Rs bn)

  BE 05 RE 05 BE 06

Incr over
RE 05

Ministry of Health & Family Welfare        
   Dept of Health
   Traditional Medical Systems
   Dept of Family Welfare
Ministry of Human Resource Devt
   Elementary Educn & Literacy
   Secondary & Higher Education
   Women & Child Devt
Min of Labour & Employment
Ministry of Rural Development
   Dept of Rural Devt (incl rural emplymt schemes)
   Foodgrains component of Food for Work
   Dept of Land Resources
   Dept of Drinking Water Supply
Min of Social Justice & Empowerment
Ministry of Tribal Affairs
Ministry of Urban Empl & Poverty Alleviation
Total as % of GDP

BE 05 = Budget Estimates for 2004-05
RE 05 = Revised (ie, year-end) Estimates for 2004-05
BE 06 = Budget Estimates for 2005-06
Incr over RE 05 = Increase of Budget Estimates 2005-06 over Revised Estimates 2005

From the above it would appear there has been a substantial increase in social services expenditure in the 2005-06 Budget, by 38.6 per cent over the Revised (ie, year-end) Estimates for the preceding year. Most of the heads, with a few significant exceptions, will see increases of 20-50 per cent. The largest increases are for rural employment (see the heads for Department of Rural Development, and the allocation of foodgrains for Food for Work) and elementary education.

These figures need to be seen in perspective. The increases seem so large as percentages of the previous year’s spending because the Centre’s expenditure on social services has been abysmally low in the first place. (The bulk of the spending on social services, meagre as it is, is carried out by the state governments.) So any increase on such a low base looks impressive – till one compares it with the requirement. In 2004-05 social services expenditure accounted for just 10.2 per cent of the Centre’s expenditure5; in 2005-06 that share is budgeted to rise to 13.2 per cent, still a small fraction. In 2004-05 the total social services expenditure of the Centre was just 1.57 per cent of GDP, that is, Rs 1.57 of every Rs 100 of value generated in the economy. The addition in 2005-06 is only 0.37 percentage points, that is, 37 paise of every Rs 100. The Common Minimum Programme of the UPA government talks of increasing outlays on just education and health by 4.5 per cent of GDP over five years; but the above table shows that in 2005-06 the Centre’s education budget will increase its share of GDP by just 0.2 per cent; and its health budget by just 0.06 per cent.

Could it be argued that the Centre is not expecting the increased expenditure to come from its Budget, but from the states’? No such growth in state governments’ spending is on the cards, for two reasons: (i) During the period of 'liberalisation', state government expenditures on health and family welfare fell from 0.85 per cent of GDP in 1990-91 to 0.77 per cent in 2002-03; on education, from 2.78 per cent to 2.66 per cent. This happened partly as a result of the squeeze on state finances created by the liberalisation policies. (ii) As we shall see later, this Union Budget has introduced a dangerous new feature that will cripple states’ finances in the coming years and prevent them from carrying out any such increases.

A few significant heads have seen only trivial increases in the 2005-06 Budget: allocations for welfare of Scheduled Castes, Scheduled Tribes, and the handicapped (under the Ministry of Social Justice and Empowerment); specifically for public health (under the Ministry of Health and Family Welfare; this includes major disease control programmes for malaria, kala-azar, filaria, tuberculosis, trachoma and blindness, and AIDS); and secondary and higher education (under the Ministry of Human Resource Development).

The last is part of a stated policy. For years, the Economic Surveys have made clear that various governments believe that secondary and higher education are not to be subsidised by the State; they must fund themselves through higher fees, or better yet, be left to the private sector. This effectively bars all except the well-off from going beyond primary education. Consequently, even were it possible for the so-called “knowledge economy” of Information Technology to absorb the vast numbers of unemployed, the latter would not have the education required for the job.

With a broader perspective of truly national development, it is evident that subsidies to higher education are necessary, along with checks on the emigration of those availing of it. Is it conceivable that a country can develop independently without ensuring its supply of engineers, doctors, scientists, mathematicians, technicians, and social scientists? Of course, if the pattern of development is distorted, dependent, and catering to a small elite, as at present, then even the present small stream of qualified personnel can be excessive, and even after the best qualified emigrate not all the remainder find jobs.

Rural employment – seemingly impressive increase falls far short of promise
Looking specifically at the provision for rural employment, we find it has risen from Rs 86.10 billion in 2004-05 (Revised Estimates) to Rs 146 billion in 2005-06 (Budget Estimates). The latter figure includes an apparently interest-free loan of Rs 56 billion of foodgrains from the Food Corporation of India, up from Rs 22.02 billion in 2004-05.6

Table 2: Central Rural Employment Schemes (Rs bn)

  2004-05 RE 2005-06 BE
Sampoorna Gramin Rozgar Yojana
National Food for Work (NFFW) Programme
Foodgrains component of NFFW*
As % of GDP

* The Budget speech states that the overall NFFW expenditure was Rs 40.20 billion; the Expenditure Budget vol. II lists a figure of Rs 18.18 billion for the NFFW, presumably the cash component.

While the increase in the allocation for rural employment is thus nearly 70 per cent, as a percentage of GDP the increase is merely 0.14 percentage points. Moreover, one should keep in mind the fact that the budget for rural employment last year fell in 2004-05 by 10.7 per cent from the earlier year, 2003-04.

Indeed, the budgets for rural employment since the late 1990s have been much lower than the level reached in 1995-96. Thus in 1995-96 the total employment generated under Centrally-funded rural employment schemes was 1,242 million man-days. In 2005-06, even if we assume generously that the cost of generated one man-day of work is the same as in 2003-04, the seemingly impressive allocation of Rs 146 billion will yield just 1,159 million man-days of work. That amounts to 100 days of employment for just 11.59 million persons. Assuming employment is to be provided to just one member per family, this would take care of just one-third of those rural families officially designated as “poor”. (As we shall see below, it is possible that the cost per man-day may be lowered – by lowering wages, thus making a mockery of the purpose of the scheme.)

Of course, the need for rural employment is much greater than this. Given that three-fourths of the rural population are consuming less than the medically recommended minimum of calories, it is clear that the poor are not the minority but the great majority in the rural areas. The total population in the working age group (15-59 years of age) in the rural areas is around 435 million.

This pattern – of seemingly impressive expansion that falls far short of the requirement – can be seen also in the proposed National Employment Guarantee Act. The Common Minimum Programme had promised that the UPA government would “immediately enact a National Employment Guarantee Act. This would provide a legal guarantee for at least 100 days of employment, to begin with, on asset-creating public works programmes every year at minimum wages for at least one able-bodied person in every rural, urban poor and lower middle class household.” Let us ignore for the moment two serious and unjustifiable restrictions embedded in the above promise: that only one member of each family would be eligible, and that she/he would get only 100 days’ work per year. These are based on the untenable assumption that the provision of productive employment by the State is some sort of charity, and a waste of public resources, which must be restricted. (Whereas, properly designed and implemented on a large enough scale, such employment is not merely “relief”, but can be a stimulus to the economy in a number of positive ways – by creating demand for wage goods, in turn triggering investment and employment in industries producing wage goods; by creating productive rural assets such as irrigation and land improvements, thus improving agricultural productivity; by improving people’s nutrition and thus their physical and mental standard; and by improving the bargaining capacity of agricultural labour.)

In fact, the proposed Act violates various elements of this promise. Apart from the fact that it has not been brought about “immediately”, but is still to be enacted one year later, and that it covers only the rural areas, other major features of the bill7 are even more serious violations:

1. Not the “poor and lower middle class” (as stated in the CMP), but only the “poor”, are to get work under the scheme. That is, the scheme will not be open to all who apply. Presumably the beneficiaries will have to be identified as being Below the Poverty Line (BPL), as was done by each state government to determine eligibility for subsidised rations. In that instance, each state used various arbitrary criteria of its own invention, resulting in only a small minority being eligible. The offtake of foodgrains from the Public Distribution System fell by 36 per cent between 1998-99 and 2000-01. A similar eviction of the “non-poor” will whittle down the employment scheme drastically. Moreover, the official concept of the poverty line is absurd, as it considers vast numbers who cannot even meet their daily nutritional requirements as “not poor”.

Learned economists are busy churning out articles warning against hordes of the “non-poor” getting employment under the scheme. The image conjured up is of the rural rich lining up for digging and shoveling at Rs 60 a day. If they do so, they are not rich or even “middle class”, but, by any sensible definition of poverty, poor. Perhaps all such economists should be made to avail of the benefits of employment under the NEGS; the experience of labour might improve the quality of their economic thought.

2. The scheme is only to be implemented in such districts as are notified, and no date is fixed for its extension to the whole of the country, which will only be “after evaluating the implementation of the Act in the districts chosen”. The implementation may be withdrawn from a particular district at any time.

Indeed, one analysis of the Act warns: “The Act as it stands today will convert a bulk of the universally accessible rural employment schemes into targeted ones...”8 This trend is visible in the current Budget, which reduces the expenditure on the existing non-targeted Sampoorna Gramin Rozgar Yojana (SGRY), and increases the amount for the targeted National Food for Work (NFFW) scheme. Eventually the SGRY is to be shut down, and only the NFFW is to remain.

3. The wages paid will not necessarily be the minimum wage (such as that fixed by state governments for agricultural labour), but a wage to be fixed by the Centre. Indeed the World Bank has long demanded that in any such rural employment scheme (as, for example, the Employment Guarantee Scheme in Maharashtra) wages must be below the market rates. The Bank’s logic is that State action must on no count prevent market forces from driving down wages to the level at which employers decide to hire (see Aspects no.s 36 & 37, pp. 87-116, for an exposure of this argument). In other words, the Bank is opposed to one of the potential benefits of a serious employment programme – that it can increase the bargaining power of agricultural labour. Given the huge reserve of unemployed in the rural areas, who are driven to accept employment even if the wage does not meet their minimum needs, the World Bank logic would ensure they remain exploited.

Further, one should note that even a wage of Rs 60 (a rough average of state minimum wages for agricultural labour) would yield only Rs 6,000 in additional income per year for each family benefited by the scheme – or Rs 3.28 per day for each member of a five-member family. If the wage is to be even lower than Rs 60, the benefit will be even more paltry.

4. Various further clauses provide for whittling down the beneficiaries: the works permissible for the NEGS are narrowly defined; a “household” (only one member of which would receive employment) is so broadly defined that it may include several nuclear families; and part of the financial burden for the scheme has been placed on state governments, which, already facing a fiscal crisis of the Centre’s making, may not bring the scheme into operation.

At any rate, while demanding a full-fledged NEGS, it is worth emphasising that in the absence of a strong movement of the poor peasantry, even a full-fledged NEGS would in practice be little different from the three-decade-old Maharashtra EGS. While in theory the Maharashtra government guarantees rural employment without restriction to all those who demand it, there is little scope for the unorganised and socially oppressed poor and landless peasantry to voice a demand for employment works, let alone compel their implementation. The Maharashtra government parades this silence as proof of the limited demand for such employment. Thus in Maharashtra, a state with declining agricultural production and appalling levels of poverty, malnutrition and unemployment, only a fraction of the fund collected for the EGS is actually used for rural employment, and the remaining amount is instead systematically and illegally diverted by the state government to other heads.

The benefit of a full-fledged NEGS on paper would be the opportunity for those organising the poor and landless peasantry to demand its implementation in their areas. The draft NEG Act, on the other hand, would not provide even that limited opportunity.


1. From an average of 63.7 per cent in the three years ending 1992-93 the Gross Enrolment Ratio fell to 59.9 per cent in the three years ending 2002-03. –Economic Survey 2004-05. (back)

2. Maharashtra government survey, The Hindu, 25/4/05. (back)

3. Survey carried out by the NGO Pratham for the Planning Commission, Indian Express, 14/9/04. (back)

4. Survey by the National Council of Educational Research and Training, Asian Age, 23/2/05. (back)

5. The 2004-05 figure has been adjusted in order to make it comparable with the 2005-06 figure. (back)

6. The information about the loan from the FCI is not stated in the Budget documents; we have calculated these figures from references in the Budget speech. However, after we wrote the above passage, it was reported in Business Standard (19/5/05) that the ministry of rural development owes the FCI Rs 173.96 billion for foodgrains over the last two years. The FCI has had to bear the interest payment of Rs 13.46 billion on these foodgrains – which amounts to a deduction from the food subsidy. The rural development ministry for its part has pleaded that it cannot clear its bills for paucity of funds. (back)

7. See Smita Gupta, “Promises to keep”, Frontline, 31/12/04. (back)

8. Gupta, “Promises to keep”. (back)


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