No. 53, May 2013

No. 53
(May 2013):

The Two Aims of the Budget

The FIIs: Difficult to Please

Why Do Credit Rating Agencies Press India to Reduce Government Spending?

The 'Fiscal Deficit' Bogeyman and His Uses

Large Corporate Firms on Investment Strike, Playing with Cash

Will Cutting the Fiscal Deficit Bring Down Inflation?

What Is Missing in the Present Discussion

The ‘Fiscal Deficit’ Bogeyman and His Uses

Till about 1990, hardly anyone in India mentioned the ‘fiscal deficit’. The term is not even to be found in the Economic Survey 1989-90; it makes its first appearance in the Economic Survey 1990-91, under the shadow of the impending IMF structural adjustment programme. The budget deficit – i.e., printing of money by the central bank to meet Government spending needs – used to be discussed in the past, but with the introduction of IMF-led structural adjustment programme in 1991, budget deficits were prohibited: The Government now had to borrow from the market to meet its needs.

Since 1991, the term ‘fiscal deficit’ has become tiresomely familiar to the consumers of news; every news channel and newspaper presents lurid charts telling us of the disaster that awaits us if we do not bring down the ‘fiscal deficit’. Parliament even passed a law in 2003 requiring the reduction of the fiscal deficit to 3 per cent of GDP by 2008; while this reduction had to be rescheduled because of the 2008 crisis, the Government has now set about reaching the targets with renewed vigour.

However, people at large are confused about what the fiscal deficit really is, and even more so about what to think of it. The lack of clarity among the public about the nature, causes and consequences of the fiscal deficit has allowed the dominant interests in society to propagate all sorts of nonsense about it. Their real agenda is to squeeze even further the small share of the social product to which the working people have access, as well as to hand over to foreign and domestic large corporate firms valuable national assets. Let us look at what happened over the previous year, and what lies in store, in this regard.

What happened in 2012-13
The Budget for 2012-13 had projected the ratio of fiscal deficit to the Gross Domestic Product (GDP) at 5.1 per cent. However, during the course of the year it became evident that this target would be difficult to meet. The Government hurriedly set up a committee to chalk out a “fiscal consolidation roadmap”. The committee recommended harsh measures (for the masses), and warned that if its recommendations were not accepted, the fiscal deficit would rise to 6.1 per cent of GDP in the current year. Other analysts projected that the ratio would rise to 5.8 per cent of GDP, and doubted the ability of the Government to bring it anywhere near the budgeted figure.

However, the new Finance Minister, Chidambaram, proceeded to slash expenditure savagely mid-year, and was proud to announce in his Budget that he had managed to keep it at 5.2 per cent. Next year’s fiscal deficit target of 4.8 per cent, he assured the media, would be adhered to at any cost: “I have drawn these red lines, I will not cross them. I did not cross the red line in the current year; I shall not cross the red line for the next year. It will be kept at 4.8 per cent or below.” [1]

To understand why the fiscal deficit/GDP ratio was rising in the first half of the year before Chidambaram brought it down through extreme measures, it is useful to keep in mind what determines this ratio.

What determines the fiscal deficit
First, let us recall what the fiscal deficit is: It is simply another word for Government borrowings of various types. Government borrowings are the difference between the Government’s expenditures and its receipts of all types (including tax revenues, non-tax revenues such as interest receipts or sale of spectrum, and capital receipts, such as disinvestment receipts and return of loans).[2]

Expenditures = Receipts + Fiscal Deficit

Fiscal Deficit/GDP = (Expenditures – Receipts)/GDP

Receipts = Tax Revenues + Non-tax Revenues + Non-debt Capital Receipts

So an increase in the fiscal deficit could be the result of either higher expenditures, or lower receipts. Lower receipts in turn could be because of lower economic activity, or because the Government lowered taxes, for example by providing tax concessions to special classes of tax payers; or because it earned less from non-tax revenues or non-debt capital receipts than it expected.

Secondly, to mention the obvious, a ratio can change either due to a change in the numerator or the denominator. So an increase in the fiscal deficit/GDP ratio could also arise from a shortfall in the GDP, not only an increase in expenditure.

More importantly, the shortfall in GDP, i.e., economic activity, itself may lead to a shortfall in receipts (via the reduced revenues of taxes on economic activity). When receipts go down in this way, the fiscal deficit rises; thus a GDP slowdown itself causes a rise in the fiscal deficit. Further: A reduction in Government expenditure can lead to a reduction in economic activity, that is, a lower GDP. So, if GDP growth slows, and the Government attempts to control the consequently rising fiscal deficit/GDP ratio by cutting expenditure blindly, it may result in bringing GDP growth done even further. Then, to meet the fiscal deficit/GDP target it would be necessary to make even more savage expenditure cuts.

The FIIs, the IMF and the Government try to scare the public with stories of the perilous size of the fiscal deficit, and ascribe it to runaway expenditure on fuel and food subsidies, implying that the salvation of the nation lies in slashing expenditure blindly. From the above simple arithmetic, however, we can see that, even if we unquestioningly accept that the fiscal deficit is something to worry about, the real reasons for the fiscal deficit may be quite different: They may lie in the rate of GDP growth, and in Government taxation policy.

Shortfall in receipts in 2012-13
The Budget papers reveal that the industrial slump was the main immediate culprit.

First, largely because of the industrial slump, the nominal GDP fell short of the projected figure by 1.3 per cent. Secondly, for the same reason, there was a large shortfall in tax and non-tax revenues. Excise duty fell short by about Rs 22,000 crore, customs duty by about the same figure, and corporation income tax by about Rs 14,000 crore. Thus, despite personal income tax and service tax overshooting the targets, the shortfall in tax revenues for the Centre was about Rs 29,000 crore.

Non-tax revenues fell short by about Rs 35,000 crore. This too was largely caused by the slump in growth and the reluctance of the corporate sector to expand capacity: The main shortfall in non-tax revenues was of income from the sale of 2G spectrum for mobile services. Since corporate firms had turned pessimistic about their prospects of profit, they bid far less for the spectrum this time than they had bid for the 3G spectrum in 2010-11; this more than accounted for the shortfall in non-tax revenues. Thus tax and non-tax revenues, taken together, fell short by about 0.6 per cent of GDP.

Rise in non-Plan expenditure, and reasons
At the same time, non-Plan expenditure rose by Rs 32,000 crore, because petroleum ‘subsidies’ overshot the target by Rs 53,000 crore. This was not surprising, since the 2012-13 Budget had unrealistically budgeted for a sharp drop in petroleum ‘subsidies’, whereas oil prices remained high during the year. Despite only a marginal increase in the volume of oil imports in April-December 2012 (over the corresponding period of 2011), oil imports were roughly 30 per cent more expensive in rupee terms.[3] Moreover, domestic oil producers get paid at prices linked to the international market price. Thus it was inevitable that the petroleum subsidy would rise sharply, rather than falling. Had it not risen, the retail prices of petroleum products would have had to be raised even more steeply than they were, and that would have got passed on in the form of general price rise – as is happening now, and will worsen in coming days. (Alternatively, the Centre and state governments could indeed have cut their heavy taxes on petroleum products, which would have sufficed not only to eliminate the so-called ‘subsidy’, but even to bring down prices. But they are not ready to give up this huge source of revenues, extracted from the people at large, because they are not willing to tax the wealthy instead.) That is, the increase in non-Plan spending did not arise from any bout of ‘populist’ give-aways, but merely shielded the economy somewhat from the effect of rising international oil prices. (That shield is now being removed, with the decision in January 2013 to raise diesel prices every month by 40-50 paise per litre till the ‘subsidy’ is eliminated. We are already seeing the effects in the form of general price rise.)

However, other non-Plan expenditure was cut, thus partly offsetting the rise in subsidies. The Finance Minister was able to make savings of some Rs 30,000 crore by cutting military expenditure and capital outlay on the various security forces, security guards, etc. This reduction in purely anti-people expenditure was perhaps the only redeeming feature of the expenditure cuts, but one suspects it was a purely temporary phenomenon, to be compensated for in coming years as the ‘global power’ and ‘national security’ juggernauts hurtle on.

In the net, non-plan expenditure rose by about Rs 31,000 crore, or about 0.3 per cent of GDP. In brief, tax and non-tax revenues fell short of Budget 2012-13 estimates by about 0.6 per cent of GDP, while non-Plan expenditures overshot by about 0.3 per cent of GDP. From this it is evident that the principal problem was not excessive expenditure, but inadequate revenue, and that the main cause of this shortfall of revenue was the slowdown in the economy as a whole.

How Chidambaram brought down the fiscal deficit
How did Chidambaram manage to bring the fiscal deficit close to the Budget figure despite the above deviation from the Budget projections, amounting to nearly 1 per cent of GDP? He merely slashed the most important and developmental part of the Budget, namely Plan expenditure, by Rs 92,000 crore, or 0.9 per cent of GDP. This amounted to a 17.6 per cent cut from the Budget figures. So steep was the reduction that, despite non-Plan expenditure overshooting the budgeted figure by 3.3 per cent, total expenditure (i.e., Plan + non-Plan) was actually 4 per cent lower than budgeted!

Table 1: Reduction in Plan Expenditures between Budget 2012-13 and Year-end Figures

As can be seen from Table 1, Plan expenditure was slashed 17.6 per cent. Spending on agriculture was cut by 9.5 per cent; rural development by 12.7 per cent; irrigation and flood control by 66.4 per cent; energy by 43.1 per cent; industry and minerals by 29.3 per cent, within which spending on village and small industries was cut by 36 per cent; roads and bridges 44.6 per cent; and science, technology and environment by 27 per cent; social services by 14 per cent; and Central assistance for state and Union Territory Plans by 13.8 per cent. Within social services, general education was cut by 8.1 per cent; medical and public health by 15.2 per cent; welfare of Scheduled Castes, Scheduled Tribes, Other Backward Classes and Minorities by 15.9 per cent; social security and welfare by 12.6 per cent; and social spending on Northeastern areas by 20.3 per cent.

The main burden of developmental expenditure, however, is not borne by the Centre, but by the states. States are mainly responsible for spending on social services (health, education, welfare, water supply and sanitation), agriculture, irrigation, and power. During 2012-13, the states were short-changed in two ways. First, the shortfall in tax revenues meant that the states’ share of Central tax revenues fell by Rs 10,000 crore. But even further, the Centre slashed the non-Plan grants by Rs 6,000 crore (9.8 per cent) and, as mentioned above, Central assistance to state plans by Rs 18,000 crore (13.8 per cent). Thus states lost in all Rs 34,000 crore from what was promised in the Budget.

Expanding social deficits
It should be noted that in many of these sectors there are vast social deficits.

India’s nutritional deficits are notorious: It has the highest level of child undernutrition in the world. “Almost half of children under five years of age (48 percent) are stunted and 43 percent are underweight. The proportion of children who are severely undernourished is also notable: 24 percent are severely stunted and 16 percent are severely underweight. Wasting is quite a serious problem in India, affecting 20 percent of children under five years of age…. Almost 7 in 10 children age 6-59 months are anaemic”, says the National Family Health Survey 2005-06. “More than one-third (36 percent) of women age 15-49 in India have a Body Mass Index below 18.5 indicating chronic nutritional deficiency…. Nationally, 34 percent of men age 15-49 have a BMI below18.5, and more than half of these men are moderately to severely undernourished…. Anaemia is a major health problem for adults as well as children, affecting 55 percent of women and 24 percent of men.” [4] The Government is taking steps to tackle this problem – by discontinuing the National Family Health Survey. [5]

India’s public health expenditure in 2011-12 was just 1.29 per cent of GDP, compared to the 2-3 per cent pledged in the Common Minimum Programme of 2004. The Economic Survey 2012-13 points out that “India’s expenditure on health as a per cent of GDP is very low compared to many other emerging and developed countries. Unlike most countries, in India private-sector expenditure on health as a percentage of GDP is higher than public expenditure and was more than double in 2010. Despite this the total expenditure on health as a percentage of GDP is much lower than in many other developed and emerging countries and the lowest among BRICS (Brazil, Russia, India, China and South Africa) countries”.[6]

According to the UN Human Development Report 2011, 53.7 per cent of the Indian population is “multidimensionally poor” – using a measure that captures how many people experience overlapping deprivations in living standards, health and education, and how many deprivations they face on the average. India’s Human Development Index ranking fell from 119 in 2010 to 134 in 2011. Its Gender Inequality Index is below that of Pakistan and Bangladesh.

According to Census 2011, only 32.7 per cent of rural households have latrine facilities. The data for provision of drinking water are highly suspect, as households which are “ensured” drinking water in one year are later listed as “slipped back”, and have to be “ensured” it again the next year; but even the official picture is dismal: “ensuring safe drinking water for the remaining 15.8 per cent of rural households with unimproved sources and 22.1 per cent of rural households that have to fetch water from beyond 500 m is the major challenge.” [7]

Government expenditure on education was just 3.13 per cent of GDP, compared to the 6 per cent pledged in the Common Minimum Programme of 2004. The Annual Survey of Education Report of 2012 records a decline in proportion of schools with at least one classroom per teacher (more than half of all std II and std IV classes sit together with another class); a decline in basic reading levels (in 2010, 46.3 per cent of all children in std V could not read a std II level text; this has deteriorated further to 52.3 per cent in 2012); a decline in basic arithmetic levels across most states (nationally, in 2010, 29.1 per cent of std V children could not solve a simple two digit subtraction problem with borrowing; this increased to 29.1 per cent in 2011 and further to 46.5 per cent in 2012); and a decline in children’s attendance (for std I-V) from 74.3 per cent in 2009 to 71.3 per cent in 2012.[8]

“All around us,” said Chidambaram in his oily paternalistic manner, “we see the smiles on the faces of the dalit girls and the tribal boys who have received their scholarships.” During the course of 2012-13 he hacked 10 per cent off the provision for welfare of Scheduled Castes (largely relating to education – scholarships, hostels), bringing it down from Rs 4034 crore to Rs 3623 crore. He sliced an even larger 24 per cent off similar allocations for Scheduled Tribes – from Rs 4090 crore to Rs 3100 crore.

“We see”, he went on, “the happiness on the faces of the pregnant women who are assured that the Government cares for the mother and the child before and after child birth.” In 2012-13, he slashed the Indira Gandhi Matritva Sahyog Yojana (IGMSY), which provides cash assistance directly to pregnant and lactating women from the end of the second trimester of pregnancy up to six months after delivery, from Rs 468 crore to Rs 76 crore – a saving of 84 per cent.

Nor can the handicapped escape their share of fiscal discipline. After all, their numbers are sizeable: The Census 2001 figure of 2.1 per cent of the population suffering from disability, and the National Sample Survey 2002 figures of 8.4 per cent of rural households and 6.1 per cent of urban households with a disabled member, may be serious underestimates. The United Nations’ informed guess is that persons with disabilities are about 10 per cent of the world population. A World Bank study on India found that “Alternative estimates from a variety of sources suggest that the actual prevalence of disability in India could be easily around 40 million people, and as high as 80-90 million if more inclusive definitions of mental illness and mental retardation in particular were used”. [9] At any rate, even the lower figure of 22 million with disability in 2001 is very large compared to the allocations made for them in the Central and state budgets.

At first glance, there would seem to be no way to cut the allocation for the welfare of the disabled: The Budget 2012-13 allocated a mere Rs 424 crore to this head. Even taking the number of disabled as in the 2001 Census, this allocation would have amounted to less than Rs 200 per disabled person. However, even this meagre sum could not escape the eagle eye of fiscal wizard Chidambaram. The Rs 424 crore was halved, to Rs 215 crore, in the course of the year. “Faced with a huge fiscal deficit, I had no choice but to rationalise expenditure,” explained the Finance Minister, in his stern yet fatherly tone. “We took a dose of bitter medicine. It seems to be working.”

In brief, Chidambaram brought down the fiscal deficit in 2012-13 by widening the appalling social deficits in every sphere.

The red line for 2013-14
For the coming year, 2013-14, Chidambaram has promised that, just as in 2012-13, “I shall not cross the red line for the next year. It will be kept at 4.8 per cent or below.” For this reason, spending levels, particularly Plan spending, have been kept very low in the 2013-14 Budget.

Since the previous year was one of severe cuts in Plan spending, the ill-effects of that will linger in 2013-14. It would require additional spending in the coming year merely to compensate for the severe setback of the previous year. Instead, there is a cut in real terms, i.e., after accounting for inflation. Plan spending is budgeted to rise only 6.6 per cent over the Budget figure for 2012-13.[10] This is lower than the likely rate of inflation. Within the overall Plan figure, the Central Plan is budgeted to rise 7.2 per cent, and Central assistance to state plans by just 4.8 per cent.

Within this, the allocation for Agriculture is to rise by just 6.3 per cent; Rural Development is to fall by 13 per cent; and Irrigation and Flood Control is to fall by 5.9 per cent. Energy is to rise by just 0.8 per cent, and Industry and Minerals is to fall by 5.9 per cent (within which “Village and Small Industries” is to fall by 36.5 per cent). Social Services are budgeted to rise by 9.7 per cent, which, it seems, may also be the rate of inflation (for example, the IMF projects that consumer prices in India will rise 9.7 per cent in 2013-14, and wholesale prices will rise 7.5 per cent[11]).

However, even these spending levels may be cut. Chidambaram has projected a sharp increase of 19.1 per cent in tax revenues. Given that GDP growth is projected to remain relatively slow in the coming year, this growth in tax revenues seems unlikely. If it does not materialise, cuts would have to be made in spending, since the 4.8 per cent figure for the fiscal deficit is inflexible.[12]

A false picture presented to the Indian public, the real one to the FIIs
When Opposition parties in Parliament attacked Chidambaram for having slashed Plan expenditure by Rs 90,000 crore in order to stick to his fiscal deficit target, Chidambaram tried to justify his actions by telling MPs that what had happened in Europe by ignoring, for too long, the consequences of not bringing spending under control. “Everyone in this house who is observing what is happening to the rest of the world knows what those consequences are. Those are very grave for India and (if not checked) would have spelt clear disaster for India,” he said.

However, a little over a month before trying to frighten the public with this bogeyman, Chidambaram made a completely contrary presentation [13] to FIIs in Singapore, Hong Kong, London and Frankfurt. In that presentation, a chart shows that Gross General Government debt (Centre + states), as a percentage of GDP, has been declining, and that decline is forecasted to continue (see Chart 1).

The presentation goes on to point out that India’s government debt continued to decline even through the crisis years and after; that interest payments have been falling as a percentage of revenue receipts; and that the Government debt as a percentage of GDP is even lower than the targets set by the 13^th Finance Commission. (The 13^th Finance Commission target was 78.6 per cent of GDP in 2011-12; in fact the figure was just 64.1 per cent.)

In fact India’s Government expenditure, as a percentage of its GDP, is not high (see Chart 2). Not only is its expenditure/GDP ratio much lower than that of the advanced economies; it is also somewhat lower than the average for emerging markets, and even that of sub-Saharan economies.

Low tax/GDP ratio
As we said at the start, we need to look at both expenditures and revenues to know the reasons for the fiscal deficit. Chidambaram said in his Budget speech that the ratio of taxes to GDP in India is “one of the lowest for any large developing country and will not garner adequate resources for inclusive and sustainable development.” However, he also says that “In a constrained economy, there is little room to raise tax rates or large amounts of additional tax revenues.” Hence he has made only minor changes to direct taxes, by adding small surcharges (5 to 10 per cent) to the present rates of taxation on very wealthy individuals (those reporting income of over Rs 1 crore) and on corporations. These surcharges have been so trivial that the propertied have not bothered to emit the usual howls of protest.

At the same time, he has taken certain steps to lighten the tax burden on corporations, among them a 15 per cent investment allowance for manufacturing firms that invest more than Rs 100 crore in plant and machinery in the next two years; power projects would have another year (till April 2014 to be eligible for the tax concession under section 80-IA of the Income Tax Act; and a concessional rate of tax on dividend received by an Indian company from its foreign subsidiary. The concessional rate of tax on interest paid on long term infrastructure bonds (just 5 per cent for non-resident investors) has been extended to domestic investors too.

In the net, Chidambaram estimates his direct tax proposals will yield an extra Rs 13,300 crore, or about 1 per cent of projected gross tax revenues. However, the most important announcement he made regarding direct taxes was his acceptance of the bulk of the recommendations made by the Shome Committee regarding the General Anti-Avoidance Rules, or GAAR.

GAAR was introduced in last year’s Budget in order to prevent firms and individuals from entering into arrangements with no commercial substance, purely for the avoidance of tax. To give an example of such an arrangement: In 2007 the British telecom giant Vodafone bought an Indian company Hutchison Essar; however, it did not make the purchase in India, despite the underlying assets being Indian. Hutchison Essar was controlled by the Hong Kong-based billionaire Li Ka-shing through a company he set up on paper and made resident in the Cayman Islands, a tax haven. Vodafone purchased this Cayman Islands company, and thus got control of Hutchison Essar in India. Normally, the purchaser (Vodafone) should have withheld the capital gains tax due (from Hutchison) on the sale, and handed the amount over to India’s tax authorities. However, Vodafone did not do so, on the ground that the sale took place abroad. In this fashion the Indian exchequer was cheated of Rs 11,200 crore. The GE-Genpact, Mitsui-Vedanta, A.T.T.-Tata, SABMiller-Foster, and Sanofi Aventis-Shanta Biotech transactions are reportedly similar to the Vodafone case, and are pending before various courts.[14] As pointed out by the Finance Secretary R.S. Gujral at the time of the introduction of GAAR, these are standard rules applicable in over 30 countries, and the U.K. itself is considering introducing them. When Vodafone purchased Mannesmann in a transaction routed through a tax haven much as it did with Hutchison Essar, the U.K. authorities forced it to pay $1.3 billion in taxes. “Is India a banana republic? Why should they treat India to be a banana republic so that they do not have to pay tax here?”[15]

Nevertheless, when GAAR was introduced, foreign corporations and foreign institutional investors (FIIs) in India’s stock market protested indignantly. They threatened that their investments would drop, as in fact they did in the following months (till Chidambaram became Finance Minister and appointed the Shome committee). India has treaties with Mauritius, Singapore and some other countries allowing investors “resident” in those countries not to pay tax in India; as a result a large number of foreign corporations and financial investors route their investments through such countries. Mauritian residents are the biggest FDI and FII investors in India, with Singapore running a distant second. On the face of it this breathtaking avoidance of tax would fall foul of GAAR. Gujral clarified that “if you have a mere post box operation and no establishment but show that you are trading on the Indian stock exchange whereas actually you are doing it sitting in New York then it is impermissible. That is misuse of the treaty and GAAR will get invoked.” It is also widely known that a large portion of the FII investments coming through these tax havens are actually from the illegal foreign stashes of Indian corporate barons (a U.K. court case regarding Anil Ambani provides interesting confirmation of this[16]). These investors prefer to invest in India’s share market through an instrument called a “Participatory Note” (PN), which enables the identity of the ultimate investor to remain hidden. Revealingly, the Indian corporate sector was as vociferous as foreign investors in criticising GAAR.

Now Chidambaram has embraced almost all of the Shome committee’s recommendations. GAAR will only cover transactions whose main purpose is to get a tax benefit; even if tax benefit is one of the main purposes GAAR will not be applicable. Such a standard of proof is near-impossible to achieve. At any rate, a multi-member panel will determine whether GAAR is applicable to specific transactions, of which panel only one member will be a tax official, answerable to the tax authorities; a second member will be from academia, and the panel will be headed by a judge. Shome explicitly states that GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius, and that PNs will be excluded from GAAR. If all this were not enough to render the rules a joke, a punch line follows: The implementation of GAAR is to be postponed till 2016-17.

The GAAR episode confirms that, in matters of taxing foreign investors (among whom are the Indian elite, who too are now foreign investors), India is indeed a “banana republic”, as the finance secretary put it. Further confirmation is given in the “Revenue Forgone” document in the Budget, which lists the giant tax concessions given to the wealthy and the corporate sector. The Budget very correctly refers to these concessions as “an indirect subsidy to preferred tax payers,” but this subsidy is not targeted for attack by the anti-fiscal deficit brigade.

For the corporate sector, while the statutory tax rate applicable to the financial year 2011-12 (assessment year 2012-13) was 32.45 per cent, the effective rate was only 22.85 per cent, a fall from the previous year’s 24.1 per cent. The projected revenue forgone on corporate tax in 2012-13 is Rs 68,007 crore. The corresponding figure for personal income-tax was Rs 45,464 crore. The revenue forgone on excise duty and customs duty was Rs 206,188 crore and Rs 253,967 crore, respectively. While it could be argued that the people benefit from some of the concessions on excise and customs, the Government has failed to force the corporate sector to actually pass on these benefits in the form of lower prices. Note that the single biggest chunk of customs duties forgone is on diamonds and gold, accounting for Rs 61,035 crore, or 20.5 per cent of the total customs duty revenue forgone (in the previous year, it was Rs 65,975 crore, or 23 per cent of the total). This is, in the main, a subsidy to wealthy investors in gold.

The aggregate revenue forgone from central taxes, direct and indirect, in 2012-13 is put at Rs 5,73,626.7 crore. The fiscal deficit in 2012-13 was Rs 5,20,925 crore, i.e., almost Rs 53,000 crore less than the revenue forgone.

When Chidambaram says in his Budget speech that “In a constrained economy, there is little room to raise tax rates or large amounts of additional tax revenues,” the constraints are of the class interests he represents. To the Indian public he bemoans the fact that India’s tax/GDP ratio is “one of the lowest for any large developing country and will not garner adequate resources for inclusive and sustainable development;” but when addressing foreign investors he quite brazenly advertises the low taxes on profits. His presentation to FIIs says “Among emerging markets India has one of the most favourable tax regimes, a very crucial factor for business growth”. The presentation provides below this a chart of various countries with “Most favourable tax score (10 = least tax)”, in which India’s score is 7. Indeed, IMF data show that India’s General Government Revenues, at 18.5 per cent of GDP, are far below not only the “advanced economies”, at around 36.7 per cent, but also the “emerging market and developing economies”, at 27.9 per cent, and even the sub-Saharan economies, also at 27 per cent.

Indeed, it is something of a misnomer to term India a ‘banana republic’. The tiny country of Ecuador (the world’s largest exporter of bananas) has managed to raise its ratio of government revenues to GDP from 27 per cent to 40 per cent between 2007 and 2012 [17], in sharp contrast with India. No doubt Ecuador has oil wealth, but India too has vast natural resources which our rulers have been busy handing over for a song to corporate barons. Perhaps people around the world should replace the term ‘banana republic’ with ‘Indian-style oligarchy’.

NEXT: Large Corporate Firms on Investment Strike, Playing with Cash

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