Congress party leaders have let the cat out of the bag and publicly deflated finance minister (FM) P. Chidambaram in a most embarrassing way.According to a well-placed media leak, a conclave of 38 party leaders told the FM that this year they would like to have a Budget “that caters to the aam aadmi”. Thus, they told him, inflation and farmers’ woes must be combated head-on and relief given concretely.
No more esoteric dream budget rhetoric, they told him. The implication of this directive is that the last four budgets Chidambaram presented did not cater to the aam aadmi, and that today inflation is rampant and farmers are in distress.
Thus the globetrotting FM was rudely brought down on desi soil and given a reality check by the party itself. Despite high GDP growth, the internal organs of the Indian economy are not healthy today.
This is alarming. Any fast growing economy can collapse suddenly, as the 1997 experience of the East Asian economies showed.
These are the principal ills in the economy right now. 1.
Jobless, low-productivity growth. High growth rates are not generating enough jobs, which have been growing at 2.
25% a year since 1999-2000. However, to progressively reduce the unemployment backlog, absorb excess farm labour into industry and provide for the new entrants in the labour market, jobs must grow at about 3.
5% a year. At the same time, the economy must raise productivity of labour and capital through induced innovations and new management practices, so that higher and higher investment rates would not be needed to sustain growth.
Hence, in the Budget there must be adequate provision for encouragement of labour-using instead of labour-substituting technology. There should also be provisions to promote innovation through radical tax breaks.
This means the education sector has to be nurtured in the Budget. 2.
Lack of agricultural reforms. The growth rate in agriculture should be at least 4% annually to ensure that 8-10% GDP growth is sustainable.
But since 1997, agriculture has shown a trend rate of 2.5%, with wide fluctuations year to year, due to lack of reforms, declining public investment, and poor, even pre-modern, infrastructure.
Rather than resorting to the silly ad hoc measures to uplift rural people that we have seen in past budgets, we must empower farmers to export through imaginative schemes rather than provide more subsidies and higher purchase prices. 3.
Fiscal deficit. Governments are impounding public sector bank funds (nearly 48%) to finance the budget deficit, thereby starving the public sector (especially manufacturing) of resources.
Chidambaram has a propensity to play to the gallery of unions of organized labour by wrecking fiscal balances through the appointment of pay commissions (for example, in 1997 and 2006) and then creating a huge capital account budget surplus to finance the huge revenue account budget deficit. This is anti-development.
No wonder inflation is rampant today, fuelled by rising money supply from revenue expenditure. 4.
Debt trap. The debt accumulated by the Centre and states is so large (86% of GDP) that the annual servicing outlay now exceeds the fresh loans taken.
This is unsustainable and can explode into a crisis. Moreover, if we correct Chidambaram’s budgets to date for the Enron-type classification of contingent liabilities, then, as the International Monetary Fund (IMF) recently found, the fiscal deficit as a ratio of GDP has actually been rising, and not falling as the FM claims.
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