The budget exposes the class bias of the Modi govt

  • Prasenjit Bose, None, New Delhi
  • Updated: Mar 02, 2015 01:49 IST

Finance Minister Arun Jaitley’s claims of already having achieved an economic turnaround, made in his budget speech, evoke suspicion. Inflation is certainly down and so is the current account deficit, but that has almost entirely to do with the crash in international crude oil prices, which have fallen from $110 per barrel in June 2014 to around $57 per barrel currently. In fact, rather than passing on the full benefits of the oil price decline to the domestic consumers, the BJP government has hiked excise duties on petrol and diesel by Rs 7.75 and Rs 6.50 per litre respectively since November 2014, thereby mopping up thousands of crore of additional revenues.

Despite such additional revenue mobilisation, the gross tax revenues accruing to the government in 2014-15 have fallen short by a whopping Rs 1.13 lakh crore from the budget estimates made last year (almost one per cent of GDP). Direct and indirect tax collection on all heads have fallen well short of the budgeted targets in the current financial year. Not only does this signify deterioration compared to the UPA 2 government’s record, but this also poses serious questions vis-a-vis the growth revival story.

Going by the new estimates of GDP announced by the Central Statistics Office in January 2015, the Indian economy grew by 6.9% in 2013-14 and 7.4% in 2014-15, making India the fastest growing major economy in the world. If this is to be taken seriously, then the last year of the UPA 2 government, which was universally considered to be afflicted by an economic slowdown, was actually a year of economic revival. The question, however, is that if nominal GDP has indeed grown by over 11% in 2014-15 as suggested by the new GDP estimates, why is the growth in gross tax revenues below 10%? More strikingly, the service sector is supposed to have grown by over 15% in 2014-15, while service tax collections show a growth of only around 8%. This clearly suggests that the economy is growing at a much slower rate on the ground than the new GDP estimates.

The moot question is whether the first full budget presented by Jaitley can succeed in effecting an economic turnaround, which is yet to happen. There are several reasons to doubt this. First, underlying the slogan of ‘minimum government, maximum governance’, there is a substantial cut in government expenditure. Against the Rs 5.75 lakh crore plan expenditure budgeted last year, the government has spent only Rs 4.67 lakh crore in the current financial year and has budgeted Rs 4.65 lakh crore for 2015-16. Such a cut in plan expenditure in nominal terms, while anticipated when the Planning Commission was itself being wound up, is quite unprecedented.

Second, contrary to the claims of strengthening fiscal federalism, central assistance for state plans is going to be cut by almost Rs 75,000 crore in 2015-16 from what was spent in 2014-15. The gains to the states from a larger share of central taxes, as mandated by the fourteenth Finance Commission, is going to be offset to a large extent because of this squeeze. Moreover, while the Centre had last year budgeted to transfer over Rs 7.75 lakh crore to the states, the revised estimates show the net transfer in the current financial year to be Rs 6.83 lakh crore only, which implies a shortfall of Rs 92,000 crore. Such a huge gap between promised and actual transfer is likely to aggravate conflict between the Centre and the states rather than improving centre-state relations.

Third, while the latest Economic Survey has advocated a thrust on public investment in infrastructure, in the backdrop of a decline in private corporate investment owing to their heavy indebtedness and accumulation of bad debt by the banks, the budgetary outlays are thoroughly inadequate. Capital expenditure — which is crucial in capital formation — is budgeted to grow by merely Rs 14,000 crore over what was budgeted last year and reach only around 1.7% of GDP, which is hardly more than that of the UPA 2 government’s record. Moreover, in order to increase public investment in sectors like railways, roads and defence, allocations on agriculture, rural development, health, school education and women and child welfare have been cut quite substantially. Thus, infrastructure spending is going to be financed through a gradual dismantling of the welfare schemes, which exposes the class bias of the Modi government.

This class bias is further evident in the regressive shift in tax policies, whereby the finance minister has promised to reduce the corporate tax rate from 30% to 25% and offered tax concessions to his favoured constituencies, from yoga gurus to offshore fund managers and realtors. While the direct tax giveaways in the budget will cause a revenue loss of over Rs 8,000 crore, the finance minister has proposed to raise Rs 23,000 crore additional revenues through increased indirect taxes — most notably the service tax rate — whose burden would fall on every citizen irrespective of their income.

The salaried middle class has little to cheer, because not only has the income tax exemption ceiling been left untouched, but the Direct Taxes Code Bill which had promised to raise the income tax exemption limit substantially has been practically abandoned in this budget.

The fiscal strategy of the Modi regime, which has been unveiled through its first full budget, comprises the following: (a) compression of public spending, especially on welfare measures; (b) narrowing the focus of public investment in sectors like railways, roads, defence etc. and through that hoping to trigger a recovery of private investment; (c) tax giveaways for the corporate sector and the financial elite, and (d) mopping up revenues through an increase in indirect taxes, disinvestment and hike in user charges like that of railway freight.

While it is doubtful whether this would bring about a growth recovery, what can be said with certainty is that this will increase wealth and income inequality and reverse the modest gains in human development that could be achieved under the previous government. How far such a strategy can be pushed without meeting stiff political opposition shall be seen in the days to come.

Prasenjit Bose is an economist and activist
The views expressed by the author are personal

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