Power Politics - independent voice for public good

Advertise with us

Power Plitics

Current Issue: July 2009

Imperatives Of Growth With Social Justice

Objectives of social justice can be accommodated, at least partly, when the economy's going is good. A recession-affected economy is hardly capable of delivering the revenue for social democracy, contends noted thinker KUMARESH CHAKRAVARTY equipped with a rare perspective from New Delhi and Kolkata.

However hard you may try, you cannot keep politics out when you make a budget. At the same time, politics of a budget cannot be wholly delinked from its economics. That is one of the major reasons why Finance Minister Pranab Mukherjee's task is rather difficult. Even otherwise, the fact that he has come back to his present ministry after a long time puts an additional pressure on him. After all, it was he who had said to Congress President Sonia Gandhi that he would prefer finance as his portfolio. (Reports say that Mrs Gandhi wanted to reward Mukherjee for his good work and has now fulfilled the latter's wishes.)

Mukherjee has to combine relief for the poor with accelerated economic growth. The government, it seems, is keen to mix growth with some kind of social democracy. The highlights of the latter include employment programmes, low-interest loan for the weaker productive sectors like agriculture and small industries, rural electrification, rural roads, and education health and housing for the poor. Not that all that will have to be completed in one or two years, but even a significant continuance of the ongoing projects, or beginning of new ones will require heavy expenditure. And the Congress party has already recommended to the Finance Minister that the relief programmes for the poor should not only be continued but also be augmented. Employment guarantee scheme for the rural poor has to cover all the districts, and Congress election manifesto promises a similar scheme for the urban areas as well. (Elections to a few state assemblies are due before the next budget. So, budgetary action for winning over voters has to be taken in this budget itself.)

With primary education having been virtually made compulsory, additional expenditure here is going to be substantial, especially the states being incapable of bearing much of additional expenditure after having implemented new central salary scales for their employees. Higher education is another area of extra expenditure, particularly after an all round criticism that India's technical personnel are inadequate both in terms of number and quality.

Infrastructure Investment

Then there are investment projects like major roads, power plants and extension of irrigation. Private investment in these areas has so far been rather hesitant. Power in particular has become a serious problem. The idea of public-private participation - combining private investment with public investment-has not really found the extent of private enthusiasm that is necessary for large-scale private funds to be available. This has led the Planning Commission to project a lower share of private investment in power generation in the 11th plan. The Commission recommends a 9 per cent growth in generation for ensuring an identical rate of GDP growth.

But that requires, according to the Commission's estimates, more than Rs ten lakh crore in five years, two of which have already elapsed, leaving a significant deficit in achievements. Consequently, not less than Rs three lakh crore will have to be invested through the current year's budget, unless the government has plans to make off-budget provisions, which however is more of a bookkeeping exercise. Private investment

is almost equally unwilling to come to road building, except for smaller length of the road, with a fairly reasonable anticipation of enough demand for use of the road on payment of not-very-small a price. In any case, power and roads are essential for keeping up a good GDP growth rate. Aviation, shipping, and railways are all likely to face bad times. The government may have to substantially subsidise each of these.

Going by the expenditure record of the past few budgets, all that, net of disbursements to states, will require more than Rs nine lakh crore for the whole year. Tax revenue, net of states; share in 2008-09 was about half of total expenditure and the fiscal deficit was more than Rs 250 lakh crore, or a little more than 6 per cent of GDP (some estimates estimate it at 7.8 per cent.) In his interim budget Mukherjee had projected a 5.5 per cent deficit for the whole year. Some analysts believe that if poor relief and other popular programmes are to continue and oil prices rise call for an increase in oil subsidy then, the current year's deficit will not be less than 7.8 per cent of GDP once again. Besides, if the current year's GDP growth rate turns out to be smaller than last year's then the deficit in percentage terms will further go up.

The Reserve Bank and the Prime Minister's Economic Advisory Council are both suggesting fiscal prudence now. Both of them have also pointed out that off-budget items of expenditure are actually deficit though not shown as that. Write off of bank loan last year had cost Rs 70000 crore. But the burden was actually borne by the nationalised banks. The expenditure on rural employment guarantee on the other hand, cost Rs 30,000 crore as a budget item. If the scheme is expanded, it will cost much more.

Growth in private investment this year is likely to be low particularly in the context of worldwide recession. International agencies have now reached the conclusion that world economic growth in 2009 will be a negative 2.75 per cent. World trade will decline by 13 per cent. India's export as a percentage of GDP is no doubt smaller than that of many countries. But, even with an export share of around 11 per cent it would mean that a good deal of demand for manufactures comes from exports.

Mukherjee's Dilemma

One thing is clear. The Finance Minister cannot allocate enough funds for 'social democracy' and public investment without incurring a much bigger fiscal deficit unless he resorts to public sector disinvestments in a big way. He may prefer the disinvestments route, though it is very difficult to reduce the fiscal deficit-GDP ratio by more than one percentage point. His other option is to compromise either on the scale of public investment or keep 'social democracy' expenditure lower than desired by his party.

If he chooses the former he will have contributed to erosion of the high GDP growth trend of the last few years. That may adversely affect the growth rate in the next three years of the eleventh plan.

Private Investment

Growth in private investment this year is likely to be low particularly in the context of worldwide recession. International agencies have now reached the conclusion that world economic growth in 2009 will be a negative 2.75 per cent. World trade will decline by 13 per cent. India's exports as a percentage of GDP is no doubt smaller than that of many countries. But, even with an export share of around 11 per cent it would mean that a good deal of demand for manufactures comes from exports.

The domestic market has not been showing much of an uptrend. Actually, barring automobiles, cement, and steel, there are very few important segments showing growth signs. If the housing industry keeps as low as it has been for nearly a year, then even the demand for cement and steel will not go up. The corporate sector wants government subsidy - by way of tax cut or direct subsidy payments-to encourage private investment. The Finance Minister will find it extremely difficult to oblige.

All that shows that social democracy can be partly accommodated when the economy's going is good. A recessionaffected economy is hardly capable of delivering the revenue for social democracy. That essentially, is Mr Mukherjee's dilemma.

Editor's Choice

Iranian Turmoil..

Of Life & Colour..

Archive

----------------------------

Archive


© Copyright Power Politics 2008 -2009