No.s 39 & 40, June 2005

No.s 39 & 40
(June 2005):

Examining the Current Boom

Budget 2005-06:
Seeing through the Propaganda

The election results of May 2004 clearly indicated mass discontent with the economic policy of 'liberalisation', privatisation and 'globalisation'. When the 2004-05 Budget of the Congress-led UPA government turned out to be very similar to the Interim Budget presented a few months earlier by the BJP-led NDA government (see Aspects no. 38), many critics gave the new government the benefit of the doubt: The first budget was prepared in a hurry, and the second budget would reflect a shift of priorities in line with the May 2004 election verdict.

As it turns out, the Union Budget of 2005-06 continues on the same neo-liberal path:

– corporate tax rates have been reduced, even though there was a large shortfall of Rs 54.36 billion from this source in 2004-05;

– income tax rates have been reduced even for the top bracket;

– import tariffs have been cut on select capital goods and parts, further encouraging imports over domestic products;

– derivatives trading (a speculative activity) has been exempted from the tax on speculative transactions, and foreign institutional investors (FIIs) have been given further concessions;

– total budgetary expenditure is set to decline from 16.2 per cent of GDP to 14.7 per cent in 2005-06, and may decline further when unrealistic expectations of tax revenues are proved wrong.

The Budget was greeted with applause by the share market and by the corporate sector. At the same time, it also was widely portrayed as making concessions to the 'Left'. Newspaper headlines on the day after the Budget read: “Growth with equity”, “Stimulus for the economy, hopes for the poor”, “Spending for 'aam aadmi (the common man)', “Bharat Nirman”, and so on. Thus, some concluded, the Budget was a compromise of sorts, between the drive for liberalisation on the one hand and on the other the pressure from the CPI(M) and CPI for more social spending.

The fact is, the Budget of 2005-06 represents not a compromise but a conscious policy in the wake of the May 2004 election results: the policy to showcase highly visible increases in select sectors of the Centre’s spending on social services as a method of politically facilitating the continued, relentless press of the current economic policies.  

Indeed, as has been the practice in the entire liberalisation period, the Government announced along with the Budget several non-Budget 'opening-up' measures: plans to open up the mining, trade (presumably retail trade) and pension sectors to foreign direct investment. On Budget day the Reserve Bank of India (RBI) announced measures to increase the presence of foreign banks. In the recent period the Government has passed an amendment to the Patents Act, continued to place pressure on state governments to break up their electricity boards (a prelude to privatisation), provided further clearances to genetically modified crop varieties, and furthered the process of privatisation of airports. All these measures (which are already facing, or will soon face, opposition) would have far greater consequences than the increases in a few social services. Yet the media played up these increases.

Even these increases in certain social services turn out largely to be deceptive, as they are matched by an undermining of the finances of state governments, and it is state governments that carry out the bulk of social services spending. More importantly, since the current economic policies depress productive investment and employment on a large scale, such increases in social services spending cannot make a dent in social misery.

Below we show the following:

(i) While there is an apparently impressive increase in social services spending, it turns out to be paltry compared to the need. The increase in the allocation for rural employment will only restore the programme to mid-1990s levels (in terms of employment created), far from the promise of a universal programme.

(ii) There is only a small increase in the spending on agriculture, too paltry to reverse the effects of many years of decline as a percentage of GDP. Besides, this is to be seen in the light of the states’ spending on agriculture having declined too (in GDP terms) in this period.

Moreover, the finance minister is promoting the dangerous line of “diversification” of agriculture away from foodgrains – when the majority of the people are malnourished because they cannot afford enough foodgrain.

(iii) There appears to be no budget constraint for the military and police, whose budgetary allocations exceed those of social services and agriculture. As always, “security” is seen not as the security of life and livelihood, but as the protection of a system with large unemployment, poverty, and morbidity.

(iv) Plan capital expenditure, that is, expenditure which creates productive assets (including loans to the states for their Plan spending), has fallen sharply during the period of liberalisation, as a percentage of GDP and of budgetary expenditure of the Centre. In the 2005-06 Budget, it is reduced further by ending the practice of the Centre making loans to the states; the states are instead given the “freedom” to raise loans from the market. This throws states’ developmental spending into uncertainty, and makes them prey to external agencies, such as the World Bank and the Asian Development Bank, which would dictate policies.

NEXT: Social Services Spending Increases on a Low Base


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