The budget and the sociological implications

By S. Swaminathan

Now that the Union budget for 2001-02 is in the ``deep freeze'' thanks to the political melodrama issuing out of the Tehelka.com expose, questions of larger societal ramifications of the budget can perhaps be properly raised. The fact that enormous damage is being caused to the process of governance by Parliament that has had to abandon serious discussion of the budget proposals made by Mr. Yashwant Sinha on February 28, cannot, however, be glossed over.

The argument that over several years now, parliamentary scrutiny of budget proposals has become highly superficial, is no consolation for the active sabotage by the Opposition parties of a crucial part of the parliamentary scrutiny of the budget. Nor can the argument that several standing committees of Parliament, attached to the different ministries, will be mulling sectoral budget proposals during the current recess of Parliament, provide any valid explanation of the erosion that has already occurred in the credibility of parliamentary approval of the budget.

A chimera is being enacted year after year in the name of a budget session of Parliament. This is the painful reality. What the process has been reduced to is nothing more than ritualistic rubber-stamping of the budget proposals after fiery declamations of protests by the Opposition on clearly predictable lines of propaganda.

The budget and the class-divide

The classical English phrase that brought out the socialist paradigm in budgets is ''robbing Peter to pay Paul.'' The phrase captures what for long was considered the paramount re- distributive purpose of all taxation in socialist budgets. The idea is simple. The budget is a process whereby the Government collects taxes from the relatively better-off sections of the population and, of course, from the ''tall poppies'', in order to spend the monies such as to add to the well-being of the poor and the disadvantaged.

Socialist governments in Western Europe in the post-second war period unabashedly sought to build the welfare state on the basis of confiscatory patterns of taxation. That these efforts have by and large had counter-productive effects on many West European economies partly explains the phenomenal rise of market-oriented economies in recent times. A simple fact is that progressive taxation, the delight of the socialist, neither brings about anything remotely resembling an egalitarian society nor adds to the productive capacity of the economies in question, much less to their global competitive ability.

The strategy of high levels of taxation, which some of the developing countries like India resorted to, has not contributed to equity in the economic system to the same extent that they have fertilised the underground economy. Mr. Sinha's budget this year has deliberately steered away from the temptation towards high taxation. It may not be correct to argue that the benefits of continued adherence to moderate levels of taxation accrue only to the affluent sections of Indian society. There is tax saving which this budget has brought about for almost all categories of assessees that can be seen in itself as a factor facilitating consumer spending or saving and investment in productive activities.

The middle-class that has emerged in the post-liberalisation period as the most visible section among the beneficiaries of economic reforms curiously seems to be in a bitter mood of resentment over some of the proposals in Mr. Sinha's budget. Many sections of middle-class public opinion seem to have been unimpressed by the fairly benign approach to taxation followed by Mr. Sinha despite the daunting task of resource mobilisation thrust on him by the Gujarat earth-quake and by the assumption of a fairly ambitious order of fiscal responsibility.

What has caused considerable mental agony for the middle-class is the strategic decision to reduce interest rates on contractual savings through the provident fund and small savings schemes. The economic rationale of reduction in interest rates on government liabilities cannot be faulted even if the impact on the middle- class is an adverse development for most of the beneficiaries of such savings.

That this development has to be seen not in terms of partisan or sectional interests but in the totality of the economic situation is easier to offer as an exhortation than to digest as a hard reality. But, compared to the millions of the poor in this country who have no social security whatsoever and who have been living on the fringe of animal existence, the middle-class certainly has no justification for high-decibel lamentation. For vast sections of the retired bureaucracy who have had an entire career subsidised at the expense of tax-payers some sacrifice of future interest earnings should not be seen as a penalty administered by an ungrateful society for valuable public services rendered in the past.

For a Finance Minister or a Government which is intent on addressing a grave financial malaise in the form of mounting fiscal deficit, there is little choice in reducing its monstrous interest burden and, what is much more important, in ensuring that interest costs in the economy are brought down as an important instrumentality for higher investments in the economy and larger employment generation. The nagging question about whether the reduction in interest rates on small savings will have a dampening effect on the total savings of the economy admits of no easy answer. Given the fact that the capital market is in a state of coma and that the equity cult is virtually dead, there are few investment outlets available for those who save (or those who cannot spend their cash inflows even on high-end consumer goods).

This is the logic of the situation that can be corrected only if autonomous investment activity in the economy can pick-up, either on the momentum of a fairly widespread revival of demand for consumer goods or on the basis of entrepreneurs deciding to build new capacities on the strength of their perceptions of enormous growth potential in the economy. A part of this emerging scenario is that foreign capital could trigger a process of re-activation of the economy in a decisive way whether the policymakers chant the Swadeshi slogan or not.

Industry mindset on budget

The euphoria that greeted the budget last month, particularly from influential industry groups in the country, does not require any detailed vindication. From the industry's point of view, the critical criterion of a wholesome budget is that while the budget does not add to the input burdens, it should provide adequate manoeuvrability for the corporate bottomline in terms of better price realisation on finished goods. Excepting for the rationalisation of the excise duty resulting in imposition of higher levels of duties on a range of manufactured products, industry, by and large, has been enthused by the overall direction of the budget that can be described as pro- profitability and pro-investment. That industry also has seen in the overall budget package some distinct glimmerings of acceleration of reforms in hitherto stalled areas of economic restructuring, particularly in labour policy and in investment enabling measures resulting in the transformation and diversification of the agricultural economy is also an aspect which has added to the so-called ''feel-good'' factor.

Do the poor figure in the budget?

An eternal residuary claimant on the Indian budget is ''the common man'' - the proxy for about 300 million poor people. An unsettled question of budgetary policy for decades has been whether the budget can at all mount a direct attack on poverty. Not even in the hectic days of Indira Gandhi's war-whoop - Garibi Hatao - has the Indian budget even remotely anchored itself on the basic resolve to mitigate poverty in a programmed fashion. Although politicians of different generations have attempted to distance themselves from the obnoxious ''trickle-down'' paradigm, and have often talked about poverty alleviation as a direct mandate of the budget, the fact is that economy growth, accelerated investment, infrastructure development, increased social sector spending and a number of other objectives have ''crowded-out'' the poor from the budget. No particular Finance Minister is to be blamed for this sorry state of affairs, not even any particular Government regardless of ideological persuasions. The whole process of nation building and the top- down approach that characterises it, with all the pervasive urban bias in decision-making, is the main reason why the poor continue to be the neglected section of the community.

No government budget can conceivably cure this evil unless the budget at the government level is seen as a pyramid formed on a broad pattern of local action at the village or town level, directed against deprivation of basic amenities for the poor. So long as the better-endowed classes in the society continue to look at the budget as an opportunity to grab resources for themselves, there will be little scope for this transformation to occur.

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