The loud hosannas which have greeted the unimaginative and iniquitous Union budget presented to Parliament and the nation on February 26, reaffirms the India-Bharat divide that separates the aspirational middle class and 21st century India’s ill-housed, ill-clad and ill-fed aam admi or common man. The first full-fledged budget of the Congress-led UPA-2 government presented by Union finance minister Pranab Mukherjee, is a resource mobilisation and disbursement plan of action of the middle class, by the middle class and for the middle class.
The USP of Budget 2010-11 is Mukherjee’s surprise decision to lower direct tax rates. By rationalising and simplifying income tax slabs, the finance minister has reduced taxes payable by the country’s 31.5 million income tax assessees (including corporates) by Rs.26,000 crore in the next fiscal year. According to Mukherjee, over 60 percent of direct tax payers — 20 million assessees — will benefit by way of lower income tax payouts and larger disposable incomes.
But simultaneously driven by the compulsion to reduce the Union government’s fiscal deficit which has balooned to 6.9 percent of GDP (against the prudent norm of 3 percent), and perhaps more important, to fund the viceregal lifestyle of the Delhi durbar and the pay and perks of India’s 18 million strong bureaucracy (Centre plus states), the durable finance minister deemed it incumbent upon him to nullify the income tax concessions granted to the country’s affluent minority. This objective has been attained through the imposition of a stringent regime of indirect taxes. Most ill-advisedly, customs and excise duties have been raised on crude oil, petrol and diesel. Coincidentally perhaps, petroleum taxes will mobilise Rs.26,100 crore for the mainly public sector oil refining and marketing companies which have been bleeding heavily.
Surprisingly, the Congress party’s most experienced finance minister seems unaware of a fundamental maxim of economics — that direct taxation (because it targets the affluent) is progressive and indirect taxation (since it is indiscriminately universal) is regressive. Therefore at a period in the nation’s history when food inflation is at an all-time high of almost 20 percent over last year, the logic of raising indirect taxes on motor fuels — which will increase marketing costs of rural produce — is baffling. Moreover it’s common knowledge that this year the rural population has suffered severe droughts, floods, forcible land acquisition agitations and a suicides epidemic apart from unremitting inflation, and thus should be spared additional taxes. Therefore the morally and politically correct option which Budget 2010-11 should have exercised is to have intelligently taxed industry (postponed reduction of the income tax surcharge on corporates; revoked income tax exemption of larger IT companies; encouraged CSR initiatives etc) and the relatively affluent middle class (maintained the status quo on direct taxes, raised indirect taxes on luxury items), to subsidise the oil marketing companies.
The job of the finance minister is to either reduce government expenditure, or tax segments of the population who can afford to pay. By failing to sufficiently curb government profligacy and resorting to regressive indirect taxation in Budget 2010-11, he has signally failed to discharge his duties and let down the people.
Foolish neglect of supply-side economics
The relentless rise of price indices — particularly food prices — during the past winter months has surely negated any sentiments of pride that the Congress-led UPA-2 government in New Delhi may have derived from insulating the Indian economy from the global recession, which has reduced annual GDP (gross domestic product) growth rates in the US and the western economies to almost zero. True, against the backdrop of recession in the OECD countries, the Indian economy is expected to record GDP growth of 7.2-7.75 percent in the fiscal year ending March 31. But it’s also a painful reality that the official wholesale price index (which is not the true measure of inflation, but is used by the Central government as a prices monitoring gauge) is 8.5 percent higher than it was a year ago and the food price index — after rising continuously for the past four weeks — is 17.47 percent higher than it was a year ago.
The observation that high inflation is a cruel tax on the poorest and most vulnerable members of society is now a worn cliché. It’s particularly cruel on the poor of developing countries (where per capita incomes are typically less than a tenth of people in developed industrial economies) because they spend over 50 percent of their pathetic per capita incomes on food. Therefore the almost 20 percent increase in food prices over the past year is the most unkindest cut of all, inflicted on 37.2 percent of the population classified by the Suresh Tendulkar Committee as poor. This percentage isn’t a mere statistic: it translates into 400 million citizens, a cohort greater than the entire population of the US.
Yet while the fundamental cause of the pressure on prices is the massive combined deficit of the Central and state governments which has risen to over 10 percent of GDP, the proximate cause is reckless injection of money into the economy by way of cash payments made under the recently renamed Mahatma Gandhi National Rural Employment Guarantee Act (Rs.39,000 crore), and payouts to 3.8 million Central government officials under the award of the Sixth Pay Commission (Rs.46,100 crore). If to these massive cash infusions into the bloodstream of the economy the Rs.60,000 crore farm debts waiver is added, it becomes painfully apparent that too much money has been chasing stagnant agricultural output within the Indian economy.
Admittedly the MG National Rural Employment Guarantee Act and the farm debt waiver legislation were necessary parliamentary initiatives to alleviate widespread rural distress — itself the outcome of a legacy failure to invest in rural infrastructure and agro-industry development during the past half century. Yet the Congress-led UPA government needs to be severely indicted for negligence to pay due care and attention to supply side economics — raising production, timely imports and improving productivity within the economy and rural India in particular. The consequence is a classic illustration of too much money chasing stagnant production.