Union Budget 2014-15

Union Budget 2014-15 and the Myth of UPA’s ‘Populism’ — Surajit Mazumdar

The Union Budget 2014-15 presented by the
Finance Minister before Parliament on 17th February this year was
the last budget to be presented in the 10 years of UPA rule.

General elections
being round the corner no significant new measures were to be taken in this
budget – that had to be left to the new Lok Sabha and government, in whose term
would fall the major part of the coming financial year 2014-15 (1 April 2014 to
31 March 2015). However, the budget accounts were still significant because of
what they revealed about the developments in the year coming to an end on 31
March 2014. For the second successive year, the revised estimates of total Central
Government expenditures for 2013-14 were lower than what had been budgeted before
the year started. The same had not only happened last year, the actual final
figure of expenditure 2012-13 turned out to be even less than the revised
estimates, at the time Union Budget 2013-14 was presented! The fiscal deficit
to GDP ratios in these two years, at 4.9 and 4.6 per cent respectively, were
also at their lowest levels in the period since UPA 2 assumed office. 

This big picture of expenditure being held
back in the last two years flies in the face of theories of ‘political budget
cycles’ which predict that governments tend to become ‘populist’ and profligate
as elections approach. The real profligacy of the UPA government has been only
in their claims of how much they have done for the ‘aam aadmi’ and for the
development of the country. When it has come to putting money to back its talk,
it has been stingy as hell. In such circumstances, the hue and cry from certain
quarters about how the UPA’s populism has destroyed the fiscal climate – seen
recently most notably in the context of the National Food Security Act – might
appear bizarre. Most people making such charges are also rooting for a Narendra
Modi led government to put the Indian economy back on track. What is really behind

The UPA’s Record: Ten Years of Fiscal Parsimony

Fiscal conservatism is one of the key
tenets of neoliberalism. While maintaining a low fiscal deficit (the excess of
expenditures over revenues of government) is one of the important objectives of
conservative fiscal policy it is equally important for this to be achieved
while keeping taxes low. For this combination to be possible, government
expenditure must also be kept within limits.

The adoption of the liberalization strategy
by the Indian state since 1991, when Manmohan Singh was Finance Minister, also
elevated fiscal conservatism to the status of the ruling dogma guiding fiscal
policy.  Every government since then has
paid obeisance to it. One of the first acts of the UPA 1 Government signalling
its commitment to it was the notification of the Fiscal Responsibility and
Budget management (FRBM) Act passed by its predecessor Government. Its
consistent adherence since then to the policy of keeping government expenditure
in check is exemplified by the levels of the Central Government Expenditure to
GDP ratio in the ten years of UPA rule (Table 1). This ratio, a measure of the
Central Government’s share in the total annual expenditure of the economy, has
through this period been kept below the level at the end of the Vajpayee led
NDA government’s term (which itself was below the pre-1991 level). Of course,
capital expenditure or public investment has faced a significant share of the
squeeze in UPA’s times. It may be worthwhile remembering that this is in a
background where public expenditure levels in India are very low when compared
to both developed as well as developing countries.

Table 1: Central Government
Expenditure as Percentage of GDP at Market Prices 

If we were to look at not the ratio of
Central Government Expenditure to GDP but its actual levels adjusted for
inflation (i.e. real expenditure), then the following picture emerges (summarized
in Figure 1). The first two years of UPA 1 saw a pretty severe expenditure
squeeze – the average annual real Central Government expenditures in 2004-05
and 2005-06 were below 2003-04 levels. Then followed a period lasting till 2010-11
during which expenditure in real terms grew pretty rapidly. A slowdown in the
pace of that growth began in 2010-11 itself, and in the last three years real
expenditure has virtually completely stagnated. In other words, in half the
ten-year period that UPA has been in power – made up of the first two and the
last three years of its rule – Central Government expenditures have remained
completely frozen. It is only in the remaining half in between the two ends
that expenditures increased.

Figure 1: Annual Rate of
Growth of Central Government Expenditure at Constant 2004-05 prices

order to understand how the increase of Central Government expenditure in the
period from 2006-07 to 2011-12 was consistent with adherence to fiscal
conservatism one needs to appreciate the following facts:

Till the global crisis erupted,
the Indian economy for a five year period beginning in 2003-04 experienced very
high and also extremely inegalitarian growth. Corporate profits as well as
high-end incomes grew extremely rapidly. As a result of the rising share of
such incomes in total income generated by the Indian economy, and not because
of any increase in tax rates, the tax to GDP ratio also increased as can be
seen in Table 2. Corporate taxes alone accounted for over 55 per cent of the
increase in the tax-GDP ratio between 2003-04 and 2007-08. While some part of
the Corporate and other income taxes were transferred to the states, the
Central Government revenue situation also improved dramatically. As a result,
expenditures could be stepped up even without reversing the trend of decline in
the fiscal deficit-GDP ratio and it is only within those limits that it was increased.
Indeed, in 2007-08 the fiscal deficit to GDP ratio at 2.5 per cent was at its
lowest level since 1991.

The last year of the UPA 1 term
saw the outbreak of the global crisis in response to which ‘fiscal stimuli’
became the flavour of the season the world over for a period of time. Even the
staunchest of fiscal conservatives did not object to the initial stimuli though
eventually the rising deficits and debt of governments led to a clarion call
for ‘austerity’ measures whose effects are being faced by people across the
world.  India under UPA followed the same
course of a fiscal stimulus followed by a retreat from it. The stimulus meant
that government expenditure growth was maintained for some time even after
2007-08. However, the major component of the stimulus took the form of tax
concessions – typical of conservative fiscal policy. As a result, the tax to
GDP ratio plummeted (see Table 2) and this more than any increase in the
expenditure to GDP ratio led to a sharp rise in the fiscal deficit-GDP ratio.

The retreat from the stimulus, or
‘fiscal consolidation’, has been the dominant fiscal policy concern for most of
UPA 2’s term. In contrast to what happened during the stimulus, however, in the
retreat the curbing of government expenditure was clearly prioritized over tax
the result of this was the slowdown in growth in the last few years, which has
intensified the revenue constraints.
Tax-GDP ratios have thus remained
lower than they were in 2007-08 while expenditures have been curbed to reduce
the fiscal deficit. This contrast is exemplified by what is visible in the last
two rows of Table 2. From 2007-08 to 2009-10, the central government
expenditure to GDP ratio increased less than the parallel decline in tax to GDP
ratios. However, while that increase has been more than undone by 2013-14, the
tax-GDP ratios have recovered by only a fourth or less of their fall.

Table 2: Central Government
Expenditure, Tax Revenue and Fiscal Deficit as Percentages of GDP at Current
Market Prices

Since there is so much talk about
populism, it is also instructive to see the expenditure heads that have been
hit most by austerity measures. As is starkly visible in Table 3, the
cornerstone of the expenditure control strategy has been cuts or restraints in precisely
those expenditures with an important bearing on the lives of people – agriculture
and rural development; fertilizer and food subsidies; and social services
(under which come areas like health and education). In real terms the
expenditure on these heads has been lower throughout the five years of UPA 2
than in the last year of UPA 1. The expenditure on rural development (which
includes the MNREGA) has even in nominal terms been lower in the years
thereafter than in 2008-09!

Table 3: Central Government
Expenditure (Plan and Non-Plan) on Agriculture, Rural Development, Social
Services and Food and Fertilizer Subsidies

Why is a Myth being Propagated?

The UPA Government can certainly be
criticized for its subterfuge – for claiming what it has not done. Like the
BJP’s Shining India campaign came flat in the 2004 elections, the people who
have experience the reality of its policies are unlikely to buy the UPA’s
claims no matter how much the statistics are juggled. The so-called ‘populism’
of the UPA will not be visible to them. However, the ‘critics’ of the UPA who
are accusing it of fiscal recklessness are somehow managing to see what neither
the statistics nor actual experience on the ground shows to be true –a
government splurging crores of rupees on schemes bringing short-term benefits
to millions of voters. These critics are certainly not people who are
illiterate about money matters. On the contrary their singular obsession is
with the process of making more and more money – the variety among them ranging
from those who engage in scholarly ‘study’ of that process to those actually
participating in it. Surely such people cannot be ignorant of the real picture.
So then why do they say what they say?

The last two decades since ‘economic reforms’
were initiated have seen extreme economic polarization of an order not seen
before in the period since independence. While the majority of Indians have
been condemned to income stagnation and depression, a few large corporate
houses and a rich upper-income segment have increased their stranglehold on the
country’s income and wealth. In this they have been aided by the process of opening
up of the Indian economy to foreign capital. Fiscal conservatism has been an
able servant to this massive concentration and accumulation which has only
whetted the appetite of its beneficiaries rather than satiated them. They are
therefore greedy for more of the same even as the regime now faces a crisis
both domestically and at the global level as a result of its own

What this greedy minority would like is to climb
their way out of the crisis by trampling even more on the interests of the rest
– they would like more tax concessions for themselves; more handing over of
national assets to them at low prices; more expenditure out of shrinking
government revenues on the roads, highways and flyovers they need; and yet
fiscal deficits to be kept low so that foreign investors are not scared away.
The critics of the UPA’s ‘populism’ are simply the conscious or unconscious
spokespeople of this desire.  W
hat they are in effect saying is that the UPA has not done enough,
meaning not been savage enough, on the expenditure compression front because of
electoral compulsions. They are hoping that Narendra Modi can benefit from the
discontent generated by the UPA’s ‘success’ in hurting the interests of the
Indian people to do an even better job of the same! After all, he has a proven
track record of knowing how the politics that takes human lives can be used to
further the economics of high human cost. 
For the time being, therefore, the only useful purpose that the UPA can
serve for its true masters is to be the butt of their criticisms about ‘loose
purse strings’ so that the appropriate climate is created for the
belt-tightening to be imposed after the elections on those who in any case have
very little.

Mazumdar is Associate Professor at Ambedkar University Delhi