“Will politics win over economics?” This is the commonest platitude one hears when the union budget is around the corner.If the government extracts huge tax-revenue from the ordinary people, curtails its own expenditure, economics wins. If the government distributes rice at a cheap rate, cuts taxes on essential goods, those are populist policies. According to the economics-wallahs, the government should cut down on welfare spending, the common man will take care of his affair. Modiji had echoed these sentiments when he mused before the budget that it’s a myth that the common man wants sops. The budget reflected his thinking.
Cheerleading “economics” year after year, we have ended up creating an unequal country which has few parallels. About a third of the fruits of economic growth experienced since 1980 has gone to the richest 1% of the country. Hardly any other country has seen such yawning gap between the rich and the rest. The degree of inequality has been growing. In the beginning of this century the top 10% of the population cornered 40% of the income. By 2014 their share rose to 50%.
How are the middle class faring? Actually there are not many middle class people, if by middle class we mean those who can afford comfortable amenities. A car or a scooter, a TV set, a refrigerator, an air conditioner, a computer – these are some of the goods which middle class families can be expected to own. In India only the top 3% households own all of these. In order to afford the middle class comfort one needs to climb to the top of the pyramid. But if you are there, can you really be called middle class? The rapid economic growth of last four decades has mostly gone to the rich, without lifting the rest substantially.
What does the union budget have to do with inequality? A lot. The budget is an annual account of income and expenditure projections of the government. Many households keep monthly accounts of expenditure and income. The union budget is a similar exercise with a crucial difference that the government can raise its income by levying taxes. Which goods it taxes — necessities or luxuries — decides whether the revenue will come from the pockets of ordinary people or the rich. In this year’s budget seven thousand crores rupees worth of sops have been given to corporates. There is no dearth of dollar-billionaires in India. Forbes adds one more billionaire to the list every two months. 37% of them have inherited their wealth. Yet there is no inheritance tax. Nor do we tax wealth. These policies, or their absence, further elevate the pyramid, push the rich far away from the rest. How the government spends its money also affects the architecture of inequality. The government can decide to spend more to revamp the Public Distribution System (PDS). It can recruit staff in the hospitals which are in a perennial state of manpower shortage. But if these happen, the media will be in uproar: “politics is defeating economics!” The bottom line: economics of the poor and middle class is not economics, giving sops to the rich is not politics.
The Peasants and the Budget
This budget was the last full-fledged budget before the parliamentary elections. Madhya Pradesh, Rajasthan, Chhattisgarh – ruled by the BJP – have their assembly elections later this year. The poll fortunes of the BJP have not been splendid of late. The Gujarat assembly election was a close shave. In rural Gujarat the party won only a third of the seats. It fared the worst in North Gujarat, an agrarian region adversely affected by falling cotton price. In the Rajasthan by-election, all BJP candidates were defeated. Farmers have been protesting low crop price across states. Crops have been spilled on the highway, protesting peasants have been killed by police bullets.
What lies behind the rural unrest is a protracted distress in agriculture. About 64% of rural Indians depend on agriculture. The 1980s were a time of agricultural growth. From the early 1990s, the growth curve started to go down. The rate of growth almost halved between those two decades. 1999-2003 was a crisis period in farming, and output fell. In India, about a third of the food crop is purchased by the government through payment of the minimum support price (MSP). The procured grain is sold through the PDS at subsidized rates. A high MSP means better income to the seller-farmers. The MSP affects the market price as well. From 2007 to 2009 the MSP of paddy and wheat, the two main crops, was raised substantially.
Figure 1: Annual growth rate of paddy minimum support price (subtracting the CPI-AL inflation from nominal growth of MSP)
Campaigning in the 2014 elections Modiji promised that he would fix the MSP at 50% above the cost of cultivation. Promises notwithstanding, during the Modi Sarkar growth of the MSP has been tepid (see figure 1). On the other hand, the cost of cultivation has been rising. Caught between low price and rising cost peasants are facing severe losses. According to an all-India survey 40% of farmers wanted to quit cultivation and join some other profession in 2003. Most of them cited low profits as the reason for wanting to quit. Mr. Arun Jaitley is not unware of these concerns. In 2016 he promised to double farmer’s income in five years. But agriculture is growing at 2% a year and crop prices are low. How will the income double? Perhaps as a solution in this budget Jaitleyji declared that the MSP will be fixed at a 50% margin above the cost – a welcome policy intervention. But above what cost?
There is a cost which is paid in cash or kind, this is called A2. However, most Indian farmers (more than 90%) are small and marginal. They own their pieces of land, supply their own labour, and the capital is also often owned by them. Thus, the paid-out component of the cost is likely to be small. The implicit cost of own labour, land, capital should be included to get a comprehensive idea of cost. This cost is called C2. Did Jaitleyji mean fixing MSP 50% over C2 or A2? This is important for there is a huge gap between the two. If A2 is taken, then for a number of crops the existing MSP is near one-and-half times the A2. Little is needed to be done. If C2 is taken, which is more meaningful, for most crops the 50% margin will warrant a steep jacking up of the MSP. This is unlikely to be feasible in a year. Or was some other cost, for example A2+FL which includes wages of family labour, meant? If that is the case the return will not be on the actual cost, C2.
We needed a well-thought-out plan which includes improvements in irrigation, electrification, extension services, scientific research, rural credit disbursal, crop procurement infrastructure to bring the agrarian economy out of crisis. We got few opaque assurances instead.
Who got those one crore jobs?
Farming is not the only challenge that the rural economy is facing. The share of rural income from cultivation has dropped below 40%. About a third of the income of farmer households comes from wages and salaries. Low profit in agriculture is forcing peasants to migrate in search of jobs. But there is a lack of jobs. In 2017 two crore people were looking for jobs, whereas only 20 lakh jobs were created. Remaining unemployed for long can devastate the morale of a job-seeker, she quits job-hunting after a point. The share of the population in jobs or looking for jobs has been going down alarmingly, particularly among rural women whose self-sufficiency is taking a hit. Presently the number is 44%. In China the corresponding figure is 71%.
Ours is a young country, the median age of the population is 28 (China 37, Japan 47). Young people would work, earn, pay taxes which will fund welfare programmes, the country will develop. Young people, desperate for means of livelihood, ensured victory for Modi-the-messiah in 2014. There was a promise to create one crore jobs a year. After four years, pakoda vending is being peddled as job creation. The frustration finds expression in the demand for caste-based job reservation, which often degenerates to sectarian violence.
On employment generation the budget has little good news. The MGNREGS allocation has remained constant, which means it is going down in real terms. It appears that the government seeks to outsource the job creation responsibility to private companies. The justification Jaitleyji offered as he proposed a 5% cut in corporate income tax is, lower taxes would give more money in the hand of the rich who will invest and create jobs. The proposal to extend the system of contract labour to all sectors, so that workers can be thrown out easily, is driven by a similar motivation. There is lack of evidence in support of the claim that it’s the difficulty of firing which keeps employers from hiring. Yet, sops are given to capitalists on that pretext of job creation. This is the infamous trickle-down economics in a different clothing.
Insurance instead of medicine
The government expenditure on health is abysmal, a paltry 1.15% of the GDP. According to the ambitious National Health Policy of 2017 the figure will be pushed to 2.5% by 2025. But this budget proposes a mere 5% rise in expenditure, which may not even cover inflation. A revamped insurance scheme has been proposed. There are reasons to be skeptical of the plan. The results for the Rashtriya Swasthya Bima Yojana, the scheme in its earlier avatar, are not encouraging. Out-of-pocket expenditure of the patient family has not gone down significantly. A system of perverse incentive has been created. The private hospitals get the insurance money if the patient gets her treatment there. Hospitals are indulging in unnecessary, unethical medication to corner the money. In Bihar, Chhattisgarh, Andhra Pradesh uterus of women have been unethically removed for insurance money. In Chhattisgarh the share of allocation of government hospitals has fallen due to rising allocation for insurance. Why are not health services provided directly to the poor through government hospitals? What good will the insurance do if there are no hospitals to go to, or if private hospitals dupe, exploit patients? The budget did not answer.