Budget in the time of Globalisation

Though, normally, every year since Independence the finance minister of the day has been presenting Central Budget to Lok Sabha on the last working day of February, there have been far-reaching changes in its dimensions since the advent of the Washington consensus based globalization. Now it is no longer presented towards the close of the day when important capital and money markets down their shutters. Instead, it is presented soon after the Lok Sabha assembles for the day and all the markets and offices begin their work. Moreover, as in the past no pre-budget panic is witnessed. Goods do not go underground and people at large do not indulge in hoarding cigarettes, petrol, soaps, edible oil and so on for fear of a rise in their prices. This is simply because in the present age of globalisation, the government does not enjoy so much sovereignty as in the olden days

For fixing prices of telecom services, electricity, petroleum products, etc. there are regulatory authorities. Then there is WTO that has imposed constraints on the level of tariffs and various kinds of levies on domestic goods and services as well as their foreign counterparts. The stipulations of dismantling both tariff and non-tariff barriers within a specified period have imposed severe constraints on the government. Then there are international financial institutions like the World Bank and the IMF that regularly monitor the working of the economy and dole out suggestions, advice, and, sometimes, sugar-coated threats about reducing fiscal deficit and the direction of fiscal policies. In addition, there are bodies like the US Treasury Department, the OECD and the EU that, from time to time, intrude into our financial affairs and economic policy matters and exert pressure to move the government in the direction desired by them. To substantiate this assertion, let us refer to a recent report on China.

There is no denying the fact that the Chinese economy is in a much stronger position than ours. Moreover China enjoys greater political sovereignty and no government on earth can afford to treat its defence minister in the manner the American government treated our fiery George Fernandes when he landed at the Dulles Airport of Washington D.C. as defence minister of the Vajpayee government. A recent report in The Financial Times (June 28) has this to say: “The European Union will refuse to recognise China as a market economy, after an in-depth inquiry by Brussels found the Chinese economy suffering from too much state interference, weak rule of law and poor corporate governance. .

“The findings, contained in a confidential report [is] obtained by The Financial Times…..
“Formal recognition as a market economy is of paramount importance to China, because the status makes it much harder for other countries to impose anti-dumping penalties on Chinese exports.” .

The report goes on to add: “The verdict is much tougher on the four key hurdles: the degree of government influence on the economy, for example through tax discrimination, the existence and implementation of transparent and non-discriminatory company law that ensures adequate corporate governance, the existence and implementation of a coherent, effective and transparent set of laws to ensure property rights and the operation of a bankruptcy regime, and the existence of a genuine financial sector which operates independently from the state.” .

The collapse of the Soviet Union and the withering away of the Socialist Bloc has reduced the leeway India had in foreign trade and other spheres of external economic relations. Western countries in general and the USA in particular remain the major source of foreign direct investment and technology. Obviously, India can neither antagonise them nor can it opt for any measure of autarky. It has to adjust its policies according to the requirements of the new situation. The NAM has virtually withered away. Hence, there is no concerted and sustained pressure in the international fora to make developed nations soften their attitudes and policies to suit the needs of developing countries. .

Besides the constraints underlined above, there are limitations imposed by the nature of coalition politics. There are parties that have only regional and sectional interests to serve and they seldom bother about national and international developments and problems. To illustrate, take, for example, the TRS. It is an assorted collection of people with political loyalties ranging from the RSS to the Congress but with a commitment to the goal of a separate state of Telangana. .

In spite of all the constraints and limitations enumerated above, the UPA finance minister can use the budget not only to present the annual financial statement and the expected receipts and expenditures in the coming year, but also enumerate the policy measures that can shape the economy in the desired direction. Moreover, he can, through fiscal and other instruments available to him, influence the distribution of incomes and expenditures in the economy and thereby the composition of goods and services to be produced, and savings and investments. .

The present finance minister had an extra burden to handle in the form of correcting the distortions introduced by the previous government. During its six-year rule, the BJP-led NDA government neglected agriculture and the rural sector. Consequently, there was a decline in the capital formation in agriculture due to a fall in public investment. Rural infrastructure, irrigation and agricultural research and development were neglected. Non-availability of sufficient amounts of credit combined with changing crop-pattern and uncertain marketing prospects led to distress to the rural community and the suicides by farmers. Unemployment became rampant and it led to frustration among the youth with grave consequences. The public sector was sought to be dismantled through disinvestment and outright privatisation. There was an unhindered loot of the people’s savings as was illustrated by the US-64 scam and the working of non-banking financial companies. The UPA government was expected to correct the distortions and initiate a coherent policy dispensation. .

If there is any attempt in this direction, it is very feeble and ineffective. The finance minister is on record saying that he is determined to integrate the Indian economy into the world economy. In other words, he accepts the Washington consensus-based globalisation without raising any question as to its suitability to India. In fact, he is bent on continuing the policy package inherited from the NDA government. To substantiate this assertion, let us take the case of pension reform introduced by the NDA at the prompting of international financial institutions. P. Chidambaram has decided to take it forward without any fresh look at it in view of the experiences of other countries including America. Private sector companies may use the contributions made by employees to pension funds for speculative and other purposes. They may meet the same fate as that of the investments in US-64. .

The only seriousness shown by the new government is on the rural front where the finance minister has talked of guaranteeing 100 days of employment in a year to one able-bodied person in every poor household at the minimum wage. He plans to double the volume of agricultural credit in three years, accelerate the completion of irrigation projects, provide farm and livestock insurance, improve marketing of agricultural products and creating rural business hubs a la the Chinese model as underlined by the Prime Minister at the Chief Ministers’ Conference on Panchayati Raj on June 29. The government has half-heartedly tried to assuage the feelings of senior citizens by announcing a special savings scheme. .

So far as the industrial sector is concerned, there is no assurance that the public sector will be expanded and new units will be set up to overcome regional disparities. Only assurance is that profit-making public sector units will not be privatised. .

The most perturbing proposals of the finance minister relate to FDI. In his own words: “Foreign Direct Investment (FDI) has the potential to add a competitive edge, especially in the industrial sector. The NCMP declares that FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports. Three sectors of the economy fully meet this description. They are telecommunications, civil aviation and insurance. There is an urgent need for infusing huge amounts of capital in these sectors. I, therefore, propose to raise the sectoral cap for FDI in telecommunications from 49 per cent to 74 per cent; in civil aviation from 40 per cent to 49 per cent; and in insurance from 26 per cent to 49 per cent.” (emphasis added) .

Raising the FDI cap in telecommunications and civil aviation is certainly going to jeopardise India’s national security. It seems Chidambaram has forgotten the raison d’etre of nationalisation of foreign oil companies by Indira Gandhi. To refresh his memory, it was to ward off the danger to national security arising from the blackmail tactics of foreign oil companies. .

If the FDI cap in telecommunications is allowed to increase to 74 per cent, what will happen? It will be difficult for India to keep its sensitive data safe from the prying eyes of foreign powers. The growing reliance of Indian armed forces, intelligence activities, business and financial operations and the energy sector on information technology will increase country’s vulnerability once the MNCs start dominating telecommunications. It will become extremely unsafe to preserve, transfer and process data by utilising the information technology. India will become dependent on the MNCs for hardware, software, network applications, etc. on them. It will hinder the development of indigenous capability. Using the Internet for communications and transmitting data of sensitive nature will become extremely unsafe and risk. Already the country has experienced troubles from the Pakistani hackers who have tried time and again to destroy, if not able to steal the data of sensitive nature. Once the MNCs enter, this problem will become aggravated. Moreover, these MNCs will not allow indigenous R&D to develop because they are always fearful of increased self-dependence of developing countries. .

It will become extremely difficult to keep a watch on the Internet and the telecom infrastructure so that it remains secure. Whether we like it or not, it will amount to selling India’s valuable bandwidth, without which the country will not be able to run operational and strategic networks. .

It is unfortunate that we do not draw proper lessons from what America, France, Russia and China have done. These nations have kept the telecom sector under national control. For example, in the USA, the Communication Act of 1934 and the Communication Satellite Act of 1962 have laid down that no US enterprises with foreign ownership exceeding 20 per cent will be granted common carrier radio licences. Besides, foreign companies or people are not allowed to own more than 20 per cent of the share capital of any US corporation possessing radio licences. .

Thus the country must retain full control with proper legal and regulatory powers and frameworks over our telecom networks. As is known, defence information infrastructure such as the DCN is to use these networks. If foreign MNCs are permitted to come and then the government creates fibre optic network backbones for use by the defence services and intelligence departments, the expenses will be prohibitive. At the same time, doubts will persist about security and safety of the data transmitted. What is needed is to make utmost efforts at developing indigenous domestic hardware manufacturing and operating systems. This can take place only on the basis of domestic market as China has been trying to do. .

So far as the insurance sector is concerned, foreign MNCs will gather our domestic savings and lend them according to the priorities fixed by them. Till now they have not cared to lend according to the priorities laid down by the government. In addition, a part of the savings will be siphoned away to other countries. .

One does not understand why the government, whether it is of NDA or of the UPA, obsessed with grabbing as much FDI as possible. On the one hand, it liberally allows precious foreign exchange for all kinds of foreign tours and travels and shopping in the malls and shopping arcades and witnessing matches and performances and, on the other hand, is ready to kneel down before the MNCs for FDI. In 2002-3 Rs 16761 crore was spent on foreign tours and travels. This sum must have increased in 2003-04. There is no indication that the present government has any inclination towards restraining it. No accurate information is available on shopping because even without hard cash one can purchase with credit cards. During 2002-3, the import of gold and silver increased by more than 50 per cent. Besides, the import of precious metals, gems, gold and silver has increased enormously. It is anybody’s guess that a substantial part of this is purchased by black money holders. One had hoped, in vain, that this government would do something to mount an offensive against black money. .

It appears utterly humiliating for the UPA finance minister who belongs to the party of Nehru and Indira Gandhi going to the corporate sector magnates and share-brokers to propitiate them. One must not forget that the Indian corporate sector is largely parasitic. Its savings come to just 3.4 per cent of the GDP while the households’ savings come to 22.6 per cent of the GDP. Moreover the Indian corporate sector has not excelled either in R&D or management techniques. .

The brokers are angry because they have been asked to pay 0.015 per cent tax on their transactions and the media have painted a gloomy picture of the economy if these brokers non-cop-operate with the government. It is forgotten that the stock market does not have much to contribute to the Indian economy as it exists at present. Only around 1.5 per cent households have something to do with this institution. .

In a nutshell, the present budget does not come up to the expectations of the people who have voted the UPA to power. Mrs. Sonia Gandhi, the only genuine Congressperson concerned with the fate of the great organisation and the country must take note of the implications of the proposals and the background of the persons behind them.

To give one example, people have doubts whether a person who has always stood for “trickle-down” strategy in his academic writings can change overnight to manage India’s planning outfit in order to realise the dreams of national movement as articulated by Nehru and Indira Gandhi.

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