The politics of the coming budgetnews
Prem Shankar Jha
21 January 2006

Prem Shankar JhaOn February 28, Mr Chidambaram will present his third budget. Judging from the past two it too will perform a political balancing act between the demands of the Left and Mrs Sonia Gandhi's Advisory Council and those of industry and trade, while trying to adhere to the revised deficit-reduction targets of the Fiscal Responsibility and Budget Management Act. When, like a magician, he produces such a budget, the entire business and political elite of the country will applaud and share prices will rise still higher.

The applause will blind the country to the grave political threat that is looming over the horizon. This is the threat of overt, violent class conflict. A certain amount of class conflict exists in every society. In democracies it is the prime mover of political change. But in the past decade or more, it has grown steadily in India to the point where it has become an imminent threat to the stability of the country. If that stability is lost , then economic development will be the first casualty. India could then descend at breathtaking speed into becoming a failed state.

The threat is developing not out of what the government (or for that matter its predecessor) has done, but what it is not doing. The country got a gentle warning when the NDA's 'shining India' slogan backfired and cost it the election. It got another, more explicit, warning when a thousand Maoists captured Jehanabad in Bihar, held it for several hours, and freed Naxalite prisoners from the local jail. But so far these warnings have been completely ignored, even by the Left.

Political sagacity requires us to take preemptive action before the conflict actually begins. Because once that has happened the time for salving political wounds through economic action will be past, and force will remain the only option.

Class conflict is being exacerbated in the Indian polity by three recent developments:

  • The first is the growing famine in the job market.
  • The second is the widening gap in incomes.
  • The third is a growing insensitivity to the poor in the state itself and, consequently, a more and more frequent resort to force to quell social unrest.

Growing job famine
Not only has employment in the organised sector stopped growing, but agriculture's capacity to absorb more workers has been virtually exhausted. The government's strategy for employment generation is a comic muddle of direct assaults on rural poverty and unemployment via the National Rural Employment Guarantee Programme, and attempts to stimulate employment through growth in small and medium industry and construction. It has itself not grasped that the 5.5 per cent annual growth of employment in all services between 1993 and 2000, was a direct product of the very high average growth (8.8 per cent) of labour productivity in industry during most of this period.

The plain, but little understood, truth is that because productivity growth in services always lags behind productivity growth in industry, increases in productivity in the latter literally forces increases in employment in the former. This is the explanation of the constant convergence towards full employment and reliance upon immigration to meet labour shortages in the first generation of industrialised countries between 1820 and 1973, and the repetition of this phenomenon in South-east Asia in the last 30 years.

Employment growth requires high rates of industrial growth, and today that needs a sharp increase of investment in the infrastructure. Instead this has been declining steadily for years and Mr Chidambaram, to perform his balancing act has cut it back more sharply than any of his predecessors.

Last year, after cutting fixed plan outlays by 40 per cent he announced that public-private partnerships would fill the gap. But a year has passed and neither the Special Purpose Vehicle nor the Viability Gap financing schemes has produced any new infrastructure projects. They will, eventually, but by then most of this government's term in office will be over.

This year the NREGP has committed Mr Chidambaram to increased outlays on Rural Employment. He also faces the need to make good the huge deficit that the oil refineries face because of the rise in the price of crude oil. The prospects for an increase in planned investment in the infrastructure are therefore bleak.

Rising income inequality
The second reason for the increase in class conflict is the widening gap in incomes. While the pressure of job-seekers has kept entry level salaries constant at best, and actually made them decline in real terms in the unorganised sector, managerial salaries have been increasing by 30 per cent or more a year in recent years . At the top of the pyramid these have shot through the roof: salaries of a crore or more a year are no longer uncommon.

This increase is inextricably linked to the advent if a new level of conspicuous consumption, in which foreign cars, foreign brands and foreign trips loom large. The desire for these among those who fix their own salaries and perquisites leads to a spiral of rising incomes financing rising conspicuous consumption. It is also without a doubt , feeding increased corruption in the bureaucracy.

Taken together, these developments have wiped out a crucially important buffer that had existed between the rich and the poor in the '70s. This was of a 'socialist-minded' managerial and bureaucratic class whose salaries were modest, which frowned upon conspicuous consumption and was conscious of the need to maintain social harmony in the country. So far, the change that has taken place is more qualitative than quantitative. But it has laid bare the conflict between the rich and the poor as nothing had done so far.

Increasing insensitivity to the poor
Finally, public sector financial and other enterprises have become more market oriented, and state governments more 'development-minded'. In ways that would take too long to explain, the victims of both have been the poorest of the poor. Insurance has become unavailable or the premia have risen; crop loans have become more niggardly; the properties of defaulters are attached with greater celerity; loan melas are a thing of the past.

But perhaps the most insidious change has been in the attitude of the state itself. Tribals who protest against the appropriation of forest land for mining or infrastructure projects are being routinely fired upon. In Rourkela, for instance, tribals who were demanding the return of land acquired for the steel plant 50 years ago but never used, were arrested in droves earlier this week.

The statement of a Maoist leader, published in an interview in the Hindustan Times a few weeks ago, that this unthinking resort to repression was precisely what had given them a stream of recruits, and his warning that they were poised to challenge the Indian State, has clearly had no effect on government policies so far.

The cure
A budget that displays a modicum of political sensitivity, would contain policy measure that would tackle all these causes of potential conflict. The only way to increase the growth of employment is to boost the industrial growth rate. The only way to do that is to increase investment in the infrastructure. The only way to do that, in turn is to cut subsidies.

The first place to do this in is the oil sector. Pricing kerosene at the same level as diesel and rebating purchases made by the poor on ration cards could recover the Rs12,000 crore from those who are mixing kerosene with diesel . By the same token, a five rupee increase in the price of diesel to reduce the gap between it and the price of gasoline could bring twice that much.

The best way, by far to discourage conspicuous consumption is to exempt savings from taxation and thereby convert the income into a consumption tax. This has been proposed more than once but been dismissed with something bordering on contempt.

The alternative to making the poor victims of development is to make them partners in development. This can be done by offering those displaced by infrastructure projects a royalty in perpetuity for the use of their land or the loss of their hereditary rights. But all they have been offered instead is a pittance by way of compensation and a 'relocation' that leaves them permanently impoverished.

* The author, a noted analyst and commentator, is a former editor of the Hindustan Times, The Economic Times and The Financial Express, and a former information adviser to the prime minister of India. He is the author of several books including, The Perilous Road to the Market: The Political Economy of Reform in Russia, India and China, and Kashmir 1947: The Origins of a Dispute, and a regular columnist with several leading publications.

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The politics of the coming budget