Date: 04 Feb 2018
Budget: All Hype, No Substance
This year’s budget speech of the Finance Minister is remarkable for the fact that it contains absolutely no mention absolutely of India’s external accounts situation. That is simply amazing, as a key aspect of our economic policy making for the last nearly three decades, ever since India began globalisation in 1991, is tackling our foreign exchange crisis. By the late 1980s, the Indian economy was entrapped in an external debt crisis (our foreign debt was nearly $84 billion dollars) and was on the verge of external accounts bankruptcy. And so in mid-1991, the Indian Government, in return for a huge
foreign loan to tide over the foreign exchange crisis, signed an agreement with the World Bank and the International Monetary Fund, agreeing to implement what are known as neoliberal economic policies. Since then, each and every government that has come to the Centre has been implementing these economic reforms; the Modi Government has been implementing these economic reforms at an even more accelerated speed.
There is a reason why there is no mention of our external debt or current account deficit in the Finance Minister’s budget speech. That is because the situation is going from bad to worse. Our external debt crossed $495.7 billion in September 2017, making India one of the world’s most indebted countries. The Indian economy has become totally dependent on foreign capital inflows, including both foreign direct investment inflows and speculative capital inflows, to stay afloat. All the glib talk about our large foreign exchange reserves is meaningless; as we have shown in several of our writings, our foreign exchange reserves are much less than our ‘vulnerable external liabilities’ (foreign capital that has come into the country that can leave the country very quickly). This means that if foreign investors decide to pull out their money from India—which they can do at the tap of a computer key— our foreign exchange reserves are simply insufficient to prevent the economy from once again plunging into foreign exchange bankruptcy, similar to what happened in 1990-91.
In financial year 2017-18, our external accounts situation is getting worse. During the first half (H1) of this financial year, India’s current account deficit (CAD) rose to $22.2 billion, or 1.8% of GDP, as compared to $3.8 billion or 0.4% of GDP during H1 of 2016-17. Our trade deficit for the first six months of this year zoomed to $74.8 billion from $ 49.4 billion in H1 of 2016-17.
Regarding growth figures too, the Finance Minister continues to behave like an ostrich sticking its head in the sand to hide from realities. He continues to claim that the economy is doing very well. The fact of the matter is, even after the government twice revised the methodology of calculating GDP growth rate to make the GDP growth figures look good and above 7%, GDP growth rate started falling again from 2016 onwards. It fell consecutively for six straight quarters, from 9.2% in first quarter of 2016 to 5.7% in the second quarter of 2017. Now, the government claims the economy has started recovering once again, it grew at 6.3% in the third quarter of 2017 and is expected to grow even faster after that.
In actuality, this claim of the growth rebounding is based on incomplete data, and so is not correct. That is because this official estimate of the economy growing at 6.3% is based on quarterly data, and this quarterly data is largely based on information provided by the organised sectors of the economy only. It does not include data from the unorganised sectors of the economy, and this sector contributes to 93% of the employment and 45% of the total output. Data for the unorganised sector is collected by the government through periodic surveys. This unorganised sector that was hit hard by first demonetisation (announced in November 2016) and then by GST (rolled out in July 2017). However, the government has carried out no surveys to estimate the impact of these policy measures on the unorganised sector. Therefore, the data used by the government to estimate the quarterly growth rate of the economy does not include the shock experienced by the unorganised sector. This means that the official growth rate figure given by the Finance Minister at best shows that the organised sector growth accelerated from 5.7% in the second quarter to 6.3% in the third quarter. Data provided by private surveys point to a large negative rate of growth for the unorganised sectors. Combining the two, the rate of growth of the economy for not just the third quarter of 2017, but for the first and second quarter too, is probably only around 1%, and not the 5 to 7% being claimed by the government.
There is no formal data to show the job creation in the economy—the government very conveniently does not collect this data. Unofficial studies show that job growth in the economy has probably fallen to its lowest ever level since Independence, with formal job growth plummetting to near zero.
With the Finance Minister not willing to admit that the economy is in crisis, he is obviously not concerned about increasing government spending, specially in the social sectors, to give a boost to economic growth. He has reiterated the fraudulent fiscal deficit theory in his speech, stating that the government attaches utmost priority to controlling fiscal deficit, and therefore he promised to bring it down from the revised estimate of 3.5% in 2017-18 to 3.3% in 2018-19. As had been demonstrated by Keynes several decades ago, the economic theory that governments must balance their expenditure with income and bring down the fiscal deficit to near zero is plain humbug. The reason why global capital and India’s foreign creditors are insisting on the government reining in its fiscal deficit is because it serves as an excuse to cut our social sector expenditures. And that is precisely what the government has done in this budget too. The budget speech as usual makes tall claims about the government’s concerns for the poor and improving the social sectors to provide everyone an opportunity to ‘realise their full potential’. But as has been the norm for all of Jaitley’s budgets so far, this is not matched by financial allocations. Thus, the budget for education has gone up by only 3.8%, while that for health has increased by an even lower 2.4%, both of which imply a cut in real terms.
The finance minister also claims that his government is committed towards welfare for farmers, but again, this is a big lie. What matters is not claims but financial allocation. Total allocation for all agriculture related sectors (Ministry of Agriculture and Farmers’ Welfare, Ministry of Rural Development and Ministry for Water Resources) has increased by only 7.1% over the revised estimate for 2017-18, a cut in real terms.
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