Gambling on the Private Sector at the Cost of the Working Class

Gautam Mody

The UPA government is clearly preparing for an election. It has sought to use the Union Budget 2013-14 as an instrument for that advance. There has been a careful attempt to appear to be visibly reaching out across sections of society. In the treachery of its detail the budget hits the working class. The budget while making small money increases in a range of programmes of social provision and protection, offers no programme for job creation or any substantive policy measures to contain inflation that continues to erode the real wage while it commits itself to cash transfers and cuts in subsidies all of which will contribute to further worsening the economic condition of the working class.

The increased tax on the ‘super-rich’ (incomes of above Rs. 1 crore) and companies is made in the spirit of charity and therefore comes with the promise of being imposed for one year alone. There is no effort to address the long-term ‘structural and institutionalised increase in inequality that has come to be built into economic policy over the last decade. There is indeed an increase in taxes on luxuries such as large cars (SUVs). Yet, much of budget making has in fact been taken out of the budget process. In the months preceding this budget the government has already put in place a mechanism of reducing subsidies on diesel and cooking fuel (LPG) all in name of fiscal prudence.

While so doing, apart from reducing the quantum of subsidized LPG, the government has squarely placed the burden on the working class by raising the price of diesel for the railways and state transport services at a rate much higher than for the retail prices. Hence while the increased cost of diesel for bulk goods and public transport is already feeding into the inflationary system by raising the cost of both travel and freight. In contrast the owners of large cars, the tractor owning large farmer and the newly emergent agri-corporation continue to get diesel at a subsidised price. This fundamental inequity cannot be corrected by a one-year tax increase or a 3% increase in the tax on large cars.

What remains unchecked is inflation especially food price inflation, which both the Finance Minister and the Government’s Economic Survey 2012-13 released yesterday, confirm, to be still in double digits. Inflation remains unchecked even though the rate of growth of consumption has halved from 8% in 2011-12 to 4% in 2012-13. Rampant inflation has, by the government’s own admission, seriously eroded real wages affecting even more the already perilous state of the working class. In addition it augurs poorly for an economy whose growth model is predicated on expanding demand.

The failure after four years in government to legislate a National Food Security Act with universal reach is stark. The budget promises no increase for the PDS (with only an additional Rs. 10,000 crore for administrative costs) signalling that when it legislates it can only be a targeted programme and not a universal one. Furthermore, the budget reaffirmed its commitment to cash transfers which if it replaces provision of food and other basic needs through the PDS it will further inflationary pressures by placing cash in a non-monetary public provision. The inflationary pressure will in turn erode the value of the transfer, making it impossible for the working class to afford what they could under the PDS.

While recognising falling real wages and continuing inflation, government has little to offer the working class. The rates of increase in expenditure in both education and healthcare have only just kept abreast with the rate of inflation. The only promise for social security is to streamline the schemes under various ministries but with no increase in level of fiscal support. The money for the MGNREGA has been frozen at the same level as last year at Rs. 33,300 crores which when in real terms works out to half the real value of the provision in the year 2006-07. The proposal of extending the MGNREGA to railway construction also means that government is looking at for reducing its wage bill through the MGNREGA. This in fact would mean a reduction in the number of aggregate jobs available and would create lower wage jobs on government construction projects.

This in fact marks the demobilising of employment guarantee. The budget also lacks provision for regularisation of employees under the ICDS, NRHM, SSA and other programmes. The several million employees under the social protection programmes are in fact the only net new jobs, in any sector, that have been created in the last 20 years and the majorityof them – Anganwadi workers, ASHAs, ANMs, MDM workers, Para Teachers and such other – who are primarily women who work on honorariums that are way below the legal minimum wage. In fact the government admits in its Economic Survey that far too many workers are bound to agriculture which cannot sustain them while manufacturing and services are simply not throwing up new jobs. Government, of course, limited by its ideology, sees the lack of skills as the source of the employment gap rather than the failure of capital to create jobs. Agriculture continues to remain in the doldrums with a lack of investment that has caused endemic low productivity. Hence government is left with little choice but to look for ways to promote self-employment through skill development and micro-finance under the National Rural Livelihood Mission without being able to address the vulnerability and unsustainability of self-employment at the bottom of the economy. While the prospect of new jobs is frozen, the government has increased the expenditure for defence equipment by 25% to the tune of Rs. 17,000+ crores or two-thirds the increase in the total health, education and housing spend. The direction of government appears clear that it would rather warmonger in the sub-continent and use the armed forces to put down voices of dissent in the North-East and the Kashmir Valley than addressing the causes of dissent. The government perhaps has little choice but to stoke nationalism since the burden of this growth model has hit both the working and middle class. The government seeks to pass the blame for declining rates of growth on to the global economic crisis. Reality is that this government led the integration into the global economy without even addressing the structural constraints of the domestic economy. Not just is the agriculture sector in near permanent regression, the last year – 2011-12 – brought out bottlenecks in the growth of the manufacturing and construction sectors placing excessive reliance on the service sector to maintain the economy on a growth path. This year – 2012-13 – the decline in the real economy has caused deceleration in the expansion of the service sector too. In the absence of an expansion in the real economy the service sector cannot remain evergreen. If India is to regain its rates of growth then it has to address the inherent constraints of private capital in the manufacturing sector.  Nothing exemplifies the structural weakness of the economy as does the external current account deficit (CAD). Even the Finance Minister appears to recognise this. At close to 5% of GDP this is simply unsustainable. In recent years the CAD has been financed primarily by short-term foreign inflows. Export growth has for the most part dried up. Despite the economic slow-down imports have not slowed down. Both oil and gold import growth remains high. Worse still capital goods imports have not slowed down either. The deficit has been further worsened by the spurt in demand for gold that reflects insecurity about the stability of the economy and the resolute lack of confidence in government policy that cuts across class lines. As a result government is dependent on financing the deficit primarily through short-term foreign inflows.

This continued dependence on imports reflects two things: first, the lack of technological capability; and second, the substitution of domestic capital goods by imported capital goods. This latter aspect – substitution of domestic capital goods – largely explains why the domestic capital goods sector has contracted and has become the driver of sharply decelerating manufacturing growth. Therefore increased import competition has dampened both expected corporate profitability and therefore the willingness of the private sector to invest. And no amount of tax breaks on capital goods expenditure will change that.

Although over some 20+ years industrial production has been restructured in a way that the share of wages halved with a corresponding doubling of the share of profits. This has not translated into a stable expansion in private corporate investment. Large corporates have used continued profitability to successfully reduce their debt-burden and are now cash surplus but are unwilling to invest despite the enormous investment subsidies made available to them. Hence the economy’s most stable source of investment has come from the savings of working- and middle-class households that constitute two-thirds of aggregate domestic savings. In turn government planned capital investment has fallen short in excess of 20%. Government has failed to meet its investment promises ranging from minor irrigation works to heavy industry and infrastructure including electricity and roads. Government has not just been bogged down by charges of corruption, large investment projects have met with resistance since government has failed to address livelihood needs of citizens, most of all the rural proletariat. While government has relied on private sector to drive economic expansion, the private sector has consistently sought to ride on the back of government investment. This is a vicious cycle that government can only hope to change but it lacks the political will to do so.

With the complete collapse of government investment and the withholding of private sector investment beyond household savings, the government has placed its reliance on foreign investment. The rush to open up multi-brand retail to foreign direct investment, despite all the averments to the contrary, is driven by this desperation. While government waits for FDI, it followed two roads – first to rapidly increase the short-term borrowings including raising the limits of FII investment in the government bond market. And second to squeeze the public sector.

Apart from the veracity of the fact that government indeed disinvested up to the extent of Rs. 16,000 crores in the current quarter (January-March 2013), and coerced the public sector financial institutions, such as the Life Insurance Corporation, into picking up equity in other public sector corporations, it has also extracted another Rs. 5,000 crores in excess of budgetary estimates as dividends from the public sector. What this means is that government has used fiat with public financial institutions, to draw in prudent household savings, into buying discounted public sector equity. It has further jeopardized the public sector’s medium- and long-term viability by soaking up its investable surpluses.

Furthermore, in the budget year 2013-14 government has relied on an estimate of Rs. 55,000 crores from disinvestment receipts. This budget estimate is more than double the claimed receipts for 2012-13.

The working class is faced with declining real wages, cuts in social provision and their meager savings for their future being dwindled away to subsidise capital and meet government expenditure while this government, clothed in the political rhetoric of apka paisa apke haath mein (placing your money in your hands) is by stealth, committing itself to a neo-liberal road far more than any, itself included, of the past.

1 March, 2013, New Delhi

Gautam Mody is Secretary, New Trade Union Initiative

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