With farmers agitating for more, prices to continue to be a big worry in 1981

Finance ministers should keep their bags open and mouths shut. When Ramaswami Venkataraman told some editors towards the close of last year that he hoped to contain his budget deficit within Rs 1,500 crore, he was apparently talking too soon.The deficit this year will almost certainly exceed Rs 2,000 crore, if not more, though what with receipts from black bonds and other artifices, it will no doubt be made to look less daunting. Venkataraman will have two options before him, as do all finance ministers faced with such yawning gaps: to spread his tax net a little wider and narrow the gap or leave the deficit untouched and hope for the best.A great deal, of course, will depend on Venkataraman's view of the economy which seems somewhat out of focus just now. The Government has been saying for some time that prices have stabilised and even the Reserve Bank, whose reports traditionally hide more than they reveal, has said in its latest report that the rate of inflation is decelerating - which is another way of saying that prices are going up, but a little more slowly than in the past. This is, however, nothing more than playing with figures, for there is little evidence, as the National Council of Applied Economic Research has pointed out, that inflation is on its way out. In fact, prices rose by 18.9 per cent between April and December 1980, over the same period in 1979, as against 14.8 per cent in 1979 over the preceding year, and this was before the latest increase in petroleum prices was announced. With the farmers agitating for more, prices will continue to be as big a worry in 1981 as they were last year.But should this really worry the budget-makers? In fact, several economic pundits are now asking whether budgets really do matter all that much. Going by the record of the last 10 years, there is little evidence that budget deficits have much of an impact on prices, or even industrial output, or, for that matter, capital formation in industry. The Indian economy seems to have attained, within a short span of 30 years of planning, state of nirvana, where nothing that the government does seems to touch it, this way or that. It has learnt to take everything in its stride, from whopping big deficits to stiff tax increases without losing its cool.Budgetary Outlay: For this purpose it is necessary to look not only at the Central budgets but also the state budgets. The Combined budgetary outlay of the Centre and states has increased nearly four-fold in 10 years, from Rs 8,352 crore in 1970-71 to Rs 30,366 crore in 1979-80. It has been rising steadily, but never by less than 7 per cent as in 1979-80 (Charan Singh's disastrous budget) and only twice by more than 20 per cent in a year. There is no correlation between the yearly increase or decreases in outlay and increases decreases in either the gross national product or industrial production or, for that matter, prices.There is a school of thought spawned by Milton Friedman and his monetarist friends, including Nani Palkhivala and others in India, which often argues mat all deficit budgets are inflationary and the only thing that can curb inflation is a balanced budget. Budgets have never been in balance for the last 10 or 12 years and the overall budget deficit has varied from as little as Rs 43 crore (in a total outlay of Rs 7,375 crore, orless than 0.5 per cent) to as high as Rs 1,698 crore (in a total outlay of Rs 30,366 crore or 5.5 per cent). There are businessmen who believe that deficit budgets are good for industry because they put purchasing power, howsoever phoney, in people's pockets and this upsurge in demand pushes industry forward. This must be a pipe-dream, for there is not the slightest evidence that deficit budgets have had a bullish effect on industrial output.In 1977-78, overall budget deficit went up by 658 per cent, that is, by a factor of 7.5, but that year industrial output went up by a measly 3.3 per cent while in the previous year (1976-77) when the deficit had actually been brought down by 61 per cent, industrial output had gone up by 9.5 per cent. Does this mean that reductions in budget deficits are good for business? In 1973-74, the deficit was reduced by 36 per cent, and how did industry do that year? It crawled ahead. if that is the word, by less than 1 per cent, the second lowest growth rate of the decade.And how do deficits affect prices? In 1970-71, the budget deficit soared nearly 10-fold, from Rs 43 crore in the previous year to Rs 424 crore, but the wholesale prices that year went up by only 3.7 per cent. Last year (1979-80) on the other hand, the overall deficit was reduced by 8 per cent but prices went up nonetheless by 16.7 per cent, the highest rise since 1975-76. The fact is that prices are affected by a thousand and one things-oil prices, monsoon rains, power, labour strikes-and deficits and taxes probably come at the fag end of the list.There was also a general scare last year about the withdrawal of the 80-J tax-holiday measure and the stock market plunged 4 points in two days immediately after the budget. It was said that some companies would go to the wall and the impact would be so bearish as to bring the whole stock market crashing down. It did nothing of the sort. In fact, the market started climbing and reached a record high of 223.2 (Economic Times Index 1969-70=100), after an unprecedented rise of 13 percent.Budget Secrecy:Nor have the chops and changes in taxes and deficits made the slightest difference to investment in industry. According to a study, the gross fixed asset formation in the private sector has been more or less stationary around Rs 1,000 crore a year since 1974-75, with minor ups and downs. During this period, the budget deficits have also gone up and down but they have had only a marginal effect on investment. The question is: if the budgets do not affect prices, industrial output or investment, what is all the brouhaha about?Thetamashaatmosphere associated with our budgets, or, rather, their presentation in the Parliament, is totally out of place with its ultimate impact on the economy. The budgets in die US are not treated as secretively as they are done in India or Britain. US presidents send their budget proposals to the Congress long before they become actually operative. Jimmy Carter, for instance, had already sent his budget to the Congress before Ronald Reagan took over from him, although the incoming president will now formulate his own budget proposals.The US fiscal year is from July to June and budgets are prepared and published six months ahead in January. The real reason why the budgets attract so much attention in this country is not their long-term impact, which is at best marginal, but their short-term implications, particularly the changes in excise and other duties which, with intelligent anticipation, can bring small fortunes to lucky businessmen dealing or speculating in these commodities in an economy chronically short of everything. For the same reason, the budget is an exercise in speculation for the Government also, as the Government too is very much in business. With its vast public sector, it is probably the biggest businessman in the country-and is as much interested in the quick buck as the corner grocer or sharebroker. And now with the 'black' bonds, the Government will have a slice of the black business also.But in a planned economy, with five-year plans, dutifully rolled out from Yojana Bhavan's computers, quick money should be the least of the Government's main objectives. Now that the sixth plan blueprint is more or less complete, and the programme of investment reasonably clear, there is little need for furious chops and changes in taxes and other revenue-collecting measures. Their effect is in any case marginal but they contribute to unnecessary turbulence in the economy. Long-term business planning is virtually impossible in a climate of turbulence, whether economic or political, and the least the Government can do is to assure businessmen of a reasonably long period of stability in taxation and other financial measures in which to plan their business.One reason why, possibly, the budgets do not have much of an impact on the economy is that the bulk of the budget outlay is spent on the Government's own house-keeping, leaving little for the so-called development expenditure. In fact, the position is so bad that the Government has to borrow to meet its revenue expenditure and cannot make both ends meet without borrowing. Until 1977-78 there was a small surplus on the revenue account, but since then things have deteriorated. In the following year there was, for the first time, a deficit of Rs 128 crore on the revenue account and there are indications that this has been steadily growing. The Government's finances are in such dire straits that it has to print money just to keep the wolf from the door, let alone for investing in the future. If Venkataraman can reverse this trend and set his house in order first, he will have gone some way towards tackling the other ills of the economy.Monetary Tinkering: The main reason, however, why budgets - not only in this country but nearly everywhere else, including Britain and the US - do not make much of an impact, is that budgeting is, after all, a monetary exercise which helps to influence only the demand side and leaves the supply side largely untouched. Yet, India's problems are 'basically supply-side problems which cannot be solved by monetarist tinkering. What is driving inflation is not demand - it is cost, and mainly the cost of wages running steadily above any gains in productivity. And demand does not necessarily lead to investment, as British economists brought up on Keynes are now beginning to discover. What is needed is the underpinning of the economy at the supply end, by lowering the cost of capital and creating conditions for increasing productivity. If creating demand by manipulation of taxes and interest rates were enough, supply would have caught up with demand and the country could not be so short of nearly everything - steel, cement, paper, edible oils and, of course, jobs. In fact, since 1966, gross domestic fixed capital formation has stagnated around Rs 3,600 crore a year in real terms, while between 1950 and 1965, it increased more than two-fold from Rs 1,400 crore to Rs 3,200 crore. The finance minister's first task must be to breakthrough this deadly bottleneck by creating conditions in which investment is not taxed and companies are able to retain a bigger share of the surplus created by them. This can be done, as the Bombay Chamber of Commerce has suggested, by permitting higher depreciation and also cutting down the cost of capital. Even Margaret Thatcher, the last Friedmanite, is coming round to the view that taxes and money supply are not everything and in the end, what matters is growth. However, in the end, as Keynes once said, we are all dead, but that was of course when Keynes - and Keynesian economics-was very much alive. It is apparently still very much alive in India - the last outpost of outdated phoren ideas-unless Venkataraman intends to bury it in his coming budget, and start on a clean slate.INFLATION: A RELENTLESS DEMON The rupee is no more what it once used to be; in fact, it is not even what it used to be two years ago, having lost a full third of its worth since January 1979. Only once before has the rupee had such a big fall-way back in the early '70s when it lost 40 per cent of its worth between 1971 and 1974. At this rate, the rupee, which has already lost 80 paise since 1960, will be worth no more than 8 to 10 paise in 1990 and will have disappeared into thin air by the end of the century, if not earlier. We shall then be dealing, as the Italians do, in thousands of rupees and every Indian will be a millionaire, including quite a few whom the statisticians now put below the poverty line.The trouble is that even when things are getting out of hand, statisticians, particularly those in the Government, have their own way of gilding the lily. The Reserve Bank, which should know better, has been painting a rosy picture of the situation on the price front, repeating more or less what Finance Minister Venkataraman has been saying. However, the fact is that prices are now rising (over 1979 level) at more than twice the rate they were going up immediately before the 1979 budget. That budget, Charan Singh's first - and apparently last-exercise in budget-making, shook up the economy so violently the tremors it let off are still being felt. If Venkataraman does the same thing again this time, there is no knowing where the whole thing will stop.One of the most striking features of the price situation is that retail prices continue to climb even as the babus drone on that wholesale prices are coming down. In November, for instance, the wholesale price index declined by 6 points but the consumer price index in that month rose by 5 points. There is a feeling that the wholesale price index as well as the consumer price index are 'rigged' and trade unionists like Datta Samant in Bombay have often claimed that they simply do not believe the official figures.Inflation: How do housewives cope with rising prices?A person earning Rs 1,500 a month in 1979 should now be making something like Rs 2,200 just to keep pace with the rising living costs, which means two increments of Rs 350 per year. Those with index-linked dearness allowances-like clerks in banks and the Life Insurance Corporation (LIC) - can perhaps get away with it. But for the rest, the cuts are very real and make big holes in family budgets.It is of course true that inflation is not wholly a 'desi' phenomenon. There are different ways of calculating inflation rates - the higher the rate, the more sophisticated the calculations - and that may be a reason for the differences. According to the latest available reports from Europe, Italy was affected the most in 1980 with an inflation rate - in terms of retail prices - of 22 per cent and West Germany the least, with slightly over 5 per cent. On the same basis, India's would be 13.4 per cent, nearly three times that of Germany and slightly over half of Italy's.Since inflation is simply too much money chasing too few goods, the only sure way of curbing it is to cut down wages and salaries when output is down and raise them when it is up. In 1979-80, for instance, gross national product in real terms was down by as much as 5 per cent. If all incomes were cut down by this margin, there would be no inflation, for people simply would not have the cash to bid against one another and push up the prices. Since no self-respecting trade union will allow such a thing, wages and salaries kept on going up and, with every rise, the price spiral was given a twist.If wages and allowances cannot be frozen, another way out is to just throw people out of jobs, so that at least a portion of the income is frozen, if not actually reduced. This is what Margaret Thatcher is trying to do in Britain, which has still not been able to bring its two-digit inflation under control. But this calls for strong political will which only the Thatchers and the Reagans can apparently summon. By freezing the dearness and other allowances of the LIC staff, Mrs Gandhi's Government is also entering the fray against inflation, but only the budget will show whether the Government really means business. Published By: AtMigration Published On: Nov 27, 2013 08:42 IST--- ENDS ---

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With farmers agitating for more, prices to continue to be a big worry in 1981

Going by the record of the last 10 years, there is little evidence that budget deficits have much of an impact on prices, or even industrial output, or, for that matter, capital formation in industry.

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