Budgeting for reforms II
Finance Minister Yashwant Sinha in effect moves the process of economic reforms out of the budgetary
domain and into a broader terrain. As the euphoria of Budget 2001 evaporates, the pernicious effects of
the reforms process sink in, spelling si gns of real trouble ahead.
in New Delhi
FOR reasons that are at times rather mystifying, the stock market in India has been elevated to the
exalted status of a barometer of the state of the economy. As Union Finance Minister Yashwant Sinha on
February 28 unfolded his budget proposals, the mark ets showed a certain buoyancy. After he concluded
his speech, the captains of industry who had assembled at the headquarters of the Confederation of
Indian Industry (CII) in New Delhi pronounced it an unqualified triumph of the liberalisation process.
Co nfident predictions were made that the sensitive share price index on the Bombay Stock Exchange
(Sensex) would ascend to the stratospheric heights and top the level of 5,000 within a matter of days.
But in reality, the Sensex hovered precariously around the 4,000 mark, buffeted by conflicting
expectations and a frenzy of speculative forward selling that short-circuited the buying mood. The
over-extended positions taken by certain operators were then further aggravated by a rival cartel of
operators who ruthlessly drove down the vulnerable scrips. The BSE president quit in disgrace, the
statutorily empowered watchdog of the markets, the Securities and Exchange Board of India (SEBI)
launched an inqui ry, and the Finance Minister repeatedly assured Parliament that the markets were in no
danger of paralysis on account of broker defaults.
What was evident in the markets a bare 10 days after the Union Budget was not the exuberance of a bull
run celebrating the revival of the faltering liberalisation process, but the disarray of a loosely regulated
and undisciplined system. Although a buyin g frenzy was evident initially, prices never quite scaled the
heights that had been forecast. Rather, the markets plunged into a serious payments crisis and the indices
remained at the levels where they had been hovering prior to the Budget.
Obviously, the gathering at the CII, which included some of the most credible public figures from the
community of industrialists, may have seen only part of the reality. The budget proposals that may have
really engendered the euphoria were simply the t axation measures, particularly the removal of all but
one surcharge on corporation and personal income taxes, the reduction of excise duties on certain
consumer durables, notably motor vehicles, and the reduction of the rate of tax on dividends by 10 per
With the emphasis on the excise duties front being on a simplification of rates and the gradual
elimination of exemptions, the Finance Minister has estimated that the yield would increase by the order
of Rs.4,600 crores. On the customs side, there has be en an overall slashing of rates, leading to an
expected decline in revenue of just over Rs.2,100 crores. And though changes in direct tax rates are
expected to result in a revenue loss of Rs.5,500 crores, improved compliance and better administration
wou ld, in Yashwant Sinha's assessment, make up for this.
Viewed in the context of the fiscal deficit, which is projected, perhaps rather optimistically, to touch
Rs.116,000 crores in 2001-02, these tax initiatives must seem rather modest. That was clearly the
principal cause of the initial euphoria that greete d the Budget. Rather than go in for the imposts that
could cause a dent in the deficit, the Finance Minister chose to stick to the philosophy of lowering rates
in the belief that this would provide an incentive for productive agents in the economy. This act of faith
in the virtues of liberalisation was obviously the first cause of the euphoria that swept the markets.
CENTRAL to the Budget,though, is the reduction in administered interest rates on small savings and
provident fund accumulations by 1.5 percentage points. Although this directly impacts on the earnings of
millions of middle-income earners, the government' s calculation was obviously to relieve a part of the
huge burden it bears on account of its accumulated debt. Tangentially, it is also a signal to the small
saver that he or she should be focussing greater attention on unconventional savings instruments such as
stocks and shares. For the edgy share markets, this was another vast stimulus.
Finally, however, the markets could not surmount the power of the broker lobbies, who proved that their
gatekeeping function is always decisive in any encounter with expressions of investor sentiment. It is
tempting, though, to view the lack of scruple o f the stock market cartels as the only irritant in an
otherwise buoyant situation. This would, for anybody who believes that the stock market cannot for long
outrun the performance of the real economy, be simply implausible.
It is a curiosity of the current mood that the profit warnings being issued with increasing regularity by
some of the star performers of the stock exchanges - notably the information technology firms - have not
quite been factored into calculations. In w arning that earnings for the current quarter could fall well
below market expectations, many of these firms, including Infosys Technologies, NIIT Ltd and Wipro
Technologies, have been gradually coming to grips with the realities of the global marketplace . The
digital economy rapidly transmits stimuli - - whether positive or negative - from distant New York
trading to the Mumbai market. And the crumbling of the key indices in the U.S. economy, notably the
Nasdaq Composite of technology intensive firms, h as had a definite impact in the Indian context.
In their confident forecasts of a bull run in the markets, India's industrialists proved oblivious of global
realities. If this Budget incorporates features that would tend to overwhelm these deeply imbedded
structural constraints, these have to be sough t in the measures that the Finance Minister has introduced
which are, strictly speaking, in the domain of other Ministries. Thus, the decision to allow retrenchment
without prior clearance in all industrial units employing a thousand workers or less was announced
without the formality of prior consultation with the Labour Minister, who would now be tasked with the
contentious job of introducing the necessary legislation. The decontrol of sugar prices and the revisions
to the drug control order were, sim ilarly, announced without broad consultations among all the
Assuming that these irritants are sorted out, there is a whole new domain of negotiations with the States
that this Budget has opened up. Three vital areas that the Finance Minister ventured into with greater
recklessness than conviction - the revamp of State electricity boards (SEBs), the introduction of a new
decentralised food procurement system, and the levy of user charges for services such as irrigation at
commercial rates - would seem to call for a prolonged and perhaps contentious process of neg otiations
with the States.
Since the plan to accelerate the reforms of SEBs was announced, a meeting of State Chief Ministers was
held on March 3. The Central government held out an incentive that a one-time settlement of all "past
dues" from the SEBs to the Central sector power g eneration enterprises would be considered, provided
it was linked to a time-bound programme of SEB reform. It was also resolved at the meeting that
sustained supply of power from Central sector generating stations would be linked to "demonstration of
cap acity to make payments for current purchases and securitisation of past dues".
On March 5, the Central government announced the constitution of an Expert Group to work out
measures to settle outstanding dues of the SEBs and to recommend a strategy to restructure their capital.
Headed by Planning Commission member Montek Singh Ahluw alia, the group is expected to address
the first part of its mandate within three weeks and complete the second part in another three.
There is a commendable sense of urgency over resolving a problem that has been in the foreground of
policy debates for close to two decades. But how workable the plan would be, the financial costs it
would impose and the distribution of the burden of adj ustment, are still unsettled questions. It has for
long been a complaint of the SEBs that their capital base comprises entirely of interest bearing loan and
that a part conversion to equity would dramatically improve their operational parameters. But the costs
of this transition would have to be met and the Central government would be expected to bear a part.
How far it would be willing to back up its exhortations to the SEBs with infusions of finance, remains
Food stocks management remains another area where the States' vital interests could come in the way of
any facile effort at change. A decentralised system of food procurement has been in operation in the
States of West Bengal, Uttar Pradesh and Madhya Pr adesh since 1999-2000. The difference between the
cost of procurement of grain and the Central issue price is reimbursed to the States as subsidy. In
2000-01, the total subsidy that was paid to the three states amounted to a little over Rs.250 crore. Thi s
would seem a rather inconsequential figure when assessed against the Central Government's food
subsidy of over Rs 12,000 crore. The provision for subsidy made in 2001-02 is Rs 13,675 crore. As of
now, there is no reckoning of how much of this would be actually passed on to the states, simply because
few states have indicated how they intend to respond to the new proposals. But the transition is unlikely
to be smooth and painless.
Similar difficulties are more than probable in the provision of services like irrigation on a commercial
basis. The measure directly impinges on the interests of powerful interest groups in state politics. And
with Indian agriculture already in crisis, a ny such move could be politically expensive.
With all the attention to matters outside the budgetary process as conventionally understood, the Finance
Minister has not quite been able to obscure the rather bleak statistics of languishing investments in vital
sectors. Total Central Plan outlay in 20 00-01 is just over Rs.108,000 crores - over 7 per cent below the
initial budget estimate. The shortfall in Plan spending has been acute in agriculture and rural
development, as well as in industry and mining. But the social services such as education and health, and
energy too have suffered seriously from the growing investment famine. Although the Finance Minister
has budgeted for a 20 per cent increase in Central Plan outlay in 2001-02, there is considerable
uncertainty with regard to the attainment o f this target. And if it is borne in mind that the weakening of
growth impulses in the last two years have had a lot to do with bottlenecks in the energy and
infrastructure sectors, there would seem ample reason to view the Finance Minister's optimistic
projections with some scepticism.
Games on the market
THE BSE Sensitive Index, the most popular stock market index in the country, fell by 12 per cent over
the previous month to end at 3,882 points on March 9.
In itself, that was nothing unusual. The Sensex has fallen by such magnitude in the past. But a series of
incidental developments preceded and accompanied the latest fall. And it is not often that a Sensex crash
is accompanied by the president of the Bom bay Stock Exchange (BSE) putting in his papers.
There seemed to be no reason for any such panic. The Union Budget, presented on Feburary 28, was
well received by industry and the capital market and the market indices went up sharply that day. But the
slide started soon after.
Rumours in the market about imminent payment default by some broker or other accompanied the latest
crash. Confidence in the systems that have been built over the last few years to insulate the market from
such defaults appears to be low.
Anand Rathi, the president of the BSE, quit office once it became known that he, a stock broker active in
the equity market, had made a call to the BSE's executive arm during trading hours and obtained
privileged information. The BSE's executive arm is s upposed to be separated from its stock broker
directors on the governing board by a firewall in order to prevent any conflict of interest. But events over
the last few years have shown that the firewall exists only on paper. Access to privileged informat ion -
especially on the activites of other investors - gives the recipient an unfair advantage. Rathi, however,
denies that the information he received was misused.
Speculation on the activities of select stock brokers and institutional investors seems to have played a
significant role in determining share price behaviour over the last year. In recent times, rumours about
select individuals and entities impacting on share prices goes back to 1999 when a bull run started in the
stock market. The last bull run, between 1999 and 2000, was marked by a spectacular uptrend in the
share price of companies in the information technology, electronic media and entertainment a nd
telecommunications sectors. Along with this, the influence exercised by BSE brokers such as Ketan
Parekh grew. A mere rumour that Parekh had picked up a particular in a stock was enough to send the
shares of the company concerned to higher levels.
The biggest beneficiaries of the rumours were stocks in the technology and entertainment sectors. On the
face of it, the popularity of these sectors with investors was well-founded, for growth in these sectors
have far outstripped growth in other sectors . Moreover, with these sectors being relatively new, the
potential for continued growth existed.
High-profile brokers and institutional investors played an important role in raising the profile of the
technology and entertainment sectors. High levels of investor interest coupled with good prospects led to
an unprecedented boom in these sectors.
During the bull run and after came rumours of collusive behaviour involving company promoters,
institutional investors and select stock brokers. When the going was good none of it seemed to matter
and the capital market regulator, the Securities and Exch ange Board of India (SEBI), did not show any
visible sign of urgency in investigating the rumours.
An interesting aspect of the bull run and the higher profile acquired by technology companies is the
rising interest in India in the development in the U.S stock market, especially Nasdaq. Nasdaq is where
technology companies in the U.S. are listed and w here a few of Indian technology companies headed
over the last couple of years. The high incidence of software exports, especially to the U.S., meant that
events there did have a bearing on the new pivotals in the Indian stock market.
A few banks and finance companies appear to have resorted to lending against securities as collateral.
Hard data on the activities of banks in the capital market is unavailable as yet, but there are credible
reports that some of them may have over-reache d in lending ag against shares.
Once the bull run petered out last year, the fall in stock market prices in technology and entertainment
stocks was fairly sharp. In fits and starts, the new pivotals drifted downwards.
Since the beginning of the year, foreign institutional investors (FIIs) have brought in over Rs.5,000
crores as portfolio investment. Traditionally, FIIs have driven market movement, but on this occasion
their investment pattern did not leave a deep impa ct.
On March 2, Oracle, an information technology company in the U.S., announced that its financial results
would be lower than expected. That day, the Sensex plunged 177 points. It was on that day that Rathi
made a call to the Surveillance Department of the BSE and received privileged information.
In the subsequent week, the slide continued amidst rumours that stock brokers were likely to default, that
banks that had lent against shares as collateral had begun to sell and that the slowdown in the U.S. was
worse than was initially expected. SEBI re sponded by banning short sales for a fortnight. At the end of
the week, all the leading stock exchanges had settled their accounts. But the sharp fall in share prices is
expected to lead to defaults in the subsequent week.
The role of SEBI has come in for criticism. On the one hand, SEBI deserves praise, as do the stock
exchanges, for having made a transition from an opaque and antiquated system to a transparent and fully
automated trading system. But SEBI, and to an exten t the BSE, have not been able to convince the
market players that they were able to enforce rules in an equitable manner.
There were reports in the mdeia about collusive behaviour involving stock brokers, institutional
investors and a few promoters. The situation has the potential to create an upward spiral in share prices
that may be transitory. If SEBI has tried to do any thing about it, it remains a well kept secret.
The old problem of stock brokers' tentacles reaching into the BSE administration has not been addressed
convincingly. A sad aspect of the panic seems to be a pervasive belief that the stock market is still rotten.
Contrary to popular perception, progress here in the last five years has been remarkable. But yet far too
many people believe that the system still turns a blind eye to misdemeanours of the powerful. And
therefore, the problem is greater than what is apparent.
The silver lining in the latest "crisis" has been that thus far the leading stock exchanges have been able to
ensure that the stock market functions smoothly. But that has not translated into confidence.
Wrong premises, callous priorities
THE elite euphoria over the Union Budget for 2001-2002, carefully nursed by government and corporate
spokespersons in the electronic and print media, should not blind us to the economic crisis facing our
country. These aspects - which include a significa nt slowdown in agriculture through the 1990s, a
less-than-impressive growth in industry, especially manufacturing, over the same period, a remarkably
slow growth of employment between 1993-94 and 1999-2000 as evident from the National Sample
Survey data, and the persistence of mass poverty despite all the hype over liberalisation-induced growth
- have received little or no attention in the Budget and in the commentaries of the government and
corporate cheerleaders. Although the Economic Survey draws att ention to some of these questions, such
as the slow growth of agriculture, its policy recommendations amount essentially to more of the same
policies which have brought the country to this pass, only at a more accelerated pace.
The Budget is faulty on at least two counts: its premises and its priorities. First, its premises. The
Budget's diagnosis of the decline in the growth momentum of the last three years is that we are not
liberalising, privatising and globalising rapidly e nough. Thus it is presumed that if we provide all
possible incentives to large capital, Indian and foreign, rapid growth will automatically follow, and it
will take care of problems such as poverty and unemployment. It is also presumed that the only way to
attract foreign capital is to move rapidly towards capital convertibility, and to subject every policy
proposal to the acid test of whether it will help retain and/or enhance the "confidence" of the foreign
investor in the Indian economy. It is assume d as an article of faith that the government's sole role in the
economy should be that of providing a minimum set of public goods that the private sector will find
unprofitable to provide, including, of course, "law and order" to ensure that the rules of the economic
game are properly followed.
These are all untenable premises. In every case of successful development, including the East Asian ones
that our policymakers repeatedly invoke, the state has played a crucial role. Investments in infrastructure
have rarely come on largely private initi ative. The same holds for investments in human development.
Public investment in agriculture has been a key to agricultural growth in India and elsewhere. The
current crisis in Indian agriculture is not merely one of unremunerative prices or the severe d amage
being and likely to be caused by the removal of quantitative restrictions (QRs) on imports, although
these are also important. The crisis is fundamentally about the neglect of investment in agriculture, the
slowdown in productivity growth, the weak ening of public funding of research and development in
agriculture, and the lack of support to post-harvest and marketing activities.
THE revised estimates for 2000-01 are, in the aggregate, not far off the budget estimates. The Finance
Minister has found this to be a matter for self-congratulation. However, a look at the disaggregated
figures of receipts and expenditures shows that th is "achievement" has resulted from severe expenditure
compression, especially in relation to capital expenditure. The government's capital expenditure, as per
the revised estimates for 2000-01, is lower in nominal terms than the Budget estimate by 9.4 pe r cent.
When inflation at around 8 per cent is taken into account, the decline in real terms can be seen to be
much larger. Central Plan outlays of some sectors have borne the brunt of the cuts. For instance, the
revised outlay of the Ministry of Mineral s and Mines is down by 28.2 per cent and that of the Ministry
of Steel by 29.7 per cent, compared to budgeted outlays. Revised outlays on energy are 12.4 per cent
below the budget estimate and those on agriculture and allied activities 11.8 per cent less than budgeted.
For all the professed concern about outlays on social services, the revised estimate of outlay for this
sector is nearly 10 per cent less than budgeted.
In terms of proposed outlays for 2001-02, the total Central Plan outlay is budgeted to be 11 per cent
higher than those of 2000-01, which in real terms implies little increase. If the last year's experience is
any guide, the final outlay may well be much less. The Finance Minister's tax proposals involve a loss of
Rs. 2,128 crores on customs duties and of Rs. 5,500 crores on income tax and corporate taxes. Excise
duties, on the other hand, are slated to rise by Rs. 4,677 crores. The excise duties in res pect of a number
of articles of common consumption have been increased. Thus, there is no real effort to mobilise
resources from the very rich. Although the Finance Minister has assumed that buoyancy in direct tax
receipts arising from both growth and be tter compliance will make up for the estimated loss, it is worth
noting that last year's corporate tax receipts were lower than anticipated, as were customs. By contrast,
receipts from income taxes, a significant proportion of which is paid by salary and wage earners,
exceeded the budget estimates.
The Budget has provided a plethora of incentives to investments in infrastructure by the private sector,
including ten-year tax holidays. It has allowed 100 per cent foreign investment in non-banking financial
intermediaries, and raised the ceiling on fo reign institutional investor (FII) holdings in a company to 49
per cent. It has made it easier for rich Indians to invest their money abroad, and has taken steps towards
capital convertibility at a time when in the rest of the world there is rethinking o n this issue. It is not
surprising that foreign investors and Indian corporates are pleased with the Budget. It is, however, by no
means certain that this pleasure will get reflected in significantly increased investment. Nor is it obvious
that private i nvestment will be greatly stimulated by the reduction in interest rates on small savings on
the ostensible ground that these were high in real terms and acted as a floor to market rates of interest.
With inflation hovering at around 8 per cent, the real interest rate on provident funds can hardly be made
the villain of the piece.
THAT the Budget priorities are callous is evident in its handling of labour as opposed to its treatment of
the corporate sector. It seeks to do away with the very notion of security of employment and suggests
that if employers were given the right to hir e and fire at will, and engage contract labour for a large part
of their business, suddenly investment will boom and everybody will find a job. The proposed carrot of
enhanced compensation for retrenchment is poor comfort for the worker.
The budget speech makes clear the intention of the government to complete the demolition job begun in
the last year's budget with respect to the public distribution system (PDS). Having raised the issue prices
of foodgrains in the PDS to a level that has led to a sharp decline in offtake and a large rise in stocks
with the government, the Finance Minister has now proposed to minimise the role of the Central
Government and the Food Corporation of India (FCI) in PDS, ostensibly to promote the involvement of
States, and ultimately to abandon the poor and the food-insecure to the tender mercies of private trade.
This move is of a piece with the government's claim, based on highly questionable statistics, that poverty
has declined dramatically to just 27 pe r cent. The claim that the problem we have on the food front is
one of how to cope with surpluses provides a measure of the callous policy priorities of the National
Democratic Alliance (NDA) regime.
The refusal of the government to launch a massive food-for work programme, using the large stocks of
foodgrains, build much needed rural infrastructure and stimulate a public investment-led growth process
stems from its wrong premise that growth in India is not demand-constrained, but only
A paradox of a deal
The Budget exemplifies how what may be a dream for some can be a nightmare for others.
THE initial euphoria that greeted Budget 2001-02 has waned. Stock market analysts who dominated the
airwaves had declared it a dream Budget and rated it close to 10 on a ten-point scale. Their enthusiasm
was understandable. The Budget had done away with earlier surcharges on income tax; reduced tax on
dividends distributed by domestic companies from 20 to 10 per cent; exempted from taxation capital
gains derived from the sale of securities and units so long as they are reinvested in primary issues of pu
blic companies; and provided a host of tax holidays to investments in sectors ranging from
infrastructural areas to Internet Service Providers (ISPs) and broadband networks. The Sensex
immediately captured the enthusiasm in market circles generated by th ese concessions, rising by more
than 170 points on a single day.
But the euphoria in the markets proved short-lived. A bear-run, allegedly based on insider information,
sent the Sensex crashing, forcing the regulator to intervene and launch an investigation. This, however,
was not a chance event that was unfortunate f or a Finance Minister who had 'performed' well. It brought
home a message that is central to the assessment of the current Budget: markets are not benign
institutions peopled by agents involved in arm's-length transactions; they are sites of contest b etween
powerful and manipulative entities which have no scruples while engaged in their search for ever-higher
WHY, it may be asked, does this message matter for the Budget? It does because what has been seen by
many as most significant in this Budget are a set of "off-budget" measures that are based on the premise
that markets left to themselves are the best mea ns to organise economic activity. Examples of such
measures mentioned in the Budget speech are many, but two deserve special mention.
First, consider the food policy initiatives "announced" in the Budget. From a budgetary point of view
what matters here are the subsidies, which have to be met by the exchequer. In the neo-liberal ideology
dominating public policy debates these days, suc h subsidies have been considered unsustainable. Hence,
the fact that food subsidies budgeted at Rs.8,210 crores in the Budget for 2000-2001 have turned out to
be close to 50 per cent higher at Rs.12,125 crores, has been bothering the advocates of reform.
What needs to be noted is that this increase has not been the result of the largesse of the government
vis-a-vis the poor. Rather it is the result of the foolishness of the government in repeatedly raising the
issue prices of food distributed through the public distribution system (PDS) to levels even higher than
warranted by the increase in procurement prices, in order to reduce food subsidies. The net result has
been a sharp fall in offtake from the PDS. In the event, even in a year when foodgrain out put growth has
been low, the government has found itself saddled with huge and rising stocks, which increased its
outlays on the costs of carrying these stocks. It is those costs that the higher subsidy goes to meet. A
wrong policy aimed at reducing subs idies has ended up increasing subsidies even further.
That experience would suggest that what the government should do is revise issue prices downwards, as
well as use the foodstocks available with it to launch food-for-work programmes that improve rural
infrastructure, so as to reduce stocks to reasonable levels. The Finance Minister has, however, offered
what he thinks is a completely different solution. In order to deal with the embarrassment of rising food
subsidies, he has suggested that the government should virtually wind down the system of procurem ent
and distribution of foodgrains. The Food Corporation of India (FCI) should procure only the quantity
required to maintain a "security reserve" - an estimated 10 million tonnes. If implemented, this would
mean no procurement for the coming few years, since the government holds more than 45 million tonnes
of food in stock.
Meanwhile, food movement and food distribution throughout the country is to be freed and privatised
and the task of servicing the PDS is to be left to the States, which would be provided "financial
assistance" to meet the subsidy for the population below the poverty line. This would mean that the PDS
is to be in large part dismantled. Markets would reach food to the people, including those who live in
food deficit States. Immediately this would spell disaster for the farming community, because the FCI w
ould disgorge its stocks. And if bad monsoons persist and stocks dry up, it would mean that rising food
prices in the future would erode the real incomes of consumers. Some sections would lose heavily at all
times. In the first instance, that is the caus e that would be served by leaving food distribution to the
market, in keeping with the neo-liberal agenda.
However, these markets are not to be left to themselves. In order to facilitate their functioning, the
Finance Minister has announced that private agents investing in the handling, storage and transportation
of foodgrains would enjoy one of the many long -term tax holidays incorporated in the Budget. The only
section to gain would be large conglomerates like Cargill, waiting in the wings to rush into the food
The other area where markets (read oligopolistic firms) are to be allowed to operate freely is in defining
the terms of purchase of labour power. Giving official sanction to a recommendation that has been
mooted by powerful lobbies, the Finance Minister has suggested that firms employing up to 1,000
workers are to be allowed to close and/or retrench and layoff workers freely. As has been noted in a
section of the media, providing this freedom, hitherto available only to units employing up to 100
workers , to those employing up to 1,000 workers, increases coverage to more than 95 per cent of the
organised industrial sector.
India's industrial history is replete with instances where because of whimisical private decisions,
intra-family and inter-family business disputes and actions aimed at siphoning off surpluses from
still-profitable industries to fund speculative investme nts, many viable units have been rendered sick.
Even where the government, through the financial institutions, wields substantial influence over
individual firms, such experiences have been common. Letting an industrial sector replete with examples
of su ch units full freedom over the livelihoods of workers is obviously disastrous.
Advocates of reform would argue that things have changed in post-reform India. The growth of the stock
markets to maturity and the greater ease with which poorly performing firms can be punished by
stockholders and even be taken over by rivals, has made the stock market itself an important means
through which markets discipline errant managements. That view, to start with, is derived from a
dubious reading of the dominantly American system of corporate governance. Further, it is of little
relevance to a country in which markets are dominated by a few manipulative big players, including
foreign institutional investors (FIIs) with little interest in productive employment in the domestic
economy. This is a lesson that the post-Budget plunge in stock marke ts drives home to anyone with a
mind that is still open. To use such arguments for freeing labour markets is to risk the livelihoods of an
already overexploited labour force by subjecting their tenure to the dubious whims of profit-hungry
THE Budget is not the true province of these market-friendly measures. Neither does the Finance
Minister have jurisdiction to decide upon them, nor can he use the Budget speech as the means to put
them in place. The issue that remains is what the Finance Minister has done with regard to what he can
do through a Budget, namely, spur growth and redress inequality. Here the record is dismal.
The first premise of recent Budget-making exercises, including the present one, has been that India's
prime fiscal task is to reduce the fiscal deficit. The second is that the deficit is high because of
expenditures being higher than warranted. These ass umptions are trivial and wrong. India's economic
situation today calls not for fiscal compression but fiscal expansion, for two reasons.
First, the accumulation of huge stocks of foodgrains, estimated at 45 million tonnes, with the
government. Second, the comfortable foreign exchange reserves position of the central bank, with
foreign currency assets alone amounting to $41 billion.
When food stocks are aplenty and foreign currency reserves comfortable, the manoeuvrability of the
government is substantial. It can undertake expenditures without the perennial fear that plagued it in the
past that such expenditures, by raising employme nt, incomes and the demand for food, could create a
food shortage that triggers an inflationary spiral. And even if the economy, in the wake of such
expenditure, runs into temporary supply bottlenecks in particular sectors (such as say, sugar, edible oil s
or onions), the foreign exchange reserves can be used to resort to imports to ease supply and dampen
price increases. The danger that expenditure increases on the part of the government would trigger
inflation hardly exists.
This ability to increase expenditure without triggering inflation constituted an opportunity because it
occurs in a context where demand in the economy is sluggish and poverty remains high. India's GDP
growth rate is estimated to have declined from 6.6 p er cent in 1998-99 to 6.4 per cent in 1999-00 and 6
per cent in 2000-01. What is more, even this rate of growth has been ensured because of the buoyancy of
the services sector, whereas the commodity producing sectors have been performing poorly. Industri al
growth, placed at 8.2 per cent in 1998-99, fell to 6.5 per cent in 1999-00 and is expected to be
considerably lower this year. And there is little disagreement on the fact that the sluggishness in
industrial growth is a result of slackening demand gro wth in the system. The obsession with the fiscal
deficit has resulted in the loss of a major growth opportunity.
Consider now the Finance Minister's premise, repeated in his Budget speech, that the fiscal deficit is
where it is owing to excessive expenditures. This assumes that receipts are given. What the Minister
failed to note is that between 1989-90 and 1999-20 00 the Centre's net tax revenues to GDP had declined
from 7.9 to 6.6 per cent, or by 1.3 percentage points, resulting in loss of revenues totalling close to Rs.
30,000 crores. This decline occurs in a context where India's tax-GDP ratio is low compared t o many
other developed and developing countries, providing a case for raising the tax-GDP ratio over time.
Instead, what we have is a decline.
The tendency to ignore the decline in tax-GDP ratio is not without motive. It allows the government to
extend its neo-liberal tax concessions aimed at stimulating the private sector. In this Budget these
concessions have not merely come in the form of th e withdrawal of surcharges on income taxes, of 10
per cent in the case of corporates and 15 per cent in the case of non-corporates, without substituting them
with other direct tax levies, but through several other measures directed at finance and industr ial capital
mentioned earlier. These, combined with other concessions, are expected to result in a revenue loss of
Rs.5,500 crores of direct taxes in a year. In addition, the drive to reduce customs tariffs even when they
are below those specified in com mitments made to the World Trade Organisations , is expected to result
in a revenue loss of Rs.2,128 crore.
EVEN while conforming to the thrust of neo-liberal reform, these tax losses are a problem, given the
obsession with the fiscal deficit. Yashwant Sinha deals with this problem in three ways. He has partly
made up for them through an ostensible "restructur ing" of excise duties aimed at moving to a single 16
per cent rate of Cenvat on all commodities. It hardly bears stating that a common rate of duty on
commodities, varying from manufactured necessities like soap to luxuries like automobiles, is regressiv
e by definition. Yet the Finance Minister's excise homogenisation initiative has involved reducing duties
on a range of luxuries varying from automobiles to refrigerators and increasing them to double their
current ad valorem levels on many mass consumpt ion goods. The net estimated effect is additional
revenue mobilisation to the tune of Rs.4,467 crores from indirect taxes other than customs duties.
Not being enough, this has to be compounded with a squeeze on capital expenditures. The ratio of
non-defence capital expenditures to GDP, which had fallen sharply in the last two years, is budgeted to
remain at its low level in the coming year.
Finally, 'revenues' have to be generated from hasty and large-scale privatisation of lucrative public
assets. The Budget provides for a record Rs.12,000 crores to be garnered from disinvestment of equity in
public sector undertakings. Even the revised fi gures for 2000-01 provide for Rs.2,500 crores from
disinvestment. Thus far, the government has managed to garner only Rs.788 crores from privatisation,
Rs.552 crores of which comes from the Balco deal. This implies that over March, hasty privatisation to
the tune of Rs.1,712 crores would have to be gone through in order to validate the Budgetary estimates.
Big bargains await those who are cash-rich. And those bargains would get better still when the rush to
find another Rs.12,000 crores from privatisati on gets under way in 2001-02.
Combining all this with optimistic projections of tax-buoyancy, the Finance Minister has declared that
he would reduce the fiscal deficit to 4.7 per cent of GDP in 2001-02. This compression from the fiscal
side is to be accompanied, if the Finance Minist er has his way, with a 2 per cent reduction in
government employment and a sharp reduction in private employment. That would reduce demand even
further. An inherently inflationary budget paves the way for demand compression and slower growth.
That is rea son enough to suspect that what is a dream for some can prove a nightmare for others.
C.P. Chandrasekhar is Professor of Economics, Jawaharlal Nehru University, New Delhi.
The poverty of theory
Beneath the specific provisions and prognostications of Budget 2001 lies a flawed strategic perspective
derived from an erroneous theory.
ANY budgetary exercise is informed by a set of theoretical suppositions which define its strategy; its
worth is crucially dependent on the validity of this underlying theory. What is noteworthy about Budget
2001 is that its theory is fundamentally wrong. Beneath its specific provisions and prognostications lies a
flawed strategic perspective derived from an erroneous theory.
The essence of this underlying theory is that the economy's sluggishness arises from a high real rate of
interest (defined as the excess of the nominal rate of interest over the rate of inflation). A high real
interest rate inhibits private investment. I t also affects public investment adversely by contributing to
negative public savings through an increase in the interest burden on the government. This high real
interest rate in turn arises, it is assumed, because of a large fiscal deficit: as the gove rnment borrows
heavily from the market it pushes up the real interest rate. The key to the revival of the economy, on this
argument, lies in a reduction of the fiscal deficit, which is what the Finance Minister has set out to do.
The mistake in this theory and the ensuing line of argument is that the high real rate of interest is caused
not by the fiscal deficit but entirely and solely by the fact of liberalisation. Once a country allows freer
movement of finance into or out of i ts shores, it has willy-nilly got to offer a rate of return to finance
what is considered to be at least as good as what prevails elsewhere, for otherwise there would be an
outward flight of finance. But if this rate of return is at the same level as in the advanced capitalist
countries, then finance, both domestic and foreign, would rather flow to the advanced countries, which,
being the home base of capitalism, constitute ceteris paribus, the more attractive destination. Hence a
rate of return as attractive as what prevails in this home base must mean, in a Third World country, a rate
much higher than what prevails there. Since the real rate of interest is represen tative of the rate of
return, it follows that liberalisation in a Third World economy necessarily entails a higher real rate of
interest than in the advanced capitalist countries, and a rise in the real rate of interest compared to what
prevailed in this same economy in the pre-liberalisation period.
This is exactly what has happened in India. The real rates of interest prevailing in the advanced capitalist
economies today are in the neighbourhood of zero (in fact the nominal interest rates as well as the rates
of inflation are both exceedingly small ). In contrast, the real rate of interest in India until very recently
was about 9 per cent (the increase in the inflation rate would have brought it down a little). This is also
much higher than what prevailed in India during the pre-liberalisation peri od, when again the real rate of
interest was not much above zero.
Large fiscal deficits are not a new phenomenon in India: they pre-date liberalisation. But the rise in the
real rate of interest is a distinct post-liberalisation occurrence, which only confirms that the causation put
forward in the theory underlying the Budget is wrong. Indeed all over the Third World, wherever freer
financial movements have been introduced, the real rate of interest has increased irrespective of the size
of the fiscal deficit. In Thailand, for example, just prior to the financial cris is of 1997 the real rate of
interest was about 10 per cent even though the country had a fiscal surplus as large as 3 per cent of GDP.
While fiscal deficits do not cause high real interest rates, the latter ceteris paribus do aggravate fiscal
deficits by raising the interest burden on public debt. Or, putting it differently, the high fiscal deficits we
observe in liberalised Third World economies are not the cause but the consequence of high real int erest
rates. The real cause underlying both these phenomena is the fact of liberalisation which opens these
economies to the freer movement of international finance.
Liberalisation aggravates the fiscal crisis of the government in other ways too, notably through a decline
in the tax-GDP ratio. Customs duties have to be lowered as part of "trade liberalisation"; since excise
duties cannot be raised too much in an econ omy where customs duties are being lowered (for otherwise
domestic producers would be discriminated against and there would be rapid de-industrialisation), the
government's ability to raise revenues from indirect taxation gets eroded. Likewise the compul sion to
attract foreign direct investment (FDI) restricts the scope for raising corporate tax revenue, and hence of
direct tax revenue generally. A decline in the tax-GDP ratio as has happened in India during the 1990s is
an inevitable sequel.
If all this is ignored and the fiscal deficit is seen as the "villain of the piece", then naturally the effort
would be to curtail it by any means, even by cutting back on social expenditures and public investment.
But since the high real interest rate w as not caused by the fiscal deficit in the first place, its curtailment
would not bring down the real interest rate. Hence no encouragement to private investment would be
provided via this channel. On the contrary, since the curtailment of government exp enditure would
affect aggregate demand adversely, private investment would actually be discouraged further. It follows
that the budgetary strategy, which is claimed to be a growth-inducing one, actually turns out to be the
very opposite, namely a contrac tionary one, because of its false theoretical underpinnings.
That is not all. When the curtailment of the fiscal deficit in the hope of promoting growth has the very
opposite effect, the desperation to attract FDI to stimulate growth increases, and with it the desperation
to introduce further liberalisation measur es, and hence to reduce government expenditure in the social
sector and on development even further. Thus, the liberalisation which underlies stagnation and
recession in the first place is further promoted in the name of overcoming this very stagnation a nd
recession. This is the dangerous dialectics of liberalisation; a country caught in its grip continues to
experience growing unemployment and poverty even as more and more concessions are made to
multinational corporations (MNCs) and international fina nce in the name of overcoming this very
poverty. And every such concession by worsening the situation makes further concessions appear to be
absolutely essential to those in the grip of this wrong theory.
AS a further example of wrong theory let us take the case of disinvestment. The usual arguments for
disinvestment are altogether fraudulent. One argument sees it as a means of closing the fiscal deficit; but
if the objection to a fiscal deficit is that i t creates excess unwarranted demand pressures for any given
level of investment in the economy, then this objection is not removed when the fiscal deficit is closed
through disinvestment, since the purchasers of the disinvested shares do not skimp on the ir consumption
for doing so.
Another argument sees it as a means of improving government finances by retiring public debt which is
claimed to have become onerous. But, for disinvestment to improve government finances in this manner,
it must fetch a price such that the interest saved on the retired government debt is greater than the
expected stream of returns on the disinvested shares. Disinvestment, such as of Balco, is at such
throwaway prices that this condition is never satisfied. But the consequence ofdisinvestment then is a w
orsening of government finances over time rather than the promised improvement! Lucrative assets
being handed over "for a song" worsens government finances over time. But this worsening is then used
as an argument for further disinvestment and for a furt her curtailment of government expenditure on the
social sector and on development generally.
Budget 2001 is a prisoner of this crisis-producing dialectics of liberalisation, and it justifies this captivity
through a false theory which is imbibed entirely from Fund-Bank handouts. In the name of controlling
the fiscal deficit supposedly in order t o promote growth, government expenditure is curtailed, which
then perpetuates and accentuates the recession. The total Plan expenditure in the current Budget is slated
to increase by a mere 8 per cent compared to the Budget estimates of last year and the total Central Plan
outlay by a mere 11 per cent. In real terms these proposed increases are insignificant.
The Finance Minister of course made the increases appear more impressive than they actually are by
comparing the Budget provisions with last year's revised estimates, which were well below last year's
Budget estimates. But since last year's shortfall rel ative to the Budget estimates occurred because of a
cavalier overestimation of revenues in the Budget document, and since this same cavalier attitude has
been repeated in the current Budget, there is no reason to believe that the Budget estimates of the current
year would be adhered to any more scrupulously than last year. Since last year's expenditure
compression contributed to the recession, the fact that the current year too does not escape expenditure
compression would serve to perpetuate recessiona ry conditions.
This would be buttressed by at least three additional factors: first, the pattern of revenue mobilisation.
The increase in excise duty (Cenvat) from 8 to 16 per cent on a whole range of essential commodities,
would, apart from its distributive consequenc es, have a demand-compressing effect. Secondly, the
de-reservation of 14 items hitherto reserved for the small-scale sector, including items such as leather,
footwear and toys, would entail a substitution of small units by MNCs. Since the output of the l atter
tends to be more import-intensive, this substitution, apart from its socially regressive consequences,
would also be recessionary. Thirdly, the withdrawal of excise duty exemption for small-scale producers
of cotton yarn would have adverse conseque nces not only for the producers of such yarn but also for its
users, notably the garment manufacturers.
The unreason associated with the obsession with curtailing the fiscal deficit goes much further. It has led
to a virtual dismantling of the system of procurement-cum-public distribution of foodgrains that had
been in force for the last three and a half d ecades. The government claims that the proposed change
amounts merely to a "decentralisation" of the system, but it has three basic features which imply that it is
nothing short of a dismantling.
First, until now the Food Corporation of India (FCI) was duty-bound to procure whatever was offered by
the peasants at the pre-announced procurement price (strictly speaking it was the minimum support price
that was guaranteed but the procurement price o perated for all practical purposes as the support price).
Now, the FCI on its own would procure only as much as is necessary for a foodgrain reserve. It is under
no obligation to lift anything more.
Secondly, the Central government would not provide any subsidised food to the States. The latter would
have to make their own arrangements with the FCI to obtain the requisite physical quantities of
foodgrains. Thirdly, the Central government would only give a cash subsidy to cover the population
below the poverty line (BPL), but not for the non-BPL population.
Now, with regard to the first two points it may be argued that the States can undertake the job of
providing price support and of ensuring the physical availability of foodgrains for the PDS, using the
services of the FCI for the purpose. At best, howeve r, this amounts to the Centre passing the burden of
the fiscal crisis on to the State governments. Not only are the latter in a much worse position to bear this
burden than the Central government (which would necessarily entail a dismantling of the syste m), but
among the latter the capacity to bear the burden varies considerably. The consequences of this move
therefore would be more severe for the poorer States than for the richer ones.
On the third point, it is claimed that excluding the non-BPL population from the purview of the subsidy
is desirable, since subsidies must be targeted towards the really deserving. It is well-known, however,
that large numbers of the poor are excluded fr om what is officially counted as the BPL population.
(Madhura Swaminathan has noted that in the Dharavi slums with a population of half a million there
were only 151 families in 1999 which were counted as BPL!) Providing cash subsidies only for the BPL
p opulation therefore amounts to taking off large numbers of the poor from the system of subsidised
food. In short, the proposed change in the food procurement-cum-distribution regime would throw both
producers and consumers to the mercy of the market wher e they would face price fluctuations far larger
in amplitude than was allowed under the existing regime. This, needless to say, would also affect the
incentive to invest, and hence the growth rate, in the agricultural sector adversely.
Some people have argued that the dismantling of the system of public procurement-cum-distribution
would result in cheap food which would get rid of the huge foodgrain stocks that have got built up in
recent years. This, however, is an erroneous view. Whi le dismantling the system may result in making
cheaper food available at the present moment, it would also result in food becoming more expensive at a
later date: the basic point is that the present system keeps the amplitude of price fluctuations much s
maller than what a free market regime would allow, and what actually occurs in the world market. The
fact that the level of the food price under the present regime is too high relative to the purchasing power
of the poor, resulting in the bizarre situati on of an accumulation of unwanted stocks in a land of starving
people, has to be tackled differently, by putting more purchasing power in the hands of the people
through employment generation programmes. (The argument put forward by some people that empl
oyment generation programmes cannot get rid of foodstocks which only a price reduction can do, is
untenable, since it makes contradictory assertions about the effects of a real income increase on food
The real objection to the introduction of a large employment-generation programme is that it would
enlarge the fiscal deficit; it is to keep the fiscal deficit in check that the government is willing even to
dismantle the public procurement-cum-distribut ion regime. Now, a fiscal deficit which eventually
accrues as income to the FCI, a government undertaking, leads to no increase in the net borrowing of the
government. It cannot, by any stretch of the imagination, have any adverse consequences for the ec
onomy, while the employment-generation it finances would ensure more food for the poor, decumulate
unwanted foodstocks, and, if properly conceived, even build up rural infrastructure. But the obsession
with the fiscal deficit rules it out. This obsession in turn derives from the fact that international finance is
opposed to a fiscal deficit.
To pander to the whims of international finance at the expense of the livelihood of the people, is a
triumph of unreason. This Budget invokes a false theory to justify unreason.
Prabhat Patnaik is Professor of Economics, Jawaharlal Nehru University, New Delhi.
An argument for further reform
Growth has slowed down and the fisc is unhealthy: this is the main message about the immediate
economic situation that has been conveyed by Economic Survey 2000-2001.
THE Economic Survey, the annual pre-budget, state-of-the-economy report issued by the Finance
Ministry, is meant to be an exercise in stock-taking and identification of immediate trends and problem
areas that provide the background for initiatives to be launched in the Budget. But in the recent years, as
successive governments have committed themselves to "reform" and to the control of the fiscal deficit,
there has been shrinkage in the ability to manoeuvre the budget exercise to fit the actual state of the
economy. Consequently, most recent budget speeches have aroused more interest for their off-budget
policy pronouncements than for the budget proposals proper.
And, in parallel, recent Economic Surveys have shifted the focus from short-run developments to
medium-run issues, and become a statement of the Finance Ministry's views regarding progress along
the reform agenda. With the immediate picture not entirely rosy for the economy, and this also being the
tenth anniversary of the reforms, this is especially true of Economic Survey 2000-01.
The main message that the latest Survey conveys about the immediate economic situation is that growth
has slowed down and that the fisc is unhealthy. This provided the backdrop to the Budget in which the
Finance Minister emphasised the need to accelerate growth and lectured his audience on the need for
fiscal consolidation. On GDP growth, the Survey has noted steady deceleration from 6.6 per cent in
1998-99 to 6.4 per cent in 1999-2000 and to an estimated 6 per cent in 2000-01, with agriculture
performi ng poorly in the last two years and with the recovery in industrial growth during 1999-2000 not
sustained into 2000-01. On the fiscal front, the Survey notes some recovery in revenues from the depths
reached in 1998-99 after P. Chidambaram's "dream budge t", but to a level which is still significantly
below the average for the 1980s as proportion of GDP. The revenue deficit has therefore consistently
exceeded 3.5 per cent of GDP during the past three years and is now higher than in even the most
profliga te years of the 1980s. This is mainly because interest payments have continued to balloon.
With the Central government's debt (excluding liabilities to the Reserve Bank of India) having risen to
over 50 per cent of GDP as a result, the main casualty has been public investment. The Centre's capital
expenditure has fallen to around half of that achieved during the 1980s, and overall public investment,
including that of the States and public sector undertakings, has as a proportion of GDP come down
during the last three years to levels last seen during the 1960s. No wonder that the Survey identi fies
fiscal improvement as the key area for action, noting that the lack of public investment has led to not
only a slowdown in infrastructure but also to a decline in industrial demand.
This broad picture is conveyed without neglecting other immediate developments, both positive and
negative, but these are given less emphasis in the overall diagnosis. For example, perhaps the most
positive outcome during 2000-01 has been that exports gr ew by over 20 per cent, following a recovery
in 1999-2000 from an actual drop in 1998-99. This is, however, attributed to similar movements in world
trade following the East Asian crisis and the subsequent recovery without claiming much domestic
credit. Similarly, not as much is made as could have been of the resilience of the economy in the face of
the sharp increase in oil prices.
The chapter on prices does note that higher energy prices led to overall inflation rising from 3.9 per cent
in 1999-2000 to 8.3 per cent in 2000-01, but without much effect on the prices of other goods. Also, the
chapter on the external sector does claim a reduced trade deficit based on customs data, despite the surge
in the value of oil imports owing to higher prices. But not much is made of this, either because there is
some doubt, since balance of payments data show higher import growth, or because o f the implication
that domestic demand must have fallen if indeed imports of non-oil products did fall and domestic
non-oil prices remained depressed despite the oil price increase. In a similar vein, not much emphasis is
put on, or credit claimed for, f oreign exchange reserves reaching a record level in January 2001, this
being attributed to the issue of India Millennium Deposits.
ON the negative side, the most serious development during 2000-01 was that there was deficient or
scanty rainfall in over a third of the country, with rainfall being deficient for two successive years in
about half of these districts. This is noted, as i s the consequence that the Index of Agricultural Output
declined in 1999-2000 and is expected to decline even more sharply in 2000-01. Quite correctly,
however, the Survey views agricultural performance over a longer period. On this ground it is quietly
optimistic, although it notes a deceleration in agricultural growth post-reform.
What is missing, however, is any assessment of the response to the distress caused by drought and no
real analysis of why cereals stocks have accumulated massively over precisely these last two years
without any significant attempt either to use these pr oductively or even to relieve distress. Tucked away
in the chapter on Social Sectors is a table that in fact shows a huge setback in achievements under rural
employment schemes in the last two years. The data on per capita foodgrains availability show th ese to
have fallen during the last three years to amongst the lowest levels over the last decade, but in the
chapter on Prices and Distribution there is the statement that "domestic production has reached a level
much more than what the market or PDS can absorb".
There is of course acknowledgement of the fact that high procurement prices have led to high
procurement and that high issue prices have discouraged offtake. But there is no recognition of the fact
that low rural incomes may have depressed demand and no introspection about the decision announced
in last year's Budget to raise APL (above poverty line) issue prices. The per unit APL subsidy then was
less than the per unit carrying cost of stocks and so that move, while cutting consumer subsidy, increased
the total subsidy outgo for the government. Instead, there is only the obvious comment that costs can be
reduced by improving the efficiency of the Food Corporation of India.
In the event, the principal concern of the Economic Survey is not to identify the implications of these
recent developments for budgetary policy but to build an argument for further reform based on the
observations of slowing growth and mounting fiscal p roblems. In this context, much space is devoted to
making a comparison of growth during the pre-reform (1980-81 to 1991-92) and post-reform (1992-93
to 2000-01) years.
THERE are three points to be made about this comparison. First, the figures suggest that though GDP
growth improved from 5.4 per cent in the first phase to 6.4 per cent in the second phase, almost all of
this is the result of a sharp increase in the rate of growth of services. The rate of growth of services GDP
rose from 6.4 to 8.2 per cent between these two periods, whereas in the case of agricultural and industrial
GDP, the comparable growth rates during the two periods were 3.9 and 3.3 per cent and 6 .3 and 6.5 per
cent respectively. That is, there is no evidence of a revival of growth in the commodity producing sectors
after reform. And, indeed, there is some reason to suspect a sharp slowdown in agriculture where the
growth rate of the Index of Agr icultural Production falls from 3.4 to 2.2 per cent between the two
periods, much sharper than the decline in agricultural GDP which is buoyed by dubious data relating to
Second, the sharp rise in services GDP is by no means largely a reflection of new dynamism in sections
of the services sector such as financial services and software and information technology-enabled
services. Rather, it appears to be in significant par t owing to increases in public sector incomes ensured
through the much-delayed implementation of the Pay Commission's recommendations. Not surprisingly,
after the three years (1997-98 to 2000-01) during which these recommendations have been implemented
i n staggered fashion at the Central and State levels, there are signs of the rate of growth of services GDP
Finally, the choice of what the Survey considers pre- and post-reform years is controversial. The year
1991-92 is included in the pre-reform years, though the reforms were launched in July 1991 and the
International Monetary Fund-stabilisation induced co mpression in growth occurred in 1991-92. GDP
growth in that year stood at 0.9 per cent, industrial growth at 4.5 per cent and agricultural growth at 2 per
cent. A case could have been made to drop 1991-92 altogether from the growth comparison. But to hav e
chosen to make an extremely poor year the terminal year of the pre-reform growth calculation lays the
Survey open to criticism since it is clear that even this does not lead to an unambiguous conclusion of
much improved economic performance post-reform .
Nonetheless, this effort to establish higher post-reform growth was probably necessary to establish the
basic argument of the Survey, which goes as follows. First, it is asserted that post-reform growth has
been better than pre-reform growth. Second, it is shown that more recently growth has been slackening.
Third, it is argued that since the fiscal situation is parlous, the effort to revive growth cannot be through
the obvious budgetary route of reviving public investment. Rather, this calls for an acc eleration of
reform in the form of speedier trade liberalisation including liberalisation of agricultural trade both
domestic and international, a decisive commitment to massive privatisation, removal of protection to
small-scale industry and immediate r evision of labour laws.
The Prime Minister's Economic Advisory Council (EAC), in its recently released report, had launched
this campaign for an acceleration of neo-liberal reform. The Survey signals the Finance Ministry's
official commitment to this agenda.
In the process, however, three vital aspects of policy formulation and its feasible implementation appear
to have been given less attention. First, that the objective of any national economy policy should not be
growth for growth's sake and, in particula r, that growth should be sustainable and should not bypass the
poor. Secondly, that the policies have the required degree of consensus not to be derailed by widespread
opposition. And, third, that there be no better alternative than the one on offer.
On the first of these, the EAC had taken at face value, and without critical appraisal, the results of the
55th Round of the National Sample Survey (NSS) showing poverty incidence at only 26 per cent in
1999-2000. It had concluded from this that there ha d been a decline to this figure from the 36 per cent
recorded in 1993-94, and that therefore there was no reason to suspect that growth was bypassing the
poor. Being an official document, the Economic Survey sets the record straight by noting that the 19
99-2000 poverty figures are not strictly comparable with earlier estimates, giving details of the
methodological differences. Taken in conjunction with mutually comparable results from the NSS "thin
sample" rounds conducted during 1994-95 to 1998, and co rrecting for the fact that the 55th round used
only a 365 day recall for clothing and so on, it can now almost safely be concluded that poverty during
1999-2000 was at most about 2 percentage points lower than in 1993-94 - using the methodology then in
v ogue. This means that there is no reason to alter the pre-55th round academic consensus that poverty
reduction has slowed down significantly during the 1990s despite somewhat higher GDP growth.
If this is accepted, and there is supporting evidence from regional inequalities in the growth of
agricultural incomes and wages, there is a question mark over whether the pattern of growth observed
during the 1990s has benefited everyone. This is signif icant because this suggests that the neo-liberal
policies identified are bound to draw significant opposition. This is especially so since so far the reforms
have been sold on the promise that neither organised labour nor small producers will be hurt. Bu t with
the prognosis now that it is necessary for growth that certain existing rights be withdrawn from
organised workers, small industrialists and probably even farmers, it is almost inevitable that there will
be confrontation. While consensus can be fo rged on the share to be received from incremental growth, it
is an altogether different matter when it comes to changing the rules of the game on the argument that
certain rights have to be shifted from others to private investors in order to create a su itable investment
The really unfortunate fact is that this harsh prognosis has been drawn on the basis of an analysis that
assumes that the fiscal situation is so bad that the government can do nothing for growth through the
Budget and must necessarily disturb what are cu rrently seen to be socio-economic rights. This is where
greater sensitivity to the actual economic conditions at present would have helped. With a high level of
foreign exchange reserves and burgeoning food stocks and with the problem of demand identifie d by the
Survey itself, a less confrontational path could have been charted and growth restored along traditional
Keynesian lines without much adverse fiscal, inflationary or balance of payments fallout. The core of
this would have been a massive food-fo r-work programme to build rural infrastructure and generate
demand. But for this it was necessary to recognise that the Budget proper is more than about the fiscal
deficit and that in a democracy there is no alternative to consensus.
Abhijit Sen is Professor of Economics, Jawaharlal Nehru University, New Delhi. Until recently he was
chairman of the Commission on Agricultural Costs and Prices (CACP).
The rush to disinvest
Rather than proceed with caution that would seem essential considering the depth of public misgivings
involved in the matter of disinvestment drive, the BJP-led government has chosen to accelerate the pace,
if necessary by overriding all scruple and detail.
IT has not been infrequent in the recent past for the Union government to fix ambitious annual target
figures as the realisation from disinvestment of shares in public sector undertakings. Reality intrudes into
these rather extravagant calculations when budgetary figures are revised at the end of the year, to reveal
that the sale of shares has not quite reached expectations.
For Union Finance Minister Yashwant Sinha to have aimed for a target of Rs.10,000 crores from PSU
disinvestment in 2000-01 was entirely in keeping with practice. When the revised figures were drawn
up, the realisation from disinvestment was pegged at a r elatively modest Rs.2,500 crores. However, the
backdrop of the controversial Balco deal endowed even this seeming moderation of targets with a certain
ominous quality. Adding on the Rs.551 crores realised from the sale of Balco to the modest
achievements so far from the privatisation of Modern Food Industries Ltd., the total sum realised from
disinvestment in 2000-01 is just over Rs.650 crores. Translated into plain language: the government
plans disinvestments of a much larger scale than Balco in the f ew weeks between the presentation of the
Budget and the end of the fiscal year.
Expectedly, a furious guessing game in on. The first focus of public attention were the two national air
carriers - Indian Airlines and Air-India have been in the news in recent weeks with their quest for a
"strategic partner" who will take on a share of their equity capital and the entire responsibility of
management. Other units which were considered ripe for the auctioneer's block were the telecom giants -
Mahanagar Telephone Nigam Ltd (MTNL) and Videsh Sanchar Nigam Ltd (VSNL). Still another
contend er for attention was the car manufacturer, Maruti Udyog Ltd.
But as the speculation raged, a dark horse appeared in the shape of the country's largest urea
manufacturer, National Fertilisers Ltd. It is now believed that NFL is going through the final phase of
assessment by a number of prospective bidders. Bids are expected to be submitted soon, following which
the unit could be delivered into private hands before the fiscal year is out.
The feverish speculation that has shrouded the disinvestment process is itself a commentary on the
opaque and rather questionable manner in which public assets built up over decades are being handed
over to private control. As an enterprise, NFL dwarfs B alco in the scale of operations. The bids received
for it are likely, in this sense, to be of a considerably higher order. Also higher is the probability that a
controversy could break out over NFL.
SEEN in this context, the Finance Minister's target of Rs.12,000 crores from disinvestment in 2001-02
perhaps strains credulity. In relative terms, this would mean two sales of the order of the Balco deal
every month. If the political heat generated over Balco is any index, then Parliament in 2001-02 will
have time for little other than debating the propriety of various disinvestment deals.
A large part of the discord has arisen from the BJP-led government's decision to do away with the
Disinvestment Commission, a non-partisan body with expert skills in evaluating the value of PSUs.
After setting up a Department of Disinvestment (DoD) in 19 99, the government allowed the
Commission's term to expire without nominating a new team. All the reports prepared by the
Commission became, in this respect, merely of academic value, since the DoD intended to begin anew
and utilise its own parameters to evaluate the PSUs that came within its gaze. And as the case of Balco
shows, in the rush for quick results rigour is often the first casualty. The evaluation process for this
enterprise, which by any account is endowed with physical assets that would be irreplaceable even at ten
times the cost at which it was sold, was completed by a little-known assessor in the period of a week.
As a notion, disinvestment induces a degree of discomfiture among those who believe that prudence is a
necessary quality in financial matters. The experience of the United Kingdom in particular has removed
some of the stigma attached to the sale of asset s to meet current expenses. But the public welfare
implications of the British privatisation drive of the 1980s is by no means a clinched issue. The debate in
fact is only beginning anew.
In India, the concept of selling household assets to meet consumption needs is one that is suffused with
allusions of ruinous poverty and indigence. This is a deeply ingrained cultural trait which a decade of
disinvestment - in theory if not quite so muc h in practice - has done little to dispel. On pragmatic
grounds too, there is a credibility gap that the ideologues of privatisation have to overcome. For instance,
in 2000-01, the Union government received over Rs.14,000 crores as dividends from underta kings it had
a stake in, including commercial banks. By progressively shedding its ownership stakes, the government
clearly risks a rapid diminution of this source of revenue, even if its yield is rather modest in relation to
taxes collected. And conside ring the fact that the monies realised from the sale of assets would be used
to bridge the deficit on the revenue side, the analogy with the indigent household on the path to ruin is
Rather than proceed with the caution that would seem essential considering the depth of public
misgivings in the matter, the BJP-led government chose to accelerate the pace of disinvestment, if
necessary by overriding all scruple and detail. The politica l backlash now is unlikely to subside any time
soon, since the Congress(I), which was among the most ardent proponents of liberal economic policies,
seems now to have rediscovered some virtue in the public sector.
Disinvestment was first proposed as far back as 1991-92, ironically enough by Yashwant Sinha during
his abbreviated tenure as Finance Minister in the Chandra Shekhar government. The scheme was modest
in its scope: to disinvest up to 20 per cent of govern ment equity in certain PSUs in favour of financial or
institutional investors. The rationale cited was the need to broad-base ownership, improve management
and enhance resource availability.
The belief that diversification of ownership would induce a measure of management efficiency gained
further purchase with the following Congress(I) government. A rather more systematic effort was made
by the P.V. Narasimha Rao administration to bring PSU equity to the market. But in a concession to
political sensitivities, the Congress(I) laid down a number of safeguards. In the first stage, the PSU
shares would be sold at an agreed value to public financial institutions, which would then take steps to
ensure the listing of these scrips in the country's markets. Any appreciation relative to the initial
transacted price would be shared in a fair manner between the government and the shareholder through
what is known as a "clawback" agreement.
It later transpired that the financial institutions which had bought the PSU shares had, far from adhering
to their part of the deal, clandestinely transferred them to a cabal of stock market operators in Mumbai
and Kolkata. Expectedly, there was a polit ical outcry. Following a number of strictures passed by
statutory audit authorities, the whole process of disinvestment was soon moved to the back burner.
The next phase in the disinvestment process began in 1996, with the United Front government and the
formation of the Disinvestment Comm-ission. Reflecting a delicate political compromise, the U.F.'s
Common Minimum Programme undertook to "carefully exami ne withdrawal (of the government) from
non-core and non-strategic areas", "to set up a Disinvestment Commission to advise the government",
and to ensure transparency in disinvestment decisions while safeguarding job security.
Headed by the veteran administrator G.V. Ramakrishna, the Disinvestment Commission examined the
case of 58 PSUs between February 1997 and October 1999. Of these, 29 were notified for strategic sale
involving a change in management control, while eight we re earmarked for sale through stock market
channels, if necessary culminating in transfer of control. The sale of shares was recommended in respect
of five enterprises, while for another 11, a postponement of disinvestment was proposed. In respect of
the rest, the Commission recommended closure and final disposal of assets.
A government keen on preserving a semblance of propriety could clearly have utilised this level of
expert input. But with powerful interest groups coming into the picture, the Vajpayee government chose
to revise the norms entirely. The DoD was set up, o verseen by a Minister of State who in turn would
report to a Group of Ministers (GoM) on disinvestment. And concurrently, the concept of "strategic
sector" that had earlier been crucial to determining which PSUs should be retained under government
contr ol, was jettisoned. This meant that government control in petroleum, telecom and power - vital
infrastructural areas which were in addition rich sources of revenue - were to be thrown open for
In the bargain, certain crucial functions of the public sector stand to be eroded. The telecom sector
illustrates how the objective of curbing the concentration of economic power, for instance, could be
undermined. Since cellular telephony became a thriv ing business, the public sector MTNL was
restrained from entering this area by judicial intervention and certain rather questionable decisions by the
regulatory authorities. But once these hurdles were cleared, MTNL was able to enter the cellular busines
s with instantly beneficial results for the consumer. Within a week of the launch of MTNL's cellular
service, named Dolphin all private operators were compelled by the pressure of competition, to reduce
their tariffs, seemingly with no seriously adverse impact on their profitability levels. If the plan to reduce
government holding in MTNL to 26 per cent goes through, it would remove an important check to the
growth of monopoly.
Other moves being made by the government to augment the commercial attractiveness of certain PSUs
raise questions about the operational relevance of shareholding patterns. Pradeep Phosphates Ltd, India's
largest manufacturer of phosphatic fertilizers, is known to be up for strategic sale, with the government
planning to bring down its holding to 26 per cent. But since the unit has been suffering commercial
losses since 1996-97 - though of declining magnitudes - the government is believed to be working o n a
plan to write off its loans and convert a part of the loans into equity. But given these commercial breaks
it is conceivable that Paradeep Phosphates would be restored to profitability even without its transfer to
The decision to privatise the public sector oil companies has similarly engendered serious reservations.
The administrative Ministry made desperate efforts to block the proposal on the grounds that petroleum
was a strategic sector where a degree of gover nment control was indispensable. But what should have
been a serious public debate became trivialised into a turf battle among different Ministries and the
individuals at their helm. The upshot is that the oil companies are soon likely to be put on the b lock,
with little preparatory work or debate about the consequences.
Such considerations may not apply in the domain of car manufacture, where Maruti is soon likely to be
put up for sale. Neither, in the majority assessment, would hotels and tourism be an area that the
government should exert great management control over . But in these areas the problem is with the
terms of disinvestment. With the primary and secondary share markets in a slough of despondency, it
would be relatively easy for bidders to conclude facile deals in these areas that do little justice to the un
derlying value of public assets that they gain control over.
Apart from asset value, the DoD is known to be using the future stream of revenues expected from
various PSUs to arrive at a reserve price for disinvestment. But this again is a contingent parameter
which could reflect the management neglect and under-in vestment that many PSUs have suffered over
the last few years. An alternative may be to factor in the revenue streams that could be generated in an
"ideal case" scenario, discounting it by the initial investments needed to make this a reality. Such think
ing was conspicuously absent in the Balco decision. And the controversy that has since erupted, best
epitomised by the frontal challenge posed by Chattisgarh Chief Minister Ajit Jogi, may only be a
foretaste of bitter contention in the year to come.
Battle over Balco
The sale of Bharat Aluminium Company Ltd. to Sterlite Industries meets with stiff resistance from
workers' unions, with the Chattisgarh government led by Ajit Jogi lending firm support to their cause.
CONTROVERSY continues to dog the Union government's first decisive sale of a controlling stake in a
"big ticket" public sector undertaking (PSU), Bharat Aluminium Company Limited (Balco), the third
largest aluminium producer in India. Although the sale o f 51 per cent of the government's stake to
Sterlite Industries (India) Ltd for Rs.551.50 crores was consummated on March 2, after days of uproar in
Parliament the battle is far from over.
Balco's 7,500-strong workforce at its main complex at Korba, about 275 km from Raipur, the capital of
Chattisgarh, was quick to react. The workers went on an indefinite strike from March 3, in a last-ditch
attempt to get the deal reversed.
The strident posture adopted by Ajit Jogi, the Chief Minister of the backward and predominantly tribal
State of Chattisgarh, has given the workers a shot in the arm (see interview). The resistance meant that
Sterlite was unable to take physical possessio n of the plant for several days. Sterlite's managing director
S.C. Krishnan reached the plant only on March 8.
Ajit Jogi has opposed the deal on three counts. He alleges that Balco's assets have been sold for a song
and that points to corruption at the "highest level of government", implying the involvement of the Prime
Minister's Office (PMO). Speaking in the St ate Assembly on March 2 during a two-day discussion on a
government resolution against the sale, he alleged payoffs into Swiss bank accounts. He said that he
would prove his charges provided he was given a fair and appropriate platform, such as a Joint P
arliamentary Committee. The government resolution was passed in the Assembly by 41 votes for and 19
votes against it. Ajit Jogi later claimed that the fact that only 19 of the 35 Bharatiya Janata Party
members were present in the House to vote against th e motion indicated that there were fissures in the
Jogi has also opened another front, accusing the Centre of concluding the deal without taking his
government into confidence. He has repeatedly denied the claim made by the Minister for Disinvestment
Arun Shourie in Parliament that the Chattisgarh govern ment was consulted at every stage about the
Balco sale. The Union government, he told Frontline, had dealt "a body blow to the federal spirit of the
Constitution". Spokesperson of the BJP V.K. Malhotra added a new dimension to the worsening relati
ons between the Union and Chattisgarh governments, when he announced on March 7 that Balco's losses
due to the strike would be "recovered" from the Central assistance due to the State.
The third reason cited by Jogi for his opposition to the deal stems from his contention that the sale
violates constitutional provisions on several counts, notably those aimed at protecting tribal people from
being alienated from their lands. He has mars halled court rulings to back his contention that the sale
jeopardises the interests of the tribal people. Indeed, the Korba district administration has already
proceeded to take action in the matter; the Sub-Divisional Officer (Civil) has issued notice t o several
persons, among them Anil Agarwal, Sterlite's chairman and managing director, Arun Shourie, and the
Secretary, Ministry of Disinvestment, on the grounds that the Balco sale violates constitutional
provisions meant to prevent tribal people from b eing evicted from their lands.
Addressing the workers and their families at Balco Nagar, the company's sprawling township at Korba,
on March 5, Jogi said: "The fight against the deal is over in the Lok Sabha, the Rajya Sabha and the
State Assembly. It is now to be fought in the street s of Chattisgarh." In an emotion-charged speech, he
said: "I have used all the powers at my command to stop and reverse the sale of Balco, which is so
precious to Chattisgarh and its people." On March 10, Madhya Pradesh Chief Minister Digvijay Singh
dema nded a review of the deal. He said that his government had only received a communique from a
Central official and confirmed that it had not been consulted on the issue.
Although the now-disbanded Disinvestment Commission had initially recommended a 40 per cent
divestment in Balco in 1997, the government decided to offload a controlling stake of 51 per to a
strategic partner. On June 15, 2000, it invited bids for strateg ic partners. Initial media reports suggested
that there were seven bidders for the "mini ratna", including global majors Alcoa and Kaiser and Indian
companies, Hindustan Aluminium Company Ltd. (Hindalco) and Sterlite. The bids were submitted to
Jardine F leming who were designated global advisers on the sale of Balco. Incidentally, Jardine
Fleming also coordinated the National Democratic Alliance government's controversial disinvestment in
Gas Authority of India Ltd. (GAIL) in November 1999 (Frontline , December 10, 1999).
The government was clearly on the defensive when the Balco issue was raised in the Rajya Sabha. The
Opposition's onslaught elicited the first set of details about the deal on February 27 from Arun Shourie.
Shourie said that Balco's screening committee se lected P.V. Rao and Co. for the valuation of the
company's land, building, plant and machinery and the mines were valued by the Indian Bureau of
Mines. The reserve price for the bid was Rs.514.40 crores for the 51 per cent stake in the company and a
prem ium of 25 per cent was factored into the reserve price, he said.
Shourie said that Jardine Fleming used several evaluation methods to assess the bids. The discounted
cash flow method for the 51 per cent stake was valued at Rs.332 crores to Rs.507 crores; comparable
valuation method yielded a value of Rs.299 crores to Rs.464 crores; Rs.305 crores to Rs.348 crores if the
51 per cent stake was evaluated in terms of the balancesheet method. Shourie said that the asset
valuation method would have yielded Rs.1,072 crores, implying that a 51 per cent stake would have
amount ed to Rs.507 crores. He said that the evaluation committee, after "detailed deliberations",
accepted the discounted cash flow method as the most suitable one for arriving at the reserve price.
The government agreed to a discussion in the Lok Sabha on March 1, owing to the pressure mounted by
the Opposition as also the rumblings within the ruling coalition, notably from the Telugu Desam Party
(TDP) and the Shiv Sena. In the Lok Sabha, Rupchand Pal of the Communist Party of India (Marxist)
moved a motion against the sale. The TDP, which had launched an attack on the deal in the Rajya Sabha,
changed tack in the Lok Sabha, where its member M.V.V.S. Murthy said that the "deal seemed to be
In his reply to the motion, Shourie challenged Ajit Jogi to arrange for a bidder who would be willing to
pay more for Balco. "He (Jogi) says the company is worth Rs.4,000 crores. Let him get a buyer who is
willing to pay Rs.4,500 crores. We will pay Ster lite Rs.500 crores and ask it to go," he said. Shourie
said: "The two governments had, in fact, been helpful at each stage." Ajit Jogi was prompt to deny that
he or his government had ever been consulted on the disinvestment proposal. He said he was read y to
resign if Shourie could prove that he had been consulted.
The government was quick to consummate the deal after the Opposition's motion was defeated in the
Lok Sabha - 239 votes against and 119 for, with three abstentions. Speaking hours after the government's
victory, Anil Agarwal declared that the "deal will serve as a model for other disinvestment in the future".
On March 2, Sterlite handed over a cheque for Rs.551.50 crores to and signed the share purchase
agreement and a shareholders' pact with the Union government.
The same day, a Bench of the Supreme Court stayed the proceedings before the Delhi and Chattisgarh
High Courts in petitions challenging the Balco sale and transferred them to itself. The apex court issued
notice to the Balco employees' unions, the govern ment-appointed valuers, Jardine Fleming and Sterlite
On March 7, the Supreme Court, hearing an urgent application filed by the Union government, directed
the Chattisgarh government to protect the workers and officers of the plant who wished to resume work.
It also directed the State government to ensure th at essential supplies were not disrupted to those inside
the plant. However, the Centre came under attack from the Opposition in Parliament. The Opposition
charged it with attempt to break the peaceful strike by going to court on "false premises". Shouri e
claimed that the government sought the court's intervention because it feared sabotage and "imminent
danger" to the plant and a breakdown of law and order in Korba in view of the inflammatory statements
made by political leaders of Chattisgarh.
The unions' position on the deal hinges crucially on the manner in which the valuation has been done.
They allege that Sterlite's 51 per cent holding will enable it to control Balco's assets, which are in several
multiples of the amount it has paid to ge t the controlling stake.
Brahma Singh, general secretary of the Balco Employees' Union, which affiliated to the Indian National
Trade Union Congress (INTUC), said that "the deal stinks". He told Frontline that on the day of the sale,
the company had fixed deposits that am ounted to about Rs.350 crores. The company had invested
Rs.200 crores in a cold rolling mill and a sheet caster, which, he said, had not even started commercial
operations. "The government," he said, "has handed the brand new machinery on a platter to St erlite."
Brahma Singh said that there were Rs.90 crores worth of salable materials lying on the plant's premises.
He said that Sterlite had now gained access to scrap worth Rs.50 crores, inventory worth Rs.70 crores
and raw materials (caustic soda, fuel oil and b auxite) worth Rs.100 crores in the plant. In addition,
Balco's 270 megawatt captive power plant had materials worth about Rs.100 crores on its premises on
the day Sterlite took over the company.
Brahma Singh also said that the acquisition would enable Sterlite to have access to the more 3,000 acres
(1,200 hectares) of land at Rs.2 lakhs per acre (based on a recent land acquisition by Balco). Brahma
reckons that the value of the land in Balco's p ossession amounts to at least Rs.70 crores. He estimates
the company's prime real estate possessions in Mumbai, New Delhi, Kolkata and Chennai at Rs.100
crores. The union leader feels that under these heads alone, and not taking into account Balco's plan t,
machinery and equipment Sterlite has gained access to assets worth more than Rs.900 crores. Several
experts have pointed out that the captive power plant is worth at least Rs.1,000 crores, even after
accounting for depreciation.
The unions allege that successive governments have failed to protect Balco's long-term interests. Brahma
Singh, now heading the seven-union front, said that Balco's expansion and modernisation had been
neglected for a long time. "Money," he said, "is not the problem. The problem has been their attitude."
Balco made profits continuously in the last 12 years; its debt-equity ratio has been rather favourable; it
even had surplus cash reserves that could have been ploughed into expansion and modernisation p
Several senior Balco officials told Frontline that the company's proposals for modernisation had been
pending with the Union government for nearly a decade. "All that Balco needed were procedural
clearances from the government. We never expected m oney for the projects, estimated at between
Rs.400 crores and Rs.600 crores at that time," said one. Instead of investing in Balco's expansion, the
government withdrew half its equity stake during the current financial year, from Rs.489 crores to
Rs.244 crores. In February 2001, on the eve of the sale to Sterlite, it withdrew a further Rs.23.80 crores.
A senior official, who has been associated with the company since the "jungle-clearing days" in the late
1960s, told Frontline that the aluminium smelter's capacity had remained at one lakh tonnes per annum
(tpa) since 1970. Its alumina plant requ ired to be expanded from the current level of 2 lakh tpa to at least
5 lakh tpa in order to be in line with best practices across the world. "Today's technology is about 30
years old, we should have kept pace," he said. "We could not, not because we were inherently inefficient
but because the government did not allow us to move on with the times." He complained that for several
years, particularly after the onset of the reforms process, "new ideas have not been promoted at Balco".
He explained that priv ate interests, referring sharply to a large Indian aluminium major, "worked to
prevent Balco from emerging as a strong competitor". Referring to Balco's participation in the country's
missile development programme, company officials also pointed to the s ecurity risks that would arise
from the handing over of the company to a private entity.
The problems on account of the failure to modernise accumulated over the years. Balco's cost of
production has been much higher compared to either Hindalco, the biggest aluminium producing
company, which belongs to the A.V. Birla group, or the other stat e-owned aluminium major, National
Aluminium Company Ltd (Nalco). Balco's weaknesses are mainly because of the higher power
consumption as a consequence of its dated production technology. Moreover, Balco was also saddled
with a loss-making private unit l ocated at Bidhanbag in West Bengal.
The seven major trade unions, under the banner of the Balco Bachao Sangharsh Samiti, have for over
two years resisted the privatisation bid. Significantly, even the union affiliated to the Bharatiya Mazdoor
Sangh, the trade union wing of the BJP has join ed the common platform.
The base of the struggle has widened in the qualitatively changed situation after the sale. A new
platform, the Nijikaran Virodhi Samyukt Samiti (anti-privatisation front), was formed on February 28,
accommodating not just the unions but all political pa rties barring the BJP. Other organisations, notably
the Chattisgarh Chamber of Commerce, have also joined the platform. On the second day of the strike,
the womenfolk of Balco Nagar participated in a torchlight procession. Said B.L. Netam, an activist of the
Centre of Indian Trade Unions (CITU): "Balco's sale has provoked even our womenfolk, who are bound
by traditional values, to come out on the streets."
V.C. Shukla, former Union Minister, who leads a Congress(I) group opposed to Jogi in Chattisgarh,
visited Balco Nagar. Although he offered to lead the agitation, the trade unions do not want to be caught
in the crossfire between the Shukla and Jogi camp s.
The struggle has been peaceful so far. In response to the Supreme Court's directive the unions have
climbed down from their earlier stand that they would not allow Sterlite officials to enter the plant.
Sterlite has invited the leaders of the seven union s to Delhi for talks. Brahma Singh said: "We do not
recognise the Sterlite management, we will only talk to the Government of India."
Sterlite declared a lockout on March 10, alleging that the plant was in risk of being damaged. However,
the unions have accused the company of precipitating a crisis by closing down the plant and blaming the
workers for it. The workers were aware that th e smelter ran the risk of being damaged in the event of a
complete stoppage of work. On the fifth day of the agitation, the core committee of the unions issued
passes to more than 70 workers to enter the plant in order to keep the smelter alive. Netam s aid that the
workers had offered shram daan (free and voluntary labour) to protect the plant. "After all," he said, "this
is the hand that feeds us. How can we allow it to be destroyed?"
Jogi's opposition to the deal has rested on the premise that it violates the hopes and aspirations of
Chattisgarh. He argues that the land on which Balco stood was acquired from tribal people. He contends
that since the company is no longer a publicly ow ned entity the land should be returned to its original
owners. Jogi has also cited legal provisions as a means to prevent Sterlite from enjoying access to the
bauxite mines hitherto operated by Balco.
Shyamlal Maravi, vice-president of the Chattisgarh Adivasi Vikas Parishad, told Frontline that land from
scores of tribal hamlets was acquired after Balco was incorporated in 1965. In most cases, the owners
were paid Rs.20 per acre.
Although the government and Sterlite have said that there will be no retrenchment for at least one year,
there is a widespread fear that the new management will shed workers in significant numbers after that
point. Sterlite's corporate reputation is also a point of animated discussion (see box). Shourie assured
Parliament that the company was committed to a lock-in period of three years and that it would not be
allowed to strip the assets of the company. However, analysts say that it will be difficult t o prevent a
shareholder with a decisive controlling stake from actually doing this.
Cynics within the Congress(I), notably those belonging to the V.C. Shukla camp and elsewhere, have
warned the workers that Ajit Jogi is making political capital out of the issue. However, those
sympathetic to him say that the Chief Minister has establish ed his tribal credentials beyond doubt. The
workers place much hope on Ajit Jogi's support, but the success of their agitation will depend on how far
Ajit Jogi would go.
The valuation of a company's assets is always tricky business. Much depends on the expectations of
profits, the size of the assets and liabilities, goodwill, and other factors. Critics of the reforms
programme have been demanding that the replacement cos t of existing assets of a PSU should be
factored into the valuation. This method, they say, would set a benchmark price, determined by what it
costs for a purchasing entity to set up a similar production facility with assets of a comparable size. The
fac t that murky deals are suspected irrespective of the nature of the offloading exercise - through the
stock markets or through "strategic sale" - only indicates that privatisation is nothing but the sale of
public assets for private benefit at a substanti al discount.
'The sale has violated the law'
Interview with Chief Minister Ajit Jogi.
The issue of the sale of Balco has put Chattisgarh Chief Minister Ajit Jogi in the limelight. Jogi has
alleged that Balco's assets have been grossly undervalued and that kickbacks have found their way into
Swiss bank accounts. He denies that the Chattisg arh government was consulted about the deal. Jogi's
strident position on the affair has roused hopes in the employees of Balco that his government will
support them in their battle to reverse the sale of the company. The Chief Minister spoke to V. Sridha r
at Balco Nagar in Korba on March 5 soon after addressing a large public meeting where he announced
his support to the employees. Jogi, a former officer of the Indian Administrative Service (IAS),
explained at length his perception of how the deal has v iolated the provisions of Union and State
legislation. Excerpts from the interview:
What are the reasons for your opposition to the privatisation of Balco?
I have posed several questions to the Union government. The deal is against the aspirations of the people
of Chattisgarh. The deal is against the interests of the workers. It is also against the kind of disinvestment
process that the Congress(I) stands f or. This is not a transparent deal. There have been huge kickbacks.
Are you opposing the disinvestment because the price is not right or because you are against privatising
Per se, we are never against privatisation. We are all for economic reforms, but there has to be a way in
which disinvestment ought to be done. The Balco sale is neither necessary nor transparent. We are not in
favour of disinvestment of controlli ng stake in profit-making public sector companies.
The Balco sale has come about despite the opposition of the Chattisgarh government. What issues
relating to federal relations in the Indian Union have been raised by this deal for this newly-formed,
backward and predominantly tribal State?
This is a body blow to the federal spirit of the Constitution of India. A very important public sector unit
located in a nascent State has been sold by the Union government without bothering to consult the Chief
Minister of the State. Now Mr. Arun Shouri e (Union Minister for Disinvestment) repeatedly says that
we have been consulted. He is telling a white genteel lie. This is a blatant lie. I was never consulted.
They may have consulted the State of Madhya Pradesh before November (Chattisgarh was carved out of
Madhya Pradesh in November 2000). That does not mean that they have consulted the State of
I have known Mr. Shourie so well. Nothing need have stopped him from talking to me and taking me
into confidence when such a big deal was being struck. It was done surreptitiously. The Union
government thought Chattisgarh was a new, four-month-old tribal State, it would not protest. They
thought they could bulldoze and steamroll their way, and do what they liked. But they are sadly
mistaken. I have a mandate from the people of the State and from my supreme leader, Shrimati Sonia
Gandhi, to fight for the rights of the people here. That is why I have taken the stand I have.
The Balco disinvestment is the first decisive sale of a large profit-making public sector company. How
do you view the fact that the process has begun in Chattisgarh?
I think the sale has a great historic significance. If the workers of Balco and the people of Chattisgarh
succeed (in overturning the Balco sale), it will certainly give a correct direction to the process of
disinvestment and economic reforms in India. I am sure and I have always believed that no power on
earth can go against the wishes of the people.
Does your support to the workers' agitation stop at the moral level or will you use state power within
reasonable democratic limits to protect the interests of the workers and the State?
I cannot possibly be a part of the agitation. I cannot be leading the agitation. My sympathies are with the
workers who are agitating. I would like to see them continue their struggle in a peaceful manner, without
taking the law into their hands. So long as they do that, my moral support will continue to be with them.
The law of the land requires me to protect their interests. According to the assessment of our revenue
authorities, the law has been violated...
Can you elaborate on how this has happened?
There have been three ways in which the Balco sale has violated the law of the land. First, at the time of
Balco's inception, the land was acquired from the local tribal people living on the land in Korba.
Sections 170 a), b) and c) read with Section 165 , sub-section 6 of the Madhya Pradesh Land Revenue
Code 1959 which governs the area in which Balco is situated, have been violated. The law says that
when tribal land is alienated, it must be restored to them (tribal people). In this case, Balco, a publi c
sector undertaking, was established on land belonging to the tribal people. When the land was acquired
from them, it was said that the land was needed for the activities of a public sector undertaking for a
public purpose. The moment it is no longer a public sector unit, its character changes: it becomes a
private entity. The land which belonged to tribal people has been transferred to a non-tribal entity. And
per se, this is illegal. Quite correctly, the authority concerned, the Sub-Divisional Office r (Civil), Korba,
issued notices to Pradeep Baijal, Secretary, Union Disinvestment Ministry, and Anil Agarwal, chairman
of Sterlite Industries who is now the so-called owner of Balco. They must appear in his court or he will
restore the land to the triba l people or their heirs-apparent.
Second, the Balco sale has violated provisions of the Land Acquisition Act (a Central Act), which lays
down procedures to be followed for the compulsory acquisition of land. The land that is now with Balco
was acquired under Sections 4 and 6 of the Act. When the government sought to acquire the land, it
stated that this land was required for a public purpose. Now, Section 44 a) of the same Act says that if
the public purpose for which the land was acquired ceases to exist, then the land must be given ba ck to
the person or the authority from which it was taken.
Third, a historic judgment of the Supreme Court, known as the Samatha Judgment (Samatha vs the State
of Andhra Pradesh and others, decided in 1996 and reported in 1997), has implications for the Balco
sale. The judgment said that in Schedule V areas (areas that are mentioned as tribal areas in the
Constitution), no factory, no establishment, no mining activity, no industrial activity, can be undertaken
by a private person. Such activity can only be done by tribal people, or a cooperative society of tribal
people or by a government undertaking - not by private entities. The Balco sale is a clear violation of the
Supreme Court judgment that laid down a principle of law - that no private entity can get a mining lease
or start an industry in areas mentioned in Schedule V. That means that Mr. Anil Agarwal does not have a
right to run Balco in a Schedule V area. He does not have the right to get a mining lease in such an area.
I think someone - some tribal person - from this area will surely go to court on this.
Is the Congress(I), which appears to be divided - between the Ajit Jogi and V.C. Shukla camps - in a
position to take on the challenge in this issue?
The party is not at all divided. The party has a supreme leader in Sonia Gandhi and she has unified us.
V.C. Shukla is a respected leader of the party. He is also with the Balco workers in their struggle.
You have alleged that the Balco deal has resulted in kickbacks, which have gone into Swiss bank
If they (the Union government) have the moral courage, they must institute a probe by a joint
parliamentary committee (JPC), and we undertake to prove what we have alleged. The circumstances of
the deal speak for themselves. How can property valued at Rs .6,000-7,000 crores be sold for Rs.551
crores? They claim that they floated global tenders. How come there were just two bids for Balco? Of
these two bids only one was above the reserve price. How can these be explained?
Arun Shourie has offered to place all the relevant documents relating to the deal before the Comptroller
and Auditor-General (CAG).
Documents, committees, Comm-ittee of Secretaries, Group of Ministers... All these are just bureaucratic
jargon. All the manipulation is done through these mechanisms. In this case, the mechanism has been
used to receive kickbacks.
You have named some people in the Prime Minister's Office...
Everybody in Delhi is talking about this. The high and mighty sitting in (names a hotel)..., an
extra-constitutional authority, is the prime beneficiary in this deal. There are also other beneficiaries.
Everybody in Delhi is talking about this. I have me ntioned in the Vidhan Sabha names of people
involved in the deal. If there is a proper forum where I am assured that justice will be done, I am
certainly willing to reveal all the evidence that I have.
What could these forums be?
Either a JPC or a judicial inquiry. I do not think there is any other forum where justice will be done.
The aluminium scene
ON June 15, 2000, the Union government invited bids for strategic partners for the sale of 51 per cent of
its equity in Balco, the third biggest aluminium producing company in India. Balco, the
government-owned National Aluminium Company (Nalco) and Hind ustan Aluminium Company
(Hindalco) belonging to the A.V. Birla group together produce over three-quarters of the country's
primary aluminium. Hindalco produces more than 40 per cent and Nalco about 34 per cent.
Balco's takeover by Sterlite is the latest in a series of acquisitions that have taken place in the industry in
recent years. In February 1998, Sterlite made a bid for a stake in Indian Aluminium Company (Indal) but
faced a strong challenge from its Cana dian promoter, Alcan. Although it bid only for a 10 per cent
stake, it banked on the support of financial institutions and foreign institutional investors to sell shares in
its favour. Market sources said at that time that the low price of Indal's scrip in relation to the value of
the company's assets made it an easy target for a raider. Although Indal produces only 7 per cent of
primary aluminium, it is known for its strength in the high-value downstream segment of the market.
Eyeing the company's pote ntial, in March 2000 Hindalco accepted Alcan's offer of a 55 per cent stake in
the company . With this acquisition, Hindalco's market share in primary aluminium production increased
to 47 per cent. Hindalco also acquired a controlling stake in India Foil s, which belonged to the Khaitan
Group. This acquisition was aimed at deepening its penetration in the downstream segment.
Nalco made its own acquisitions. It acquired 100 per cent stake in International Aluminium, which has
an export-oriented unit at Angul in Orissa.
Earlier, Sterlite acquired Madras Aluminium Company (Malco), which had gone before the Board for
Industrial and Financial Restructuring (BIFR). Although Sterlite has claimed that it has turned around
the ailing company, critics point to the favourable te rms that it drew from the Tamil Nadu government,
then headed by Jayalalitha, as part of the revival package. Power was supplied at a rupee a unit whereas
other industrial units paid Rs.2.50 a unit.
Balco was incorporated in 1965 as the first public sector integrated aluminium producer. The technology
for its smelter and alumina plants was acquired from Hungary and the Soviet Union. According to a
former chairman of the company, now based in Delhi, one of its main strengths is that it is a vertically
integrated company. This allows it to produce alumina from bauxite, refine alumina to produce
aluminium at its smelter plant and manufacture a variety of finished products. Balco's workforce has also
b een recognised for its commitment, as attested by the low incidence of strikes or work stoppages at its
Although the company enjoyed the benefits of a large integrated producer, these advantages were
steadily lost in the face of technological changes that have changed the face of aluminium production
worldwide. Power is one of the most significant inputs i n the production of aluminium, and the
technological innovations in the business have invariably concentrated on the reduction of power
consumption in the manufacturing process. Associated with this was the need for expansion of capacities
to capitalise on the economies of scale they offer. The Union government's failure to allow Balco to
modernise meant that it suffered even in comparison to Nalco. In fact, in mid-2000, a Standing
Committee of Parliament had suggested the amalgamation of Balco and Nalc o as the "merger may
provide sufficient corporate resilience to meet the challenges ahead".
At the height of the controversy over the government's disinvestment in the Gas Authority of India
Limited in November 1991, it was suggested that a strategic sale, rather than a sale of government equity
in the stock markets, would fetch the government a better price realisation. A strategic sale, it was
argued, would draw only players who are really interested in the company as a business proposition and
not speculative interests. However, even at that stage it was argued by critics of the privatisati on drive
that a strategic sale may only result in the rise of cartels and the dominance of monopolies.
Industry watchers observe that one possible reason for the poor response to the Balco sale offer is that
Hindalco is more interested in making a bid for Nalco, which is also expected to be sold later.
Sterlite's market share, which was a mere 3 per cent before the Balco deal, has now increased to more
than 18 per cent. If Hindalco acquires Nalco, its market share will touch a whopping 82 per cent.
Between themselves, the two companies would then contr ol the entire primary aluminium market in the
country. The threat of cartelisation surely cannot get scarier than that.
STERLITE Industries has grown dramatically during the last decade. Its turnover increased from Rs.83
crores in 1990-91 to Rs.2,925 crores in 1999-2000. During the same period its net profits rose from
Rs.10.28 crores to Rs.337.63 crores, and its net wort h from Rs.42.08 crores to Rs.1,695 crores. Its rapid
growth is a classic example of the dramatic rise of a clutch of medium-level enterprises in India during
the "reforms decade".
Sterlite's main activity was the production of cables for the telecom industry. The rapid growth of the
company is closely linked to the telecom revolution in India during the last decade. It established a
Telecom Cables Division in 1988 and has plants a t Aurangabad and Silvassa manufacturing cables.
Its first move in the direction of establishing backward linkages was in the field of copper production.
This proved controversial. Its attempt to locate its copper smelter at Ratnagiri in Maharashtra drew sharp
protests from the local people, who feared environmental damage.
In October 1994, Tamil Nadu Chief Minister Jayalalitha laid the foundation stone for the company's
copper smelter project in Tuticorin.
Two aspects of the company's conduct in Tuticorin have been particularly controversial. The
environmental clearances obtained by it have for long been a subject of bitter complaints by the local
people, particularly the fisherfolk. In particular, the cop per smelter project's Environmental Impact
Assessment (EIA) generated much controversy. There were allegations that the EIA was conducted
before the company finalised its project, implying that the parameters were changed later. Dave Santillo,
a scientis t associated with Greenpeace, on a visit to Chennai in 1997, remarked that the EIA was "one of
the most shoddy pieces of work" that he had ever seen. The EIA remained silent on parameters related to
suspended particulate matter, particularly those relati ng to levels of heavy metal such as lead in the
THE other aspect of Sterlite's conduct in Tuticorin - and one which may have relevance to the employees
of Bharat Aluminium Company Ltd, - relates to the company's reputation as an employer. The unions
claim that most of the workers at the company's smel ter in Tuticorin are in the category of contract
labour, engaged by contractors. The unions have repeatedly complained of lax safety standards at the
plant. The company was subjected to intense media scrutiny after an explosion occurred in the plant on
A ugust 30, 1997. It made references to a bomb blast which were never proved. However, what certainly
happened was that at least two workers died, and two were maimed, in an industrial accident. The
explosion ripped off the lid of the rotary holding furnac e. Molten metal at about 1,200øCelsius fell on
the workers; union sources said that only skeletal remains were recovered from the furnace (Frontline,
October 3, 1997).
The unions, backed by human rights organisations, later claimed that complaints from the workers of an
impending disaster were ignored by the management. Union sources have for long said that the contract
labour system is not conducive to maintaining lab our safety standards.
The Sterlite scrip has attracted controversy in the past. The scrip was among those that rose
"abnormally" in May-June 1998, resulting in a payments crisis, much like the current situation in the
bourses. The matter was later scrutinised by the Securitie s and Exchange Board of India (SEBI).
Sterlite's chairman and managing director, Anil Agarwal, a non-resident Indian who lives in London,
controls a chain of steel companies across the world. He has made acquisitions across the world. Anil
Agarwal acquired a 100-year old copper mine in Austr alia, a gold and copper mine in Armenia and a
copper smelter in Mexico.
After the acquisition of the Madras Aluminium Company (Malco) in 1995, Sterlite was reported to be
considering a greenfield aluminium complex. However, a leading consultancy firm apparently advised
Agarwal against such an investment because capacity coul d be acquired from an existing producer.
Sterlite's acquisition of Balco is in line with the company's strategy to increase its market share in the
The recommendations of the Economic Advisory Council to the Prime Minister are highly flawed, based
as they are on a presumed but incorrect consensus on how the economy works and what promotes
TAKEN together, the report entitled Economic Reforms: A Medium Term Perspective, being the
recommendations of the Prime Minister's Economic Advisory Council (EAC), the Economic Survey
2000-01 of the Finance Ministry and the Union Budget for 2001-02 advocate and seek to implement a
set of economic policies, presented as sensible technocratic choices claimed to "represent a broad
professional consensus on the directions in which we need to move..." (EAC). These policies basically
entail acce lerated implementation of the neoliberal economic agenda of liberalisation, privatisation and
globalisation (LPG). The most insidious aspect of this orchestrated set of exercises is that they seek to
present blatantly partisan policies serving primarily the interests of large foreign and domestic capital in
general, and finance capital in particular, as non-political choices in the national interest, based on a
consensus of economic wisdom. Nothing could be farther from the truth.
The EAC report makes recommendations on practically every sector of the economy and every aspect of
economic policy: agriculture, industry and trade, social and economic infrastructure, financial sector
reforms and the fiscal situation.1 In al most every instance, they are advanced not on the basis of any
reasoned argument or analysis, but are implicitly taken to follow from a presumed consensus on how the
economy works, what makes for greater efficiency and what promotes economic growth. This presumed
"consensus" consists essentially of a set of assumptions, the most important of which may be
summarised as follows:
(1) Markets encourage "efficiency" and growth and best harmonise the interests of all citizens. (The
presumption here obviously is that marktes are invariably free and competitive.)
(2) Government's fiscal deficit is the most important stumbling block to growth (allegedly) crowding out
private investment, if financed by borrowing, and causing inflation if financed by money creation.
(3) The private sector is by definition more "efficient" than the public sector.
Armed with its assumptions that are presented as incontrovertible and universally accepted truths, the
report makes a series of recommendations in rather cavalier fashion. It asserts that the crisis in
agriculture will be best solved by moving away from controls and towards free markets in agricultural
products. It advocates that the Food Corporation of India (FCI) should limit itself to a buffer stocking
role, storing not more than 10 million tonnes of grain; big grain companies should be permitted to buy
directly from farmers, and without any purchase/sales tax; all reservation for small-scale industry (SSI)
in agricultural processing should be eliminated; private seed companies should be exempt from land
ceiling laws; and controls on distribution a nd marketing of sugar should be abolished. These and other
recommendations regarding agricultural policy reflect a touching faith in the efficacy of agricultural
markets not supported by empirical evidence. They imply a dismantling of the public distribu tion
system (PDS) and handing over the responsibility for ensuring food security for the poor to private
market operators, especially big grain and seed companies. Reality occasionally intrudes, however, as
for instance when the report concedes:
"... private investment is not a substitute for public investment in all areas. In fact, it can be argued that
additional public investment in critical areas of agricultural and rural infrastructure is crucial, and private
investment would go up further once investment in such rural infrastructure picks up."
So, private and public investment are complementary after all! However, on the question of where
resources for such public investment are to be found, the report recommends "...price and institutional
reforms in power, canal irrigation and fertilizer sec tors", but not higher direct taxes on the rural and
urban rich. The discussion on power sector reforms is less than candid about the disastrous results of the
policies of the 1990s, including the notorious Enron deal, of seeking to privatise the power se ctor
through the so-called independent power producers (IPPs) and fast-track projects.
On Industry and Trade, the report recommends a phased transition from an average import duty of 34 per
cent to 12 per cent in five years, abolition of reservation for SSI sector, scrapping of the Sick Industrial
Companies Act (SIC) and winding up of the Board for Industrial and Financial Reconstruction (BIFR),
privatisation of all public sector undertakings except of those having a strategic/security aspect, investing
employers with an unfettered right to retrench employees, subject only to payment of s ome
compensation and allowing for widespread out-sourcing and use of contract labour (sans protection,
though this is not so explicitly stated). Essentially, these conform to the agenda of the large corporate
sector, with an additional bias in favour of foreign investors. They will not help in overcoming the
present industrial recession, but will in fact worsen it.
Attack on States
In para 7.17 of the report, it is proposed that "...from the Tenth Plan onwards (that is from April 1, 2002)
half of the normal Central assistance to State Plans should be provided on the basis of a quantitatively
worked out fiscal reform plan", and that "release of Central assistance during the year should be linked
to achievement of milestones of policy action agreed by States as part of the Tenth Plan exercise." The
report itself recognises in para 7.18 that this proposal "... may be questioned on th e grounds that it
introduces an element of conditionality in the release of Plan assistance which may appear to be a
departure from existing practice", but seeks to justify the proposal by invoking the Eleventh Finance
Commission's recommendation linking devolution of funds from the Centre to the States to performance.
This proposal constitutes an assault on the principle of federalism, and seeks to take away even the
limited authority that States enjoy in the quasi-federal Indian Union.
In section 7.11 on 'Expenditure Control', the report proposes that interest rates for the national small
savings (NSS) scheme, the public provident fund (PPF) and for the public account be lowered to a level
not exceeding two percentage points above the inflation rate of the previous six months. Apart from the
practical difficulties and the scope for abuse that this proposal entails, it strongly undermines the
incentive to save on the part of middle-income and less well-to-do households. It will also le ad to a
sharp decline in small savings collections, which will primarily affect the States. It is not entirely
unreasonable to suggest that this recommendation reflects the pro-Centre and anti-State bias evident in
some of the other fiscal proposals in t he report.
In a section on 'Fiscal correction at the State level', the report pontificates on what the States should and
should not do, but does not breathe a word on the failure of the Centre to impose a Consignment Tax,
although it is more than 10 years since the enabling constitutional amendment was passed. It is indeed
ironic (although the authors of the report are evidently unconscious of the irony or perhaps have chosen
the safe option of diplomatic silence) that the report recommends (in 7.14) "...reducing the size of State
Cabinets, which are often very large" but is silent on the not overly modest size of the Union Cabinet.
Despite its anti-State bias, the report grudgingly recognises (para 7.7) that between 1990-91 and
1999-2000 "...States tax revenues as a percentage of GDP have at least remained stationary, whereas the
Central Tax-GDP ratio has actually fallen by over 2 percentage points."
Interestingly, after conceding the Centre's lack of tax effort by pointing to the decline in Central
Tax-GDP ratio between 1990-91 and 1999-2000, the report refuses to suggest enhancement of direct tax
rates, on personal income and corporate profits even for the highest levels of income/profits. Instead, it
proposes lowering of import duties and increasing excise duties (by removing the exemptions for SSI),
moves that are bound to affect small domestic producers.
The report hails the introduction of a Fiscal Responsibility Bill in Parliament as a commendable step,
although it concedes in the same breath that "...legislation by itself will not guarantee fiscal discipline"
(para 7.9). This commendation is entirely unwarranted. Such a Bill should be opposed strongly, for it is
not about fiscal responsibility, it is about abdication of fiscal and political responsibility. A Central
government that seeks to practise fiscal responsibility should make itself accountabl e to a
democratically elected Parliament rather than rely on an Act which takes away its room for flexibility in
managing receipts and expenditures. The Fiscal Responsibility Bill is of a piece with other legislation
being proposed, such as those relatin g to a fixed term for Parliament and a presidential form of
government, in that all these are fundamentally undemocratic.
The report mentions a growth rate of 8 per cent. If one assumes an incremental capital output ratio
(ICOR) of four, this would imply a required saving rate of 32 per cent. Currently, the saving rate is 22.5
per cent. The report offers no worthwhile sugge stions on how to enhance the saving rate, but in a
directly contradictory manner, recommends lowering of interest rates on small savings. It deals at great
length with the need to control public revenue expenditure so as to enhance capital formation for
government, but is silent on the minimal contribution of the non-household private sector to savings. By
default, the failure to tax the profligate consumption of the well-to-do, implicit in the report's view that
direct taxes need not be touched, will o nly leave a savings gap that will serve as an argument for
inviting foreign direct investment (FDI) on the most liberal terms.
Contrary to the perspective of the report, the growth rate can be stepped up to 8 per cent or even 10 per
cent if the Centre shows the political will to enhance the rates and enforce the collection of direct taxes
on the well-to-do, especially the corpor ate sector, widen the tax base to include the rural rich and
professionals and clean up tax administration. The fetish with the "fiscal deficit", a product of a
pre-Keynesian mindset, should be discarded. A bold programme to use surplus foodgrain stocks in a
massive food-for-work programme, carried out in a decentralised manner through elected local bodies,
can help build rural infrastructure and stimulate growth.
Greater public investment in infrastructure, health and education, financed primarily by better tax
collection, together with elimination of hidden subsidies to the rich in the form of tax breaks and
exemptions, and appropriate and judicious revision of user charges will lay the basis for a higher growth
rate and more equitable and healthier growth process.
If the report is serious about achieving higher growth rates, it has only to look to countries such as China
whose policies it approvingly cites elsewhere in the report. If China and South Korea report high growth
rates, this is directly linked to their high savings rates, which in turn is linked to their focus on
investment as against the conspicuous consumption that a transnational corporation-led assault on India's
domestic market implies. It must also be added that China's achievements in growth and poverty
reduction predate the current policy regime in China and that much of foreign investment in China is
from overseas Chinese and not transnational monopolies.
Venkatesh Athreya is Professor and Head of the Department of Economics, Bharathidasan University,
1. This article deals largely with some of the recommendations of the EAC. Two things may be noted.
First, there is considerable overlap (and identity of views) among the EAC Report, the Economic Survey
and the Union Budget for 2001-2002. Second, cert ain aspects of the EAC recommendations have
already been dealt with in Frontline (March 2) and hence will not be discussed here.
Tricks of magic
Magical realism in the fabulous world of the Indian economy.
MAGICAL realism is an Indian habitus discovered accidentally by Latin American fiction. Gabriel
Garcia Marquez - may his recent illness be as painless as possible - wrote in a style that evokes for me
the social relations of the Indian subcontinent. No w onder, then, that his technique is so freely, and
profitably, used (most mimetically) by Salman Rushdie and (only partly) by Arundhati Roy.
Consider two small examples. For almost eight decades, a fire has raged under several square kilometres
of Jharkhand (formerly southern Bihar). This fire, in Jharia, began in an unsafe colliery run by British
capital and it has burned, uncontrolled to th is day. Over the past three decades the Indian government
has relocated about 2,500 families (and even considered the wholesale transfer of Jharia town). But
13,500 families remain on the hot surface, with callused feet to carry them each day over the in satiable
Meanwhile, hundreds of kilometres away in Nuapada, Orissa, in the early 1980s, agencies committed to
'development' castrated the local, and very resilient, Khariar bull. Cows in the district, according to
journalist P. Sainath, were from then impregnated with imported Jersey semen. Two years later, after
millions of rupees were spent on the project, the several cows only produced eight calves of poor health.
The diary farmers in this drought prone district suffered the presence now of worthless cows and the
rumour of a fabulous, but now extinct, bull. Magical realism on the backs of the working-class and the
Foreign tourists to India often are amused by the sheer density of experiences, as they are overloaded
with sensory data. We Indians in the U.S. take on a bemused tone when confronted with the enthusiasm
of the liberal tourist. India seems to do things i n excess: too many spices, too many colours, too much
noise. Magical realist fiction thrives on this vision of an overripe India. I suspect that after you have
brushed off the orientalist (and sometimes racist) overtones of this reaction there is a germ of truth to it.
South Asian cultures are decidedly non-puritanical when it comes to public space and there is a sense of
revelry in the north Indian marketplaces with which I am familiar. If the subcontinent has a tendency to
excess, our local fascistic movement is not to let us down on this score. The Hindu Right is flamboyant
in its cultural outrageousness and almost camp-like in its subservience to the logic of capital. No author
of magical realist fiction would dream of opening a Ministry for Disinv estment. Only in India!
And who is the Minister of State for Disinvestment? Arun Shourie, the arch conservative journalist and
author who toes the line of cruel cultural nationalism. Why is this brutal writer seconded to the primary
task of neoliberalism - to cut down the welfa re state? Because, like Nixon in China, only he can do it on
behalf of transnational capital and the big Indian bourgeoisie. Like many states after the two oil shocks,
the bourgeois-landlord Indian state came under pressure in the 1970s to undertake Inte rnational
Monetary Fund (IMF) conditionalities to earn foreign exchange from commercial lenders. The agent for
IMFundamentalism at that time was the old behemoth, the Congress party. But the Congress had created
its legitimacy as the force of anti-imperi alist patriotism, even if it had long abandoned its core precepts
that put the people before capital. Import-substitution allowed the Congress to retain its position as a
patriotic force despite its active partisanship on behalf of the big bourgeoisie an d kulaks, or the big
farmers. With the turn to neoliberalism, the Congress lost its claim to the national-patriotic as regional
bourgeois forces rose to fill the gap, alongside the gradual rise of the Hindu Right.
The Hindu Right emerged in the 1980s as the national heir of the Congress, as the bulwark against the
'foreign.' The 'foreign,' for the Hindu Right, was not finance capital and transnational firms, but Muslims,
Christians, oppressed castes and others. Ar un Shourie was one of the main propagandists against the
composite nature of Indian nationality, and one of those who promoted the idea that the Hindu Right
would protect the national culture of India. When it came to power, first in 1996 (for 13 days) a nd then
in 1998, the Hindu Right has kept up this posture of cultural nationalism (mainly in its pogroms against
Muslims, Christians and missionaries, and selective elements of 'foreign culture'). At the same time, it
has been a champion of neoliberalism , first with its welcome to transnational private power companies
(like Enron) and then in its ruthless destruction of the regulated economy in favour of cowboy
capitalism. Budget 2001 is a sign that the Hindu Right has pushed forward the agenda of neoli beralism:
not as stewards of the IMF, but as agents for the dominant classes which are ravenous for state assets
that they can translate into speculative capital.
The Budget of the Finance Minister of the Hindu Right, Yashwant Sinha, was notable for three
magically barbarous moments. First, he proposed that the Ministry of Disinvestment continue its work
with alacrity. State assets worth $550 million will be put o n the auction block - most of these are vastly
undervalued industrial units whose real estate itself merits the sale price. Second, the state will divest
itself of the task of increasing agrarian produce and seeing to it that foodstuff reach the poor at controlled
prices. The public distribution system was set up to offer minimum support prices to the peasantry and to
mobilise foodgrain for the poor. But the government will now only trouble itself with 'maintaining food
security reserves', hardly the ta sk of a social democratic regime on the other side of imperialism.
Furthermore, farmers short of agro-businesses will face the threat of cheap imports of agricultural
commodities once the rules of the World Trade Organisation (WTO) come into effect. Thir d, the state
casts out of regulation all workers who toil in enterprises that employ less than a thousand workers. Most
studies show that these small scale manufacturing units already function under the radar of governmental
regulation, but now they will do so with impunity. The amended Industrial Disputes Act will allow small
industrialists to 'hire and fire' workers at will. This comes at the same time as the government puts the
small scale sector at the mercy of foreign industry, with an end to excis e taxes. Therefore a constrained
small scale sector will certainly employ ruthless tactics to eke out an existence as pressure from imports
mounts against them: the unregulated factory will become ghastly for its workforce.
Those who incidentally mouth off about the death of the state should think twice about that position. The
state remains the horizon of our democratic aspirations, just as we fight for inter-state solidarity.
Nationalism of the culturalist form is bankrup t, but patriotic statism is still necessary to engender
democracy. The state remains the only form available to ensure some measure of accountability: but not
a state in the hands of the dominant classes. To abjure the state as the horizon of our struggl es is to play
into the hands of those who want to dismantle the state in the service of other forms of entrenched
power: the state is the principal forum for the class struggle.
In 1982, Salman Rushdie wrote that Marquez' magical realism is not 'an invented, self-referential, closed
system.' Rather Marquez (and Rushdie himself) writes of those societies "in which public corruptions
and private anguishes are somehow more garish a nd extreme than they ever get in the so-called 'North,'
where centuries of wealth and power have formed thick layers over the surface of what's really going
on." Here, in the relative comfort of the United States, even the working-poor can comfort themse lves
with the chimera of American exceptionalism, with the sense that the dollar which they hold in their
hand can clobber the daylights out of any other currency. In far off India, a government tenders a Budget
that is an act of magic against its own pe ople.
But the magic trick is no mystery to everyone. The Left has been agile in its critique and in its mass
mobilisation. The Communist parties in India have planned to hold mass demonstrations across the
country from March 12 to 18 to counter the "naked disp lay of the pro-big business and
pro-multinational corporation approach of the BJP-led government." The bad guy is not only the IMF,
but decisively IMFundamentalism sired not simply by the Washington Consensus, but also by the
cultural nationalist, but ne oliberal Hindu Right.
Vijay Prashad is Director, International Studies, Trinity College, Harford, Connecticut.
In her second Railway budget, Mamata Banerjee adopts an approach that is in obvious disagreement
with the dominant idiom of economic policy formulation.
in New Delhi
RAILWAY Minister Mamata Banerjee's second budget was prefaced by a philosophical preamble that
clearly set out her differences with the dominant idiom of economic policy formulation. The 16 months
spent as Railway Minister, she said, had been an intense learning experience, which had impressed upon
her the uniqueness of the public institution she had been placed in charge of. It was also a chastening
experience, since it brought her in close contact with the enormous odds that the Railways faced in livi
ng up to expected standards of public service. There was a chant growing in volume and intensity that
the Railways should learn to operate on commercial terms. But this approach was one that she was in
obvious disagreement with, since the Railways were a bove all a "people-centric" and "society-centric"
In pursuit of this philosophy, Mamata Banerjee has chosen to take certain risks. Her efforts to petition
for a higher level of budgetary support from the general exchequer have fetched little rewards. Capital
infusions from the general Budget in the year 2000-01 were marginally increased in relation to the
original estimates. But the provision made for 2001-02 of Rs.3,540 crores as budgetary support
represents an increase of less than 8 per cent.
The Railways, in turn, have curtailed the dividend paid to the Union government from the recommended
level of 7.5 per cent to 7 per cent. This would be the second year in a row in which the dividend pay-out
is below the norm. Total accumulations under th e Railways' "deferred dividend liability" now amount to
Rs.2,500 crores. Without some rather serious revenue raising measures - which have been conspicuously
absent in the last two budgets - it is difficult to see this liability being discharged in the f oreseeable
Differences in perception have been growing over the last decade and Mamata Banerjee's resolute
refusal to play by the "market-friendly" rules that are in vogue indicate that the divergences will only
grow. The parlous state of the Railways' reserve fund s underlines this fact. The Depreciation Reserve
Fund (DRF), for instance, will end the year 2000-01 at the precarious level of Rs.50.81 crores. This is
even lower than the budgeted figure of Rs.76.72 crores. The rate of depletion has been rapid, since t he
Railways ended the year 1997-98 with Rs.1,434 crores in the DRF. In the two succeeding years,
investments were financed out of the DRF without the normal precaution of replenishing it through
revenue earnings. In 2000-01, just enough has been appropri ated to the DRF to meet planned
withdrawals - and in the event, this figure has been well below the budgeted levels. The same will be the
case in 2001-02.
The situation with regard to the other main internal sources of investment funds for the Railways - the
Capital Fund and the Railway Development Fund - is similar. The most striking is the case of the Capital
Fund, which was established in 1992-93 and ti ll 1997-98 showed a healthy balance of Rs.1,200 crores.
The year 2000-01 will close with no more than Rs.21.13 crores in this reserve and the net accretion in
2001-02, if all goes according to budgetary calculations, will be negligible. Considering the t enuous
state of the Railways' revenue and investment calculations, a further depletion in the size of this reserve
This is a distinctly unpleasant prospect for the Railways' management. Years of under-investment in
vital operational areas have begun to take their toll. Plan investment in 2000-01 amounted to no more
than Rs.10,002 crores against a budgeted Rs.11,000 c rores. The Plan investment budgeted for 2001-02
is Rs.11,090 crores, though there is no reason to suppose, given the philosophical aversion to rate
increases, that this target will be met.
There is also a growing degree of prudence evident in the Railways' borrowing programme. For a few
years the resources raised by the Indian Railway Finance Corporation (IRFC) for the purpose of leasing
rolling stock for the operational needs of the Railw ays, remained constant at the level of Rs.3,400
crores. For 2001-02, the figure has been cut back to Rs.3,000 crores. The reasons are obvious. Lease
rentals paid by the Railways to the IRFC have been growing steadily over the years, and today they
amount to over 8 per cent of the gross traffic receipts. When the Railways have to defer dividend
payments of the order of Rs.2,500 crores to the general exchequer, the burden imposed by annual lease
rental payments in the range of Rs.3,200 crores may well see m irksome.
Conventional thinking in the Railways places the heavier onus of revenue generation on freight
movement, while handing out a substantial subsidy - now estimated at Rs.3,400 crores - to passenger
movement. This paradigm is now clearly over-stretched. Alth ough freight targets in the last two years
have been met, emboldening the Railway Minister to project a rather robust figure for 2001-02, the
experience of the preceding years has been rather chastening. The migration of goods movement to other
modes of transport may have been halted and Mamata Banerjee has unveiled an ambitious programme to
regain the share of the market that has been lost on account of steep freight hikes in the 1990s. But the
costs remain high, as epitomised by the operating ratio (o r the ratio of ordinary working expenses to
gross traffic receipts). From the relatively reasonable figure of 93.3 per cent in 1999-2000, the operating
ratio has risen to 98.5 per cent in the revised estimates for 2000-01 and 98.8 per cent in the budget
estimates for 2001-02. Productivity in the Railways is under strain as never before.
The 1990s antidote to the malaise of declining yields was the programme of gauge conversion. By
eliminating costs of trans-shipment between different gauges and rationalising the costs of maintaining
rolling stock, this programme was expected to provide a boost to productivity levels. Things have not
quite worked out that way. Rather, irrationalities and discontinuities in implementation have ensured that
a continuous metre gauge line that existed from north to south was fractured, impelling a general m
ovement of freight traffic towards other modes. The loss of market share on that account has not yet
been recovered, according to many analysts.
The emphasis now is not on the obvious option of increasing passenger rates, which raises questions of
inter-class equity and political feasibility, but on non-conventional sources of revenue. One of the
schemes thought up by Mamata Banerjee is to lay do wn a nation-wide optical fibre network utilising the
Railways' right-of-way to optimal effect. A subsidiary corporation has been formed for this purpose and
it is expected to get to work soon, though matters are not exactly moving into an environment fre e of
competition. Other programmes, such as utilising the Railways' land and leasing of air-space, are seen to
offer some potential, though these remain unrealised as of now.
With all these problems of transition, the worst of the resource crunch is being borne by vital operational
areas. In relation to the budget estimates, investments in safety, signalling and telecommunications and
track renewals, all show substantial orde rs of decrease in the revised estimates. And yet the pressure to
target higher levels of public fulfilment has impelled Mamata Banerjee to introduce new services and
launch preparatory work on tracks that will not immediately be viable. With all that, th ough, she had a
rough time presenting her proposals in Parliament, in the teeth of the very evident disgruntlement of
members from Orissa, Andhra Pradesh and Maharashtra.
"I am not a fortune-teller," said Railway Board Chairman Ashok Kumar, when pointedly asked whether
a hike in rates would be imposed after the inconvenience of the West Bengal Assembly elections is
surmounted. It would appear, though, that a basic grasp o f arithmetic, rather than any form of
clairvoyance, would be adequate to guess what is in store for the Railways.