BREAKING from tradition, the BJP-led NDA government has chosen to issue a two (as opposed to single)-volume edition of the Economic Survey, released as per convention on the day before the budget for coming fiscal year 2015-16 was presented. The Survey is meant to be a ‘state of the economy’ report that identifies the positives that can be leveraged and the negatives that need to be addressed when the finance minister rises to present his budget. It is as much an assessment of the situation as a justification of the direction that the budget would take. The NDA government has chosen to go beyond this original brief, by relegating the discussion on the state of economy to a Volume II of the survey, while reserving Volume I for a speculative foray into assessing the potential and prospects for accelerated development and identifying and discussing what needs to be done by way of policy to realise that potential.

There appears to be more than one reason for the change in form and content and the relegation of the original task of the Survey to a second volume. The first volume is used to make a case for a new round of accelerated neo-liberal economic reform, to present and justify specific policies to be adopted as part of that round (many of which were on the anvil even under the UPA), and to brand the Modi government as uniquely neo-liberal and “reformist”. The principal justification for the reforms discussed, obviously is that it would help accelerate growth and exploit the opportunity to make India the next emerging market miracle. That in turn, it is asserted, would allow the government to address the many forms of deprivation in India and provide a social security net for the poor that is much needed.

VICIOUS NEOLIBERAL

ONSLAUGHT

In other words, the Survey is being used as an instrument to advertise the Modi government’s intent to push ahead with neo-liberal reform and argue that this would put India on a high growth strategy. This motivation provides another reason why the government has to relegate the state of the nation report to the second of the two volumes. This is that the new GDP estimates suggest that the economy had recovered smartly during the last two years of the UPA regime and is cruising along at a close to 7.5 per cent growth rate in 2014-15, for which too the NDA cannot take full credit since it has barely been in office. Further, there are other indicators which suggest that the economy is in better shape than in most years after the 2008-09 crisis. Inflation is moderating, and India’s BoP position is comfortable. The point-to-point inflation rate for January 2015 as measured by the All India Consumer Price Index is estimated at 5.1 per cent. The current account deficit to GDP ratio during the first half of financial year (April-September) 2014-15 was, at 1.9 per cent, significantly lower than its 3.1 per cent level in the corresponding period of the previous financial year. The official estimate is that it would go down to 1.3 per cent over the current financial year (2014-15) as a whole.

This ostensibly comfortable situation revealed by the official statistics would trouble the government in two ways. First, if the economy is doing fine, the claim that unfinished reform resulting from policy paralysis under UPA II had damaged the economy cannot be sustained. Nor can the argument that this renders reform pushed through in the form of the ordinances relating to land acquisition and FDI in insurance urgent and imperative. If the system is not broke there is obviously no need to fix it. In any case not through “emergency measures” that bypass parliament. Secondly, if growth has already returned to creditable levels, the promise of taking it higher through further reform is far less attractive. Not surprisingly, the chief economic adviser has expressed scepticism about the CSO’s growth estimates and argued that while he recognises that the economy is in recovery mode, there is as yet no surge. The NDA promises to deliver that surge and make India the fastest growing emerging market with double digit growth rates.

What matters then is how the Survey expects this growth to be realised. To be fair, it argues that the private sector is not in a position to undertake the required investment, even 25 years after the launch of accelerated neo-liberal reform in 1991 (which, of course, the Survey does not mention). Rather it sees private investment as being constrained, at least in the “short to medium term”, because of a huge debt build up that has resulted in “weak corporate balance sheets” and “an impaired banking system”. Till such time that the private sector is ready to play its role, the Survey argues, “public investment, especially by the railways, will have to play a catalytic role.”

The importance of public investment, which can also crowd in private investment as the Survey correctly argues, cannot be denied. The question is how the required public investment would be financed. One plank of neo-liberal reform is a light-touch tax structure, as reflected in the decision to reduce the corporate tax rate over the next four years. The other is fiscal consolidation in the form of a reduction in the fiscal deficit to GDP ratio to 3 per cent. If tax revenues are not rising and expenditure financed with borrowing is to be curtailed, aggregate expenditure must be cut. Since a large part of current expenditures, such as wages and salaries, pensions and interest payments, are sticky, the axe would have to fall on either welfare or capital expenditures or both. There are some measures that can increase the government’s flexibility, such as increases in excise duties on petrol and diesel (that snatch the benefit of falling prices from the hands of the consumer) or disinvestment of public equity. But even these, the budget for 2015-16 has shown, cannot deliver anywhere near enough to allow for a significant step up in expenditures. How then is public investment expected to serve as stimulus?

SPECIAL EMPHASIS

ON THE RAILWAYS

It is in this context that the special emphasis on the railways in the Survey’s statement that “public investment, especially by the railways, will have to play a catalytic role,” has to be read. It must be noted that in practice as well the railways have been given special attention. The railway budget for 2015-16 provides for a Rs 1 lakh crore annual investment plan, which amounts to a large 50 per cent increase compared with the previous year. Of this amount Rs 40,000 crore is to provided by the general budget. Since, the total spending on infrastructure in the coming year’s budget is placed at Rs 70,000 crore, this implies that the annual investment plan for the railways alone would amount to close to 60 per cent of the proposed ‘infrastructure push’ as a whole.

Thus, the government’s strategy in the context of the resource crunch it faces seems to be to focus its attention on a few sectors at a time, holding back in other areas with the expectation that either the private sector will play a role there or the government will turn to them in due course. But even if this is the conscious strategy, infrastructural investment requirements are such that the government is able to provide only Rs 40,000 crore in budgetary resources to finance the Rs1 crore investment plan of the railways.

This raises two questions. First, how is the government to raise the Rs 70,000 crore needed for its infrastructural push in 2015-16, of which Rs 40,000 crore is to go to the railways? Second, where is the remaining Rs 60,000 crore needed for the investment plan of the railways to come from. Besides the surpluses of the railways itself that are expected to come partly from new freight increases, the railway minister is expecting to resort to market borrowing to the tune of Rs 17,655 crore through the Indian Railway Finance Corporation (IRFC) and Rail Vikas Nigam. This compares with the Rs 12,045 crore raised in 2014-15. Additionally, the railways expects to raise institutional finance to the tune of another Rs 17,000 odd crore by creating new financing vehicles. According to the railway minister: "These may include setting up an infrastructure fund, a holding company and a JV with an existing NBFC or a PSU with IRFC, for raising long-term debt from domestic as well as overseas sources, including multilateral and bilateral financial institutions that have expressed keen interest in working closely with railways in this endeavour". In essence, the contribution from the budget is going to be supplemented with resources that are one-and-a-half times as much, most of which is to come from borrowing.

Which takes us back to the first question as to how the infrastructure push in the general budget is to be financed given that the central government does not garner enough revenues to cover even its current or revenue expenditures, resulting in a revenue deficit. While accepting that combining fiscal consolidation with a public investment push requires raising the tax-to-GDP ratio (which if Budget 2015-16 is an indicator is unlikely to occur), the survey also recommends that “expenditure control should be consolidated while ensuring that there is switching from public consumption to public investment, with a focus on eliminating leakages and improving targeting in the provision of subsidies” (emphasis added). So expenditures on areas that make a small difference to welfare (such as subsidies) must be pruned, so that it can be combined with “non-debt capital receipts” from privatisation of public assets to yield resources that can help finance the government’s limited contribution to an infrastructure push without deviating from its commitment to reducing the fiscal deficit. Crucial to this is the move to curb the outlay on subsidies that benefit the poor by shifting from actual public provision of pre-specified quantities at pre-specified prices to direct benefit transfers (or cash transfers), in areas stretching from food to kerosene, rail transportation, electricity and water. This is what the use of the (awfully named) JAM Number Trinity (Jan Dhan Yojana, Aadhaar and Mobile numbers) is expected to achieve.

But as the example of the railways shows, this in itself would be inadequate to finance the infrastructure push in full, which requires resort to borrowing from the open market or through specially created vehicles. Since that borrowing effort, if successful, would show up in the books of the vehicle or project concerned, and not on the government’s budget, this would not violate the requirements set by the plan for fiscal deficit reduction. In keeping with this strategy, Budget 2015-16 not only provides for disinvestment receipts of Rs 69,500 crore but promises to set up a national infrastructure investment fund that will raise resources through borrowing.

These are the ways in which the government expects to deliver the public investment necessary to push growth through projects in the PPP mode. The problem here, however, is that the experience with PPPs has not been encouraging, leading the Survey to the conclusion that “the PPP model at least in infrastructure will need to be refashioned.” Where is that likely to go? According to the Survey: “India’s recent PPP experience has demonstrated that given weak institutions, the private sector taking on project implementation risks involves costs (delays in land acquisition, environmental clearances, and variability of input supplies, etc). In some sectors, the public sector may be better placed to absorb some of these risks.” Hence, the public sector should take on more of the risk. That is surprising since even now the main criticism with regard to PPP projects is that the public sector takes on much of the risk, while the private sector gets much of the profit. This is particularly disconcerting in the context of the signal that, if the infrastructure push takes off at all, it would be largely financed with debt. In the new risk-sharing mechanism the government could well end up guaranteeing the debt.

In all probability that push will not take off at all, showing the strategy being touted by the government through the Economic Survey to be the non-starter it is. But meanwhile, in the name of this strategy, expenditures in a host of areas such as health, sanitation and education would have been slashed and programmes such as the MNREGS and measures to move towards food security would have been wound down or dismantled. India seems set for another round of a vicious neoliberal onslaught that would engineer a further redistribution of income and wealth from the poor and lower middle classes to the already rich and wealthy.