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India's Fiscal Follies

India’s new budget for 2008-2009 says less about the country’s current financial health than it does about the irresistible tendency of Indian governments to use the national budget as a pre-election cudgel. Every year, India struggles to reconcile the irreconcilable: stimulate economic growth and investment, alleviate endemic poverty, and feed a ravenous military appetite. The …


India’s new budget for 2008-2009 says less about the country’s current financial health than it does about the irresistible tendency of Indian governments to use the national budget as a pre-election cudgel. Every year, India struggles to reconcile the irreconcilable: stimulate economic growth and investment, alleviate endemic poverty, and feed a ravenous military appetite. The government must be seen to care about “aam aadmi, the common man (who votes), while satisfying the needs of businessmen (who keep the economy humming). Indeed, the new budget is a pre-election bonanza for key constituencies: tax cuts for the middle class and perks for the country’s big corporations. There’s a little something for everyone, including a stunning $15 billion in loan waivers for small farmers. For all the attention that India’s retail revolution, information technology prowess, and booming manufacturing sectors have garnered in recent years, agriculture, on which 70% of the population still directly depends, is in crisis. Growth in India’s agricultural sector declined from a lackluster 3.8% to an even more anemic 2.6% last year. Water tables are dropping where farmers are lucky enough to have wells, and rainfall has become increasingly unpredictable. Subsistence farming of traditional food grains, fruits, and vegetables is giving way to cash crops and monocultures dependent on high-priced inputs that small farmers cannot afford and water that they can’t provide. Farmers borrow money from usurious private lenders. Unable to repay their loans, they kill themselves. Farmer suicides in India have raged unabated over the past decade, a period of much-vaunted rapid growth. These more than 100,000 deaths are a tragic indictment of India’s economic “miracle, and an embarrassment for a government eager to promote India’s image as an up-and-coming global economic and military power. While well intentioned, the new budget’s lavish loan forgiveness scheme will not help those farmers who most need relief: 80% of India’s farmers have no access to formal credit, and it is bank loans that are to be forgiven. Moreover, since farmers who do have access to formal credit will have less incentive to repay their loans, banks will become more reluctant to lend to any farmers at all. A policy of expanding legitimate micro-lending schemes and prosecuting illegal loan sharks, not to mention the promotion of sustainable agricultural practices that require fewer expensive (and environmentally dangerous) inputs, would do far more to help India’s poorest farmers than this expensive and misguided measure. The new budget, recognizing the country’s acute water crisis, also calls for more money to expand irrigation. Most Indian farmers will benefit from greater access to irrigation, but if this means building more ill-conceived dams and pursuing large-scale projects, the result will be more water for industrial agriculture, more damage to India’s damaged environment, and little improvement for poor farmers. Aggressive expansion of proven low-cost, high-impact micro-irrigation techniques would do more to help small-scale farmers. The new budget is also likely to do little to improve India’s poor education and primary health-care systems. True, spending in these two critical areas is to rise dramatically (by 20% for education and 15% for health care). But, because these items amount to a pittance of India’s total budget, total spending remains low, especially relative to need. Meanwhile, the lion’s share of the new budget, 63%, will go to the military, police, administration, and debt service. India’s defense spending will hit a new record of $26.5 billion as the world’s fourth-largest military embarks on an aggressive drive to modernize its capabilities in the face of the deteriorating situation in Pakistan and China’s military expansion. Having performed poorly in a spate of recent state elections, the ruling Congress Party is betting that the new budget will swing voters its way if the national election, currently scheduled for April 2009, is moved forward to this autumn. The lesson of the 2004 election, when poorer voters, fed up with the previous BJP-led government’s “India Shining policies and slogans, threw it out of office, has not been forgotten. But the strategy of embracing “poor-friendly policies that deliver little real relief could backfire. Poor voters may not associate the largesse with the Congress-led government in New Dehli, but rather with the state governments that actually hand out the goods. Moreover, there is nothing to indicate that the government aid proposed in the budget will reach those who need it with any more efficiency than the dismal record so far. It is conceivable that Mayawati Kumari, the self-appointed “goddess of the poor whose low-caste-based party, the BSP, swept to power last year with a clear majority in Uttar Pradesh, could be the biggest winner in an early election. This would represent a revolution in Indian politics, but it is hardly the outcome the champions of business-driven market reforms would welcome. Whether a more populist government would be able to break radically with India’s flawed fiscal policies and create an environment favorable to a dramatic improvement in India’s shamefully poor human and physical infrastructure – which would give a solid boost to India’s economy over the long term – remains to be seen.

Mira Kamdar,the author of Planet India: The Turbulent Rise of the Largest Democracy, is currently a fellow at the Asia Society. This commentary is published by DAILY NEWS EGYPT in collaboration with Project Syndicate/Asia Society (www.project-syndicate.org).

Topics: Wael Ghonim

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