cashcow.jpgAn Indepth Article by C. A. Balasubramanian,
Additional Controller General of Accounts,
Government of India (retired)

It has become the practice of the Government to give one-time comments even on the most important/vital issues affecting the country…

     1‘The Gross Domestic Product’ Syndrome
 
It has become the practice of the Government to give one-time comments even on the most important/vital issues affecting the country  like: ‘the price rise is causing concern!’ the Government is ‘monitoring’ the price level’, and similar profound statements: The Government has thereby identified the problem  and found a solution!
 
In tune with the above Government philosophy, the Government has a one-liner prescription for an unprecedented level of prosperity for the country, which is ‘inclusive’ ¾ it includes the affluent, the ruling classes and the elitist classes! It will be clear, as we go on, that this is not a myopic or indefensibly uncharitable view. The Government’s one-road map for economic prosperity is: “Gross Domestic Product” (GDP)  growth rate  at least 9% growth rate as in the previous four years of UPA Government, followed by double digit growth rate  and you have the open sesame for affluence and prosperity.
 
The Government claims that there was a growth rate of 9% in the GDP during the four years 2004-05 to 2007-08.
 
                 According to reports, the sectoral shares in the GDP during 2007-08 and 2008-09 were:
 
 

 
2007-08
2008-09
 
Sectoral Share
Sectoral Share
Agriculture (Fisheries and Mining)  
17.80
17.00
Industry
26.50
26.00
Services
55.70
55.00
 
100.00
100.00

 

The Government recognized, at the time of presentation of the interim-budget for 2009-10, that the real heroes of India’s “success story” were our farmers who had ensured, through their hard work, “food security” for the country. With record procurement of 22.70 million tonnes of wheat and 28.50 million tonnes of rice for the Public Distribution System in 2008, our granaries were full. Production of food grains reached an all-time high of over 230 million tonnes in 2007-08. In spite of all these, the share of the output of the agriculture sector formed only 17% of the G.D.P.
What can be the reason for this skewed distribution of the contribution of the different sectors to the G.D.P.? The reason is that the whole attention of Government is focused on the manufacturing, I.T., and export sectors, substantial tax concessions, sops, etc. are bestowed on them and fiscal measures for enormous amounts are adopted for propping them up. These sectors, besides enjoying this entire bonanza, can jack up the prices for their products/services, as market conditions permit.
 
The minimum support price (MSP) for the common variety of paddy was increased from Rs.550 in 2003-04 to Rs.900/- per quintal for the crop year 2008-09; the increase was from Rs.630/- to Rs.1, 080/- a quintal for wheat, during the same period. Farmers are seeking an MSP of Rs.1, 300/- for a quintal of paddy, as the investment in each acre had gone up to Rs.6, 000/- (from Rs.4, 000/-) due to increase in the input cost. “The Swaminathan Commission has already recommended Rs.1, 300 as MSP per quintal, and it is the responsibility of the Government to protect the farmers by accepting it”, said the executive committee member of the All India Kisan Sangh. “Otherwise, farmers will not be keen on production of paddy.” Contrast this with the alacrity with which Government rushes to protect the interests of the industrialists, exporters, the I.T. magnates, etc. No wonder that agriculture is contributing a lower and lower share in the country’s (wonderful) GDP. Its importance in the mainstream economic development model might be diminishing for policy makers; but, this is a question of livelihood for millions of Indians, observe the analysts, G.V. Ramanjaneyulu and Kavithakuruganti.
 
The Government preens itself on having clocked an average of 8% GDP growth rate ¾ and only in the last “fiscal” it ‘slipped’ to a 6.7% due, of course, not to government’s fault, but to global economic slow down ¾ a very convenient alibi ¾ and other factors. If there is no ‘major difficulty’, the growth would be over 6% in 2009-10.
 
Despite all the hullabaloo created by the government about the 9% growth rate in four successive years, the stark reality is that the number of people living below the poverty line had actually increased by a horrifying 20%: A study made by the Indian Statistical Institute, based on the data collected by the National Sample Survey Organisation from about 1, 24,000 households across the country brought out this shocking revelation. The country had some 27 crore people below the poverty line in 2004-05 ¾ after five years of policies, named after the aam admi (common man) but shaped for the khas admi (vested interests), remarks piquantly the veteran journalist, M.J. Akbar.
 
This leaves us wondering whether we should persist with this paradigm of GDP and the policy directions dictated by it, especially when it is (obviously) backed by the “top economists,” and advisers. Fortunately for us, the views of Eric Zencey, Professor of Historical and Political Studies at Empire State College, come to our rescue! Says he: the silver lining to the current economic downturn is that, with it, comes what the economist Joseph Schumpeter called “creative destruction”, the failure of outmoded economic structures and their replacement by new, more suitable structures. This downturn offers an excellent opportunity to get rid of the economic concept that has long out lived its usefulness, viz., gross domestic product (GDP). GDP is one measure of national income, of how much wealth the people of the country make; and it is a deeply foolish indicator of how the economy is faring. It has been used as the basic number that the government takes as a measure of how well the country is doing economically from quarter to quarter, and year to year; but it is a miserable failure as representing our economic reality, as explained below.
 
GDP excludes a great deal of production that has economic value; domestic services do not find their way into the GDP. A large and deep flaw in using a measurement of national income as an indicator of economic well-being is that GDP makes no distinction between items that are costs and items that are benefits. Zencey points out that expenditure on health care, pollution control, flood control, which he calls defensive and remedial spending, goes to increase the GDP as it is calculated now, although most of it may not directly contribute to an improved standard of living but is aimed at the restoration or protection of the quality of life we already had.
 
The basic problem is that GDP measures activities, not benefit. The way GDP measures the national accounts; we cannot say whether we are better off now than before. Because of the flawed measure of economic well-being, it is foolish to pursue policies whose primary purpose is to raise it. Says Zencey: Given the fundamental problems with GDP as a leading economic indicator, and our habit of taking it as a measurement of economic welfare, we should drop it altogether.
 
It is heartening to note that France’s President has called for a ‘great revolution’ in the way national wealth is measured, throwing his weight behind a report which criticises GDP fetishism and prioritises quality of life over financial growth. Endorsing the recommendations of a report given to him by Nobel Prize winners Joseph Stighlitz and Amartya Sen, he said governments should do away with the “religion of statistics” in which financial prowess was the sole indicator of a country’s state of health. The GDP ¾ the standard means of measuring a country’s economic growth ¾ ignores other factors vital to the well-being of its population. GDP statistics were introduced to measure market economic activity. But they are increasingly thought of as a measure of societal well-being, which they are not, says Stighlitz.
 
To sum up, the government should give up its obsession ¾ not a magnificent one but a pathological one ¾ with trying to convince the people about the “economic progress” made by the country under their tutelage, with reference to the “growth rate” in GDP already achieved, according to them, and the expected “growth rate,” which is worked out by them every other day and for the next “fiscal”. Instead, they should concentrate on measures intended for the welfare of more than 60% of the population which is in the rural cum agricultural sector, besides the welfare of the urban poor. That should be the obsession ¾ and a magnificent one.
 
2.  I crave the permission of the kind reader for a pedestrian survey of a few important issues.
The National Rural Employment Guarantee Scheme (NREGS) and other similar schemes. 
The NREGS is ‘touted’ as a ‘flagship scheme of the government. The NREGS was meant to provide 100 days of work in a year for people in rural areas. The Finance Minister mentioned in his speech, while presenting the Interim Budget for 2009-10, that the NREGS generated employment for 138.76 crore man-days, covering 3.51 crore households. This works out to an average of about 40 man-days of employment per household. The writer had suggested in an earlier article that an audit of the Implementation of the Scheme will reveal how far the people for whom it was intended had been benefited, whether the payments shown as made to them are properly vouched for, whether records are kept of the works executed, measurements taken, details of assets, if any, created, and so on.
 
Mihir Shah (Member, Planning Commission) says that the objectives envisaged in the NREGS have no doubt charged the hearts and minds of the rural poor with unprecedented hopes and expectations. But, the first three years of the programme have shown that the NREGS suffers from many evils ¾ leakages and delays in wage-payments, non-payment of statutory minimum wages, work for an average of 50 days per annum against the promised 100 days, fudged muster rolls, few durable assets and even fewer sustainable livelihoods.
 
The Comptroller & Auditor General (CAG)’s report of the NREGS in 2008 stated that money meant for the scheme was spent for other purposes by several state governments. Jharkhand spent Rs.8 crores to repair vehicles, and buy diesel generators and stationery; money was spent in Madhya Pradesh, on renovating meeting halls! An MLA alleged in the Assembly in Andhra Pradesh that lakhs of rupees were misappropriated by the field/technical staff and that at many places, they colluded and created bogus records.  A Press Report says that the NREGS has become a hub of corruption, defeating the very purpose for which it was meant. Officials entrusted with the job of implementing the scheme have found numerous ways of pocketing the money. In some places, beneficiaries are offering up to Rs.20/- to supervisory staff, in order to get away with less work, instead of working for eight hours in a day! The government has taken steps to remedy the situation, by appointing social audit groups, taking action against the erring staff, and recovering as much as Rs.4.00 crore from the corrupt officials.
 
Says a report: “Generally, the tendency among politicians elsewhere is that they make money out of the existing schemes, in Andhra Pradesh, the leaders formulate pro-poor schemes with the intention of making money.” Massive corruption was noticed in the Food for Work (FFW) programme. A CAG report found in 2006 that 8.55 lakhs ineligible families were receiving subsidy in Andhra Pradesh; and there were 5.22 lakhs bogus BPL (below poverty line) cardholders in U.P.! “In a recent Assembly session in Tamil Nadu, the food minister himself admitted that rampant corruption and bogus ration cards have caused a severe strain on the exchequer. Diverting funds meant for these schemes to political parties, especially to finance elections, is also not uncommon,” said Dr. Vijay Bhaskar, Assistant Professor, Madras Institute of Development Studies.  ‘More money for social development programmes is a good sign. But, in reality, a lot of funds are under-utilised or get diverted”, said Vandana Gopikumar of NGO Banyan. Thus, even after 35 years of implementation, the National Mental Health Programme had reached just 16 of Tamil Nadu’s 32 districts ¾ and that too partially’. 
 
In this scenario, what should be done to provide food security to every hungry family, which the National Security Act aims at? Devender Sharma draws attention to the Arjun Sengupta Committee report which says that 77% of the population or 836 million people are able to spend not more than Rs.20/- a day, which, of course, is not adequate to buy two square meals ¾ a truism. Instead of catering only to the BPL (Below Poverty Line) category, says Devender Sharma, the proposed Act should extend its reach to every eligible person. There is need to universalise the food distribution system, says Amartya Sen. Hunger is the result of faulty policies; hence it is essential to make adequate corrections in the policy framework. Indian agriculture is bleeding: more than 40% of the 60-crore Indian farmers want to quit farming, if given an alternative. The NRGES cannot be a substitute for a viable farming system. If a power from outside India wishes to control this country’s destiny today, says Pushpa M. Bhargava, it has only to control Indian agriculture; and, to do that, it just needs to control seed and agro-chemicals production. He says (very charitably, in the view of the writer!) that Indian government is not cognizant of this, otherwise, more than 30% of the country’s seed business today would not have been under the control of multinational seed companies. Actually, a moratorium on genetically modified (GM) crops should have been declared until preparations had been made to test them adequately. Says Bhargava: We seem really to care only about the requirements of countries such as the U.S., the multinational companies, and the top 15-20 per cent of our rich and the powerful.
 
P. Sainath points out that, while the NREGS covering tens of millions of impoverished human beings gets Rs.39, 100 crores in the 2009-10 budget, the estimate of revenues forgone from Corporate Revenues in 2008-09 is 68,914 crores. The ‘great’ loan waiver of 2008 ¾ the write off of the loan of indebted farmers, which the editorials characterised as ‘fiscal imprudence’, was one-time one-off waiver supposed to cover millions of farmers and touch Rs.70,000 crore. But, says Sainath picturesquely, over Rs.3, 03,260crore (indirect taxes) had been doled out in concessions in just two budgets to a tiny gaggle of merchants hogging at the public trough ¾ all without a whimper of protest in the media. According to the budget documents, revenue foregone in 2007-08 was: direct tax concessions: Rs.62, 199 crore; excise duty: Rs.87, 468 crore; and customs duty: Rs.1, 53,593 crore. Total revenue forgone: Rs.l3, 03,260 crore; it comes out to over Rs.2, 00,000 crore, excluding export credit. The corresponding figure for 2008-09 would be over Rs.3, 00,000 crore ¾ which excludes all manners of subsidies, rate cuts and other freebies to the corporate sector. That is, the corporate world has grabbed, in just two years, concessions which exceed the farm loan waiver by more than seven times! You suggest an expansion of the NREGS, universal access to the PDS, more spending on public health and education: pat comes the reply: there is no money.
 
And now comes the drought: a convenient villain to hang all our man-made evils. Some vital measures the government could take to tackle the grim situation would include curbing forward trading-linked speculation that was driving one of our worst price rises in history long before the drought was in the horizon. Can we think that a government for which only the requirements of countries such as the U.S., the multinational companies and the rich and the powerful in the country matter will pay the least attention to the havoc caused by the futures trading ¾ the government will fling in our face the growth rate in the GDP!
 
Is it not preposterous that such monstrous amounts (Rs.2,00 lakh crores in 2007-08 and Rs.3,00 lakh crores in 2008-09, as indicated above) are assigned from the revenues to the corporate sector without the government batting an eyelid, while the government sheds tears of blood over the subsidy bill in food, fertilizers, petroleum and other things. This subsidy is projected at Rs.1, 11,275 crores during the 2009-10 fiscal after effecting a reduction of Rs.18, 000 crores in the “urea dole outs”.   Having assigned such colossal amounts of revenue to the corporate sector, the government has necessarily to move into the domain of huge “fiscal deficit” of 6.8% of that mythical figure ¾ the GDP! This 6.8% (of the GDP of Rs.60 lakh crores or 60 trillion) translates into Rs.4, 00,000 crores of borrowing during 2009-10, which will be roughly four times the amount envisaged in the 2008-09 budget. Who is going to bear the back-breaking burden of servicing this debt plus the existing debt of the government? Not the persons at the ‘helm of affairs’, not the money bags on whom the government is showering lakhs of crores year after year, but the people of India, 70% of whom have to “subsist” on less Rs.20/- a day. Who is supposed to be the “real culprit” of the horrendous state of affairs? The revenue deficit between 2007-08 and 2009-10 has gone up more than four times from 1.1% to 4.8% of the GDP, while fiscal deficit will go up from 2.7% to 6.8%. Revenue expenditure has increased by more than Rs.3, 00,000 crore, while tax revenues have risen by just Rs.35, 000 crores. The (massive) increase is due to interest payments, defense, subsidies, salaries and major “social programmes” such as the NRGES and Bharat Nirman. The Finance Minister stated that the fiscal deficit will be brought down to 5.5% by 2010-11, and to 4% by 2011-12. There are “skeptics” who feel that the government is being over-ambitious in aiming for a 2.8% reduction in fiscal deficit from the budgeted 6.8% (1009-10) to 4% of the GDP by 2011-12. They have argued that such a large improvement in government finances over a short time has never occurred before in India. Bluntly put, the government is trying to mislead the people.
 
On the one hand, the government recklessly exempts the corporate sector from taxes to the extent of 2 or 3 lakhs of crores and then works itself in to a frenzy to attract foreign capital to feed a projected demand of just Rs.10, 000 crores. And, as we have noted above, the government finds it necessary to resort to a fiscal deficit of the order of 4 lakhs crores or more. Veerendra Kumar, M.P. wrote as far back as August, 2008, that the government is assiduously pursuing the reform agenda in a scenario of an inequality predicament ¾ the wealth of the billionaires is equivalent to some 22% of India’s GDP in 2008, compared to less than 0.2% in 1996. Is it any wonder that Moody’s Investors Service has rated India’s domestic debt as a Ba2 ¾ a “junk” rating, and India already has a significant balance of payments deficit, as the columnist Olga Tellis pointed out.
 
The risk attendant on huge fiscal deficit includes increase in money supply and stoking of inflation. It is of vital interest for the lay person to know something about the advisability of having such deficits, and to have their repercussions explained in terms which will be intelligible to him/her. But, the “experts” talk about these matters in a manner that rivals in obfuscation the following passage from one of P.G. Wodehouse’s (humourous) novels: From the “Types of Ethical Theory”:-
 
“The posulate of common understanding involved in speech is certainly co-extensive, in the obligation it carries, with the social organisation of which language is the instrument, and the ends of which it is an effort to subserve”!!
 
It will not be a waste of time to have a look at another exercise undertaken by the Government/Reserve Bank of India (RBI). The Apex Bank (RBI) liberalized the limit of total credit flow from banking sector to the commercial sector (and not the agriculture sector which takes the back seat in all matters of concern to the Government/RBI), partly to make up for the ‘contraction’ in credit flow from external sources. While the RBI’s policy was stated to be the balancing of ‘credit growth’ and inflation, the emphasis was on credit growth for productive purposes in view of the economic slow down. Through its various monetary measures taken since September 2008, the RBI made available “potential liquidity” (hold your breadth, kind readers!) of Rs.5.60 lakh crores ¾ or nearly 9% of the country’s GDP ¾ to help in tiding over the “liquidity crisis” following the global meltdown. 
 
Did this massive injection of money into the economy achieve its ostensible purposes? A report dated December 12, 2008, stated that industrial growth was at a 15-year low in October, 2008. The ‘economic growth’ slumped to 5.3% during October-December, 2008. The growth rate in the manufacturing sector “shrank” 0.2% into “negative territory” during the quarter. The Agriculture Sector recorded a growth rate of 1.6% during 2008-09. So, the massive expansion in liquidity could not have been used much in these sectors.
 
What about infrastructure projects? Could they have been benefited by at least a part of this ‘liquidity’ being used for the execution of the projects? A review of the ‘flagship’ Bharat Nirman programme (which was completing four years in 2008-09), found that the infrastructure improvement programme (with a huge outlay of Rs.1,76,000 crores) which had six components, including electrification, roads and irrigation, was way behind the targets: only 18% of electrification, and less than 50% of irrigation targets were met till December, 2008. The editorial of a national newspaper noted that, obviously, the entire corpus of funds would not be utilized before the end of the financial year (2008-09) ¾ even with the help of accounting jugglery. Very few schemes had seen more than 50% of utilization of their allocation. When the government goes to the people, claiming credit for all the schemes for the poor and the backward, it might go unnoticed that more money was unspent than spent on them, commented the Editorial. It turned out to be very prophetic!  The effect of the total neglect of infrastructure building was brought to the fore in various ways. The heavy rain during August, 2009 brought Delhi to its knees: Gushing water from the streets, mixed with the sewage system, swept into people’s homes, many localities were converted into murky ponds… city’s arteries looked like rushing rivulets. Parts of the roof gave away in the newly built airport. Darkness in the afternoon was an apt description of what came to pass. When it rains hard even for half an hour, India’s capital ceases to be even a functioning anarchy, the metamorphic description of our governance supplied by sympathetic watchers more than a generation ago, recalled the editorial of a national daily. The trouble is that this has been occurring year after year, and those paid to deal with city maintenance take no notice, letting our tax rupee go down the chair. What is true of the seat of the national government (which is the architect of the “awesome” 9% growth rate in the GDP!) is true of the country’s financial capital, Mumbai. About the provincial towns, the less said the better. The government had (loftily?) promised a thorough re-look at the “working” (!) mechanisms of the various levels of government, with a view to making it contemporary, efficient, responsible and accountable. (What a torrent of words). Of course, we have not heard much of these later on. These are all rhetoric for the moment.
 
Was the money made available by the RBI used at least for projects related to additions to “the power capacity target in XI Plan? Remembering the frenzy with which the government was working for more than 3 years for entering into the Indo-US nuclear deal, lest the country should collapse for not ‘achieving’ energy security some ten years hence, one would have expected that the government would have shown equal keenness in achieving the targets in the XI Plan for the power sector. The Union Power Minister “disclosed” that, faced with a slow pace of reforms in the power sector in the last three years (2004-05 to 2007-08), the country would fall short of meeting the XI plan capacity addition target of 78,000 MV by 2012, a repeat of the X Plan performance. As none of the vital sectors ¾ industries, agriculture, infrastructure, power, etc. ¾ seem to have benefited by the munificence of the Banking Sector, where, to whom and for what purpose, did all that money go? The government and the Banking Sector owe an explanation on this to the public. But, as no such explanation will ever be forthcoming, the concerned citizens will have to devote their thought to this.
 
Presumably, the massive liquidity of 5 lakh crores or more has been used for one or more of the following purposes: (1) speculation in the stock market, (2) speculation in the futures market; (3) speculation in real estate; (4) hoarding of sugar and other essential commodities; (5) financing of the Elections in a long way; (6) transfer to accounts in Switzerland and other Tax havens.
 
It is time to end this excruciatingly long “article” after a brief note of the “stashing” of ‘Indian wealth’ in Swiss banks, Prof. R. Vaidyanathan has done a lot of work in this subject. He has said that the average amount stashed away from India annually during 2002-06 is $27.3 billion (about Rs.136 lakh crores). Apart from the money which living tax evaders may have stashed away in tax havens, there is a large chunk that is irretrievable, simply because those who originally parted the money these bank accounts have died without informing their heirs of all relevant details. After a period of time, the bank swallows the money, if the account holder dies without passing on the account information. According to the Global Financial Integrity Group, which tracks illegal financial flows out of the developing world, India lost about $27 billion in this fashion during 2002-06, and about a third of this was stashed in Switzerland.
 
In a shocking revelation, the former Union Secretary, M.R. Sivaraman, said that 15 years ago, the government had information about individuals and institutions hiding billions of dollars in Swiss banks, and had been approached the courts with all the findings. All that the judges needed to do was to go through the papers, listen to the parties and pronounce the verdict, but they failed. Though Sivaraman did not wish to go into details, it was obvious that the 15 year old breakthrough occurred when he was the Revenue Secretary during the Narasimha Rao government, when Dr. Manmohan Singh was the Finance Minister!
 
According to the government, the Swiss banks have told them that they would not allow “fishing expedition” of their clients’ accounts. The government have said that they would provide “specific” information in its pursuit of “any possible black money” (!) stashed there, and that they would begin the talks in December to amend the relevant treaties. Concerned citizens may kindly note how nicely the day of reckoning has been postponed. The government will next invent another phrase and say that they cannot go on “hunting” expeditions; so they will continue the talks after another six months or a year ¾ and think of another suitable treaty. If any one thinks that the government is going to show even an iota of earnestness (not to talk of honesty) in this, he will deserve to be honoured as the most indefatigable optimist on earth!
 
After having denuded itself of all resources by the “tax incentives” offered to the corporate sector, the government is banking on the foreign financial institutions to invest in the infrastructure, etc., to save the country. What is the character and what are the antecedents of these Institutions?
 
As Paul Krugman says, Americans are angry at Wall Street, and rightly so. First, the financial industry plunged the country into economic crisis, and then it was bailed out at tax payer expense. And now, with the economy still deeply depressed, the industry is paying itself gigantic bonuses. Even before the crisis and the bailouts, many financial industry high fliers made fortunes through activities that were worthless, if not destructive from a social point of view. One might be tempted to dismiss destructive speculation as a minor issue. But High Finance securities and commodities trading, as opposed to run of the mill banking ¾ has now become an important part of the American economy; and, soaring incomes in the financial industry have played a large role in sharply increasing income inequality. Says Krugman, “Neither the administration nor our political system in general is ready to face up to the fact that we have become a society in which the big bucks go to bad action, a society that lavishly rewards those who make us poorer.”
 
If this is the role played by the financial institutions in America, can anyone interested in the welfare of this country have even the least doubt that these ruthless and unscrupulous institutions, with the patronage of our government will tear the feeble (economic) fabric of this country to shreds in no time?
 
Says Medha Patkar: “… Today, Ambanis and Adanis are thriving on the open space granted to them while the generations-old communities have no space, no primacy. How can they when, in their name, the “power of attorney” is being misused, and deals to decisions are made, with no chance even to veto these. Today, the power grab is leading to resource grab. The communities and the sub-communities are devoid of power and resources; why, even the faith and confidence in governance. The divide and disadvantage in this is being misappropriated by those who rule, who decide, who produce and who profit in their name. This great political tragedy needs to be reversed by challenging the “politics of representation”. Is this a cry in wilderness?
 
The conditions in the country look very much like those in the last days of the Bourbon dynasty and the start of the French Revolution. Our rulers are no different from the Queen who could not understand why the people were agitated over the scarcity of bread and why they could not eat cake (read 9% growth rate) instead!

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