A bonus for the middle class consumer

Last Updated: Saturday 04 July 2015

FINANCE Minister Manmohan Singh has presented a budget that seeks to push the economy from stabilisation to growth, through structural adjustments. In order to give a boost to exporters, he has moved from partial to full convertibility and reduced customs duties on imports. To ensure there is no resulting threat to domestic manufacturers, Singh has simultaneously reduced excise duties on domestic goods so as to stimulate demand. These measures will give a fillip to middle-class consumerism while simultaneously forcing Indian companies to compete with their foreign counterparts. This will move the Indian economy towards greater integration with the world market. In sum, it is a budget that should please the World Bank and IMF. Many Indians, understandably, ask: Where will all this lead us?

But the fact is that despite all the socialist rhetoric, none of the major political parties has shown the courage to curtail the consumption of the Indian middle class, which is the reason for the country's balance-of-payments crisis. Therefore, India's exports must inevitably grow to match its imports and debt-servicing and measures to promote exports are urgently required. This will, no doubt, fatten the Indian middle-class, which means Singh is definitely not Gandhian in values or dal-bhaat in content. He took pains, in fact, to point out he was reducing excise duties on even noodles and roasted cereals.

The critical question, now, is: How responsibly will the middle-class behave in dealing with the challenges posed by the economic direction in which it is being pushed?

In the area of environment, the budget raises questions about the government's ability to deliver adequate protection and safeguards. During the 1980s, numerous institutions were built at both central and state levels to protect the environment and many laws enacted. But are they sufficient to protect us from Indian polluters and from foreign multinationals seeking to use India as a haven from pollution laws in their country?

Concerned Indians entertain serious doubts about the bureaucracy's ability to deliver. Some even suspect bureaucracy will form a nexus with entrepreneurs to pass ecological costs on to the poor. A case in point is the industrially backward state of Arunachal Pradesh, where entrepreneurs can now enjoy a tax holiday. This could at one level be disastrous, for practically all the industrialisation in the state is based on forest resources. Hence, the state's middle-class must find an outlet in non-forest industrialisation or be forced to use forest resources in a disciplined manner if the tax holiday is to be beneficial. But, who will ensure this happens, just as who will ensure that the 100 per cent depreciation that entrepreneurs take on pollution control equipment is, in fact, spent on operate the plants?

To expect the bureaucracy to do so, given the hard experience of the past, is no longer valid. The solution may lie in part in devising better fiscal instruments -- and Manmohan Singh will have to move towards this in future budgets. His seeming miracle of cutting budget deficits while providing concessions to the middle-class and stimulating growth is based on taking full advantage of the low energy prices in the world market.

World Bank projections expect oil prices to stay low in the future and carbon taxes in Europe or US energy taxes could lower these prices even more. Because Manmohan Singh did not need much money for oil imports and because of the projected stability in petroleum prices, he could move rapidly to full convertibility. The increase in the oil import bill can obviously be accomodated.

But what if petroleum prices go up or the rupee falls rapidly against foreign currencies? The finance minister should have improved his chances by allowing tax concessions to only those technologies and industries that are energy-efficient. Technology imports should help to improve energy efficiency, given the highly inefficient levels that exist today. But surely much more could and should have been done to push the economy in this direction.

A bigger part of the solution lies in nurturing a responsible middle-class that recognises the dangers of irresponsible growth and encouraging the political and professional leadership to delegate some of its decision-making power to local communities. This element of Gandhian socialism has become even more crucial in the wake of Singh's market-oriented budget. Nothing less than this will force entrepreneurs to internalise the ecological costs of their economic activity.

Market forces must be restrained and disciplined, but to make this possible the poor must be empowered to protect themselves. Without such democracy, there is no certainty that the budget's increased expenditure on rural employment schemes like the Jawahar Rozgar Yojana will produce any more results than keeping the poor fed and happy. But the scheme does have the power to mobilise labour on an unprecedented scale and build up the country's "natural capital" in a way that can wipe out rural hunger and destitution.

As far as science and technology is concerned, the issue is simple: Is the Indian middle-class going to respond to the challenge it faces with pride and nationalism, or will it simply succumb to the status of a commission agent for foreign interests? Indians can do commendable research and innovate as well as any other human group in the world. Will our industrialists, therefore, make the necessary investments in research and will our scientists do the hard work to produce beneficial results, or will they simply succumb to repeated technology imports?

On all these questions, Manmohan Singh could have thought harder and incorporated appropriate solutions in his budget. If he has not done so now, circumstances will force future finance ministers to do so. But, far more than anything he does, it is the quality of the country's political leadership that will determine how the middle-class will respond to the crisis of its own creation. Even as it eats noodles, will it ensure there is enough dal-bhaat for everyone and pride in it?

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