Finance Minister Chidambaram is preparing to present the Union Budget for 2013-14 on 28th February. For the past few weeks he has been repeatedly promising to deliver a “responsible budget”.
It is important for the workers, peasants and other toiling people who create the wealth of our country to understand the real aim that Chidambaram and his government is pursuing. What does he really mean by a “responsible budget”? Which class interests is his government responsible to protect?
The Finance Minister considers it his primary responsibility to protect the interests of the big capitalists of our country headed by the Tatas, Ambanis and Birlas. These big capitalists want the Indian economy to be one of the highly preferred destinations for capital investment by international capitalist monopolies. They see this as the springboard for expanding their own foreign investments and accelerating their drive to gain imperialist big power status.
When Chidambaram says he wants to bring down the Current Account Deficit, he is addressing the concerns of the Indian monopoly houses that are keen on expanding their investments abroad, as well as foreign capitalist companies keen on investing in our country. He is trying to strike a balance between these two interest groups. (see Box on Current Account Deficit).
When Chidambaram says he wants to bring down the Fiscal Deficit, he is addressing the concerns of the big industrial monopolies and the big banks. He is trying to strike a balance between them. (see Box on Fiscal Deficit).
It is reported that Chidambaram had consultative meetings with representatives of trade unions and of farmers’ associations. However, these so-called consultations took place less than two weeks before the budget presentation, by which time the main features of the budget had already been decided. They are nothing but eyewash. They are meant to create the false impression that the Finance Minister wants to address the concerns of all classes, and is trying his best to balance them.
The reality is that Chidambaram’s real balancing act is to address the concerns of various lobbies among Indian and foreign capitalists.
After consulting with the capitalist associations in India and abroad, Chidambaram also held day-long talks with the Congress Working Committee. The aim of this exercise was to figure out what so-called concessions he ought to highlight in his budget speech, so as to fool the working people and not lose too many votes for the Congress Party in the coming state assembly and Lok Sabha elections.
The burning concerns of the working class include the soaring consumer prices, persisting unemployment and job insecurity. The concerns of the peasantry include the heightened insecurity of livelihood and rising indebtedness, besides the growing threat of land acquisition. These problems will grow from bad to worse as the Central Government further increases the burden of petroleum prices and taxes on consumption by the working people. The standard of living of working people will also suffer as a result of cuts in the already inadequate expenditures on education, health care and other basic needs.
Any government that is formed within the existing political system and State will only be responsible for protecting monopoly capitalist interests, Indian and foreign. The workers and peasants need a State that is responsible for providing them with prosperity and protection.
We need to fight with the aim of reconstituting the existing Indian Republic to empower ourselves, so that we can reorient the economy to fulfill our needs. With this aim and vision, we must strengthen our fighting unity around our immediate demands, including:
- Halt futures trading and reduce indirect tax rates to bring down the prices of essential items of mass consumption!
- Establish a Universal Modern Public Distribution System!
- Halt the sale of public assets to private interests in the name of disinvestment!
- Suspend interest payments to big banks, confiscate unaccounted wealth, cut back on arms spending and reallocate the money saved to fulfill basic needs of all, including education, health care, safe drinking water, sanitation, irrigation and transport!
To address the concerns of both the Indian big bourgeoisie and the foreign investors, the Finance Minister has committed to reduce the CAD from the present 5.4% of GDP to 3.5%.
Current Account Deficit
What is meant by the Current Account Deficit?
Why is the Finance Minister concerned about it?
The Current Account Deficit (CAD) is the gap between recurring payments and recurring receipts relating to transactions with the rest of the world. The recurring payments are for imports of goods and services, repatriation of profits, technical and know-how fees, etc. The recurring receipts are from export sales, profits repatriated by Indian companies investing abroad and from remittances transferred by Indians working abroad.
The deficit on the current account is generally financed by a surplus on the capital account. The capital account surplus is the inflow of capital in the form of foreign investments and loans, minus the outflow of capital in the form of Indian investments abroad and repayment of foreign loans.
In recent years, the slowing down of export growth following the global recession, rise in petroleum prices and other factors have led to an increase in the CAD. On the other hand, increased outflow of Indian capital abroad, along with slowing down of foreign investment, has reduced the capital account surplus.
When the surplus on the capital account is not adequate to finance the CAD, it will result in a decline in India’s foreign currency reserves. If reserves are not drawn down to meet the gap, there will be an excess demand for Dollars, leading to a fall in the exchange value of the Rupee.
The big capitalists of India want to accelerate their investments abroad, as part of their drive to become a global big power. They do not want the foreign currency reserves to be drawn down too much as it could weaken their international position. Foreign capitalists wanting to invest in India do not want the exchange value of the Rupee to keep falling as it will reduce their profit rate.
Suppose a foreign company brings US$ 100 million to invest in some sector in our country. Suppose that capital gets converted at the exchange rate of Rs. 50 per US Dollar, into Rs. 500 crore. If that investment yields a profit rate of 25%, the investor would multiply his capital from Rs. 500 crore to Rs. 625 crore in a year’s time. However, if the exchange value of the Rupee falls during that year, say to Rs. 60 per US Dollar, the Rs. 625 crore of enhanced capital will be worth US$ 104.2 million at the new exchange rate. As a result, the 25% profit rate in rupee terms would translate into only 4.2% in dollar terms.
The CII, FICCI and ASSOCHAM, the three leading associations of big capitalists in our country, have demanded that the reduction in FD must be achieved while at the same time reducing taxes on corporate profits. Taking this also into consideration, the Finance Minister is preparing to impose the entire burden of deficit reduction on the backs of the working people, through higher petroleum prices, increased coverage of taxes on goods and services, and cutting back government spending on essential services.
What is meant by the Fiscal Deficit?
Why is the Finance Minister concerned about it?
The Fiscal Deficit (FD) is the excess of the central government’s expenditure over the revenue it collects in the form of taxes, levies and sale of assets, including its shares in public sector undertakings.
The FD has risen sharply following the global economic crisis. This is the result of two factors. The slowing down of economic growth has led to slowing down of government revenues. In addition, enormous additional spending and tax concessions to capitalist corporations in the name of “fiscal stimulus” have led to further widening of the fiscal deficit.
The fiscal deficit is financed by a combination of additional government borrowing from the banks and additional money creation. Excessive government borrowing raises interest rates. Excessive money creation fuels accelerated inflation in commodity prices. The big capitalists of India want the Reserve Bank to take measures to bring down the interest rate so as to enhance their profits. RBI has said it will do so only to the extent that the rate of wholesale price inflation declines, so as to protect the profitability of the money-lending institutions.
In order to address the concerns of both the industrial and financial monopolies, the Finance Minister has promised to bring down the fiscal deficit from 5.8% of GDP in the previous year to the target of 3.5%.