The faultlines within the Congress Party are exposed as finance minister P. Chidambaram prepares to present the last full-fledged Union Budget of the second UPA government before the 16th general elections. There are sharp differences between the pro-liberalisation group and the left-wing faction in the incumbent government on the overall tenor and thrust of economic policies, i.e. between those who want to reduce the deficit and those who believe the government should be spending much more — especially on social sector schemes, including heathcare, education and to ensure food security.
The left-wing faction in the ruling dispensation believes the government has to be seen to be doing much more for the poor than it has done so far, that it needs to step up outlays on anti-poverty schemes, if necessary by borrowing, to shore up its sagging popularity. The exact contours of the Budget will be known on February 28, but it seems populism will take precedence over prudence and that Mr Chidambaram will have no choice but to oblige those within his party he is ideologically opposed to.
What Mr Chidambaram wants to do is to contain the fiscal deficit to 5.3 per cent of the country’s gross domestic product by squeezing expenditure, including expenditure on defence. Although the governments of most countries across the world are, in fact, borrowing more and increasing their deficits in order to spend more to get out of recession or a phase of slowdown in economic growth rates, Prime Minister Manmohan Singh and those who subscribe to his ideology on economic policy issues have proposed a diametrically opposite strategy. The view of this group is that the fiscal deficit needs to be cut in order to accelerate the rate of growth of GDP which is expected to be in the region of five per cent this fiscal year that ends on March 31.
According to the advance estimates made by the Central Statistical Organisation (CSO) on February 7, the rate of growth of GDP during 2012-13 is estimated at five per cent as compared to a growth rate of 6.2 per cent in 2011-12 — making it the lowest growth rate in a decade. Since a distressing financial year in 2002-03, when India’s GDP grew at just four per cent, the country’s economy has grown by more than six per cent each year, the highest rate being 9.6 per cent in 2006-07. The finance ministry insists that the CSO has under-estimated the GDP growth rate.
The GDP numbers have hardly pleased the neo-liberal ideologues in the government who have been repeatedly emphasising the need to step up the GDP growth rate at all costs, while paying lip-service to “inclusive growth”, which includes creation of jobs.
A recent study by the Institute of Applied Manpower Research (under the Planning Commission) has shown that in the period between 2005 and 2010 — with the UPA in power — few jobs have been created despite relatively rapid economic growth. The study has indicated that many of those who have moved out of agriculture have had no choice but to seek temporary, ill-paid and insecure work opportunities in construction activities.
Those belonging to the left-wing faction in the ruling party (which includes many who are close to Sonia Gandhi, including defence minister A.K. Antony, rural development minister Jairam Ramesh and Digvijay Singh) realise that the UPA-2 government has become unpopular over the last few years because of its inability to control inflation in general and check the sharp rise in food prices in particular. Barring cereals like wheat and rice, the prices of many vegetables, fruits, pulses and milk products have doubled or more than doubled over the past four-five years. This has hurt the poor and the proverbial aam aadmi, and at the same time sharpened inequalities of income and wealth in an already unequal society. Recent decisions of the government to increase fuel prices (especially diesel) to bring them on par with world prices will ensure that inflation will remain at high levels in the coming months. Though the wholesale price index is a bit above seven per cent, the consumer price index is above double-digits.
Aware of the unpopularity of the government, the left-wing faction in the Congress and in the UPA-2 coalition are arguing for a sharp course-correction through a series of populist measures. These include the introduction of bills to enact new laws for land acquisition, for proving food security and for universal health coverage, a component of which is a proposal to distribute a number of generic drugs free of cost to all primary health centres across the country. Such proposals, it is being argued, may refurbish the government’s image to an extent and persuade the electorate to believe that the country’s rulers are sensitive to the needs and aspirations of the underprivileged sections.
The point to note is that inflation has sharply eroded the real incomes of not just the poor but the middle classes as well. Consequently, the savings rate has come down and this, in turn, has slowed down the rates of investment. On account of lower investment rates, the rate of economic growth has also decelerated. This explains why industrial production is not picking up. The government is hoping that foreign investors (such as Walmart) will come to the country and create jobs but this has not yet happened.
Instead, the finance ministry has sought to blame the Reserve Bank of India for not softening interest rates (that is, until recently) in order to boost investments in industry. This is what big business houses and chambers of commerce had also been demanding. The RBI has, however, justified its policy stance on the ground that the apex monetary authority had no choice but to try and cool inflationary expectations.
Budgets in India are much more than bland statements of financial accounts of the world’s largest democracy. They are important pronouncements on the country’s political economy. The Prime Minister has often claimed that there is no difference between good economics and good politics. Will his finance minister be able to substantiate such a contention?

The writer is an educator and commentator