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Liberalisation with a Human Face

While the recent growth in the Indian economy as well as the booming share market phenomenon (until late May) signalled the achievements of the union government, the burgeoning unemployment and agrarian distress point out the strategic deviation of the government from its promised :liberalisation with a human face". This article presents a few examples of failures of the UPA government in its policy measures.

Liberalisation with a Human Face

An Oxymoron

While the recent growth in the Indian economy as well as the booming share market phenomenon (until late May) signalled the achievements of the union government, the burgeoning unemployment and agrarian distress point out the strategic deviation of the government from its promised “liberalisation with a human face”. This article presents a few examples of failures of the UPA government in its policy measures.


midst the self-congratulatory mood currently prevailing within the UPA government over the 8 per cent GDP growth registered by the Indian economy last year, topped by a skyrocketing Sensex (which, however, plunged in late May), it is necessary to recall that the “India Shining” fiasco of the NDA two years ago was based upon precisely the same misleading indicators of economic well-being, which miserably failed to convince the electorate. The national common minimum programme (NCMP) of the UPA government while not making a complete break from the policies of the NDA regime had promised to address adverse fallout, burgeoning unemployment and agrarian distress. The economic performance of the UPA government would be judged primarily on the basis of its success or failure on those fronts and not on the basis of the number of new Indian billionaires added to the Forbes list last year.

During the early days of the UPA government, the prime minister had coined a phrase to articulate its economic strategy, “liberalisation with a human face”, which was widely acclaimed as a pragmatic response to the verdict of 2004 Lok Sabha elections. It was an open admission that the strategy of liberalisation lacked a “human face”, an allegory for people’s welfare, and therefore desperately required one for its continuance. However, critics had pointed out the inherent contradiction of such a strategy. The critique centred on the argument that people’s welfare crucially depended upon the ability of the state to undertake social expenditure and mobilise resources for the same by taxing the rich; and liberalisation undermines the capacity of the state to do so. That “liberalisation with a human face” is nothing more than an oxymoron has been borne out by the 20 odd months of UPA rule.

Class Bias Evident in PoliciesClass Bias Evident in PoliciesClass Bias Evident in PoliciesClass Bias Evident in PoliciesClass Bias Evident in Policies

The human face components in the economic policies of the government have been too few and far between. The only significant NCMP promise that has been implemented so far, that too in a partial manner, is the passage of the Rural Employment Guarantee Act which currently covers 200 districts out of a total of nearly

600. According to media reports, over 77 lakh people registered themselves across the country within the first 15 days of the initiation of the employment guarantee scheme in February this year, which points to both the extent of joblessness in rural areas as well as the urgency of extending the scheme to all the districts of the country. However, the expansion of the scheme to cover all districts does not seem to be plausible in the remaining phase of the UPA’s tenure given the finance minister’s penny-pinching approach towards it, leave alone extending the employment guarantee to the urban areas.

A bill to recognise the traditional rights of scheduled tribes in forests, including land and access to minor forest produce, was introduced after inordinate deferrals. The bill contains a controversial provision, added at the behest of the elite conservationist lobby, of a cut-off date of 1980 for the settlement of the land rights of the forest-dwelling tribals, which if implemented would lead to the eviction of tribals from forests on a large scale. The attitude of the government, which gives precedence to the interests of a handful of elites and hoteliers over the livelihood concerns of millions of tribals, is responsible for the delay in the passage of the bill. Tardiness in introducing pro-people legislation is also evident in the bill to provide comprehensive social security to workers in the unorganised sector, a key promise made in the NCMP. Similar is the case with the Right to Education Bill, which seeks to fulfil the constitutional mandate of ensuring free and compulsory education for all children between the 6 and 14 age group.

Contrast this with the moves towards liberalisation. While the government has been hamstrung by the parliamentary strength of the Left parties in pushing legislations like amendments to the Insurance Regulatory Development Authority (IRDA), the Banking Regulation Act, passage of the Pension Fund Regulatory and Development Authority (PFRDA) or amending labour laws to introduce “hire and fire” in the name of “labour market flexibility”, it has gone ahead full steam in accordance with the neoliberal agenda in the areas where no parliamentary approval was necessary. These include steps like opening up the retail trade, warehousing, mining and other sensitive sectors to foreign capital, enhancing the FDI cap in the telecom sector to 74 per cent, privatisation of the Delhi and Mumbai airports and reduction in the EPF interest rate. The role played by the government in the adoption of the final declaration at the Hong Kong ministerial conference of the WTO, which could lead to the forced opening up of the service sectors like financial services, health and education in the developing countries to the MNCs, besides tariff cuts for industrial and agricultural goods, show the extent of its collaborationism with the US and other developed countries.

The government has entered into an economic and strategic alliance with the US including in the crucial sphere of energy. While the benefits from the much feted nuclear deal in terms of additional nuclear power generation remains obscure, the surrender of its independent foreign policy as a quid pro quo which was evident in the Iran affair, has the potential of undermining India’s energy security strategy. The report of the US India CEO Forum on “US-India Strategic Economic Partnership”, which has made a host of recommendations like further opening up of sectors like insurance, banking, retail

Economic and Political Weekly June 10, 2006 trade, print media, etc, besides transforming the intellectual property regime in India to the liking of US capital, has been wholeheartedly endorsed by the government. The deputy chairman of the Planning Commission lost no time in announcing the formation of 20 odd committees to take those recommendations forward.

Inadequate Support for theInadequate Support for theInadequate Support for theInadequate Support for theInadequate Support for the
NCMP CommitmentsNCMP CommitmentsNCMP CommitmentsNCMP CommitmentsNCMP Commitments

The budgets presented by the UPA government so far have failed to address the serious problems afflicting the economy in any significant manner. Strict adherence to the FRBM Act, which has already institutionalised fiscal conservatism in India, has precluded any possibility of a reorientation of fiscal policy. What has been obscured in the debate over fiscal deficits and FRBM targets is the fact that capital expenditure within the central plan expenditure, which comprise the core of capital formation through the plan, has gone down steadily as a proportion of total budget support for central plan over the past three years, declining in absolute terms in Budget 2006-07 (Table 1).

The results of the 60th round of the National Sample Survey on employment and unemployment reported in the Economic Survey 2005-06 show that the unemployment rate between 1993-94 and 2004 for males increased from 5.6 per cent to 9 per cent in rural areas and from 6.7 per cent to 8.1 per cent in urban areas, and for females it increased from 5.6 per cent to 9.3 per cent in rural areas and 10.5 per cent to 11.7 per cent in urban areas. Agriculture, which employs over 55 per cent of the country’s workforce, continues to remain in the doldrums. The Economic Survey has also noted that agriculture grew by 2.3 per cent in 2005-06 after 0.7 per cent growth registered in 2004-05. This implies that the growth rate for agriculture during the entire Tenth Plan period (2002-07) is not only going to fall short of the targeted 4 per cent but may also fail to improve upon the dismal 2.1 per cent growth experienced during the Ninth Plan.

Despite such a situation the central plan outlay on agriculture and allied activities, rural development (which includes rural employment), irrigation and flood control and social services (which include education, health, family welfare, housing, social security, etc) taken together, stood at Rs 74,312 crore (revised estimates) in 2005-06, which was less than 2.5 per cent of the GDP. The central plan outlay on these heads was increased over last year by around Rs 25,000 crore in Budget 200506 and by only around Rs 15,000 crore in Budget 2006-07 (Table 2). With such inadequate central plan outlays, it is evident that the commitments made in the NCMP regarding employment guarantee, enhanced public investment in agriculture and irrigation, strengthening the public distribution system (PDS), increased spending on health and education to reach 2-3 per cent and 6 per cent of GDP respectively and social security for all workers in the unorganised sector are unlikely to be fulfilled.

Outlays on agriculture and irrigation are also grossly insufficient as far as reversing the declining trend of agricultural sector’s capital formation in GDP is concerned. The most crucial recommendations of the National Commission on Farmers like the setting up of a price stabilisation fund for agricultural commodities and universalising crop insurance have been totally ignored. The reduction in the shortterm interest rate for farmers to 7 per cent in the latest budget falls far short of the commissions’ recommendation of 4 per cent. Moreover, the fact that food subsidy has been fixed at Rs 24,200 crore in the Budget 2006-07 as against Rs 26,200 crore in the Budget 2005-06 suggest that far from contemplating an expansion in the coverage of the PDS, the UPA government is moving in the opposite direction.

Lacking Political Will to MobiliseLacking Political Will to MobiliseLacking Political Will to MobiliseLacking Political Will to MobiliseLacking Political Will to Mobilise

Given the obsession with the FRBM targets, the only way that the UPA government can possibly fulfil the NCMP commitments is by mobilising additional resources, mainly through taxes.1 However, it is clear by now that the government lacks the political will to do so. Additional resource mobilisation proposed in the Budget 2006-07 is a paltry Rs 6,000 crore, which was exactly the same as in Budget 2005-06. The fact that despite this insignificant resource mobilisation effort and collection of tax arrears remaining less than 10 per cent of total tax arrears, revenues have continued to increase is mainly on account of rising corporate taxes due to a tremendous rise in corporate profits, broadening of the service tax net and increase in customs revenue because of the rise in international oil prices.

It is true that the gross tax revenue to GDP, which had fallen to 8.8 per cent in 2002-03, has risen to 10.5 per cent in 200506 and is budgeted to be 11.2 per cent in 2006-07. While this upward trend of the



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Economic and Political Weekly June 10, 2006

tax-GDP ratio is indeed welcome, it is difficult to conceive its continuance in the absence of any substantial effort to mobilise additional resources. In any case, it is obvious that at this level of revenue mobilisation, the expenditure necessary to fulfil the NCMP promises cannot be undertaken. In the course of the parliamentary debate on Budget 2006-07 the finance minister has made it clear that he is not going to make any significant effort towards additional resource mobilisation on the ground that “stable” tax rates are desirable and “tinkering” with tax rates would impede economic growth. What this implies in short is that the resources required to meet the NCMP commitments, beyond the inadequate outlays that are being provided currently, are not going to come unless there is an almost miraculous increase in tax buoyancy.

Many of the leading lights of the UPA government often publicly hail China to be their favourite economic model. A comparison between India and China vis-à-vis revenue mobilisation and total expenditure as a proportion of their respective GDPs, shows that on both counts India lags fairly behind (Table 3). While the accounting practices in the budget differ between India and China, which does not allow exact comparisons, what can be safely concluded from this observation is that a higher share of revenue mobilisation to GDP in China compared to India allows a larger proportion of expenditure to GDP.

The basic contradiction with the “liberalisation with a human face” strategy lies in the inability of the Indian government to increase its revenues as well as expenditure even close to such levels (even in proportional terms) as is possible in China.

Let us take the example of the capital gains tax, which is a tax on unearned income, unearned because capital gains accrue to asset holders through price appreciation of assets and not through real investments. Almost all the advanced countries have taxes on capital gains and in the US most investors pay capital gains at the rate of 15 per cent. In Budget 2003-04, the NDA government in its most brazen move to please the stock market, had exempted trade in all listed equities from the long-term capital gains tax. Continuing in the same direction, the finance minister in the first budget of the UPA government in 2004 abolished the long-term capital gains tax altogether and in its place introduced a securities transactions tax (STT) to be levied on all transactions in the capital market. However, following protests by stockbrokers, the proposed STT rate was drastically slashed and the tax was completely diluted. But the long-term capital gains tax never came back, allowing investors in the capital markets to reap the benefits of tax-free capital gains. While on the one hand the government has lost thousands of crores of revenue because of this move, on the other it has led to a surge of speculative capital, both domestic and foreign, leading to an unprecedented boom in the Indian stock market.

Before this year’s budget there were demands raised from several quarters to reintroduce the long-term capital gains tax and increase the STT rates, which besides checking capital market volatility can also generate substantial amount of additional resources. However, the finance minister, far from introducing any tax announced measures to keep the stock markets happy, such as a hike in the cap for FIIs holding of government securities in the Budget 2006-07 and has also allowed Indian mutual funds to invest in overseas funds.

India and China: Contrast inIndia and China: Contrast inIndia and China: Contrast inIndia and China: Contrast inIndia and China: Contrast in
Agrarian PoliciesAgrarian PoliciesAgrarian PoliciesAgrarian PoliciesAgrarian Policies

The inadequacy of policies of the UPA government in addressing the agrarian crisis and unemployment can be better understood through a comparison with China. In order to address the growing rural-urban divide, the Chinese government has decided to massively step up expenditure on agriculture, rural areas and farmers during their Eleventh Five-Year Plan (2006-2010). They will spend $ 42 billion in 2006, the first year of the plan (in Indian currency at the current exchange rate that would amount to Rs 1,87,572 crore). This huge expenditure would be undertaken in China to invest in rural infrastructure like roads, electricity and communications as well as education and healthcare besides providing farm support and subsidies.2

The 2006 Plan for National Economic and Social Development adopted by the National People’s Congress of China in the second week of March 2006, has resolved to “build a new socialist countryside, promote agricultural development and raise farmers’ incomes”. As a means to attain this objective, grain production has been accorded top priority. China produces more than double the amount of foodgrains produced by India annually; its total grain production was 469.47 million tonnes in 2004 compared to only 204.6 million tonnes produced in India in 2004-05. Despite this, the Chinese government has laid special emphasis on grain production because they realise its crucial importance in safeguarding the selfreliance of the economy.

The principles laid down by the Chinese plan vis-à-vis grain production include protecting primary farmland, stabilising the acreage sown for grain and increasing transfer payments to major grainproducing provinces. Besides reiterating the strategy of price support to stabilise grain prices, the plan also states, “We will increase direct subsidies to farmers for growing grain, subsidies for cultivating improved crop strains and subsidies for

Table 1: Plan Expenditure in Union BudgetsTable 1: Plan Expenditure in Union BudgetsTable 1: Plan Expenditure in Union BudgetsTable 1: Plan Expenditure in Union BudgetsTable 1: Plan Expenditure in Union Budgets

(in Rs crore)

Budget 2004-05 Budget 2005-06 Budget 2006-07
Budget Revised Budget Revised Budget Revised
Estimates Estimates Estimates Estimates Estimates Estimates
Total budget support for
central plan 87,886 82,529 1,10,385 1,07,253 1,31,284 -
Central plan capital expenditure 26,217 22,712 27,015 24,417 23,815 -
Table 2: Central Plan Outlay by SectorsTable 2: Central Plan Outlay by SectorsTable 2: Central Plan Outlay by SectorsTable 2: Central Plan Outlay by SectorsTable 2: Central Plan Outlay by Sectors

(in Rs crore)

Budget 2004-05 Budget Revised Estimates Estimates Budget 2005-06 Budget Revised Estimates Estimates Budget 2006-07 Budget Revised Estimates Estimates
Agriculture and allied activities Rural development Irrigation and flood control Social services Total 4,643 9,239 458 35,739 50,079 4,799 11,196 365 39,378 55,738 6,425 13,992 524 53,384 74,325 5,907 16,716 418 51,271 74,312 7,385 18,269 587 63,313 89,554 ----

Economic and Political Weekly June 10, 2006 purchasing agricultural machinery and tools, and phase in a system of direct subsidies to grain producers for purchasing agricultural supplies, such as fertilisers and diesel fuel. We will tighten oversight and management of fertiliser prices and agriculture-related charges, curb price increases for agricultural supplies and lessen farmers’ burdens.” The Chinese policies stand in sharp contrast to the chorus of “rationalising” subsidies being sung at regular intervals by the “reformist” ministers of the UPA government.

The crucial difference between the vision which has prompted China to undertake their “new socialist countryside” policy and the Indian prime minister’s “liberalisation with a human face” can be best understood in terms of the following resolution contained in the Chinese plan: “We will adhere to the principle of giving more, taking less and lessening control and accelerate the establishment of a permanent mechanism of getting industry to support agriculture and cities to support the countryside” (emphasis added). If at all the UPA government was serious about its “human face”, it should have by now worked out mechanisms of getting Indian industry to support Indian agriculture and Indian cities to support the Indian countryside. Instead what we have witnessed in India is a move in a completely different path. Far from reinvigorating the role of the state to bring about a turnaround in agriculture, underlying the frequent calls for a “second green revolution” emanating from the prime minister is a vision of corporate driven export-led agriculture which would further expose the already crisis-ridden sector to the vagaries of the international market.

The intentions are already evident for instance in the provisions of the Seeds Bill piloted by the ministry of agriculture which seek to subvert the seed rights of the farmers and facilitate monopolisation of the seed business in the hands of the multinational seed companies. The “Indo-US Knowledge Initiative on Agricultural Research and Education”, which was launched during the US president’s recent visit to India, has also empowered Wal-Mart and Monsanto to dictate the agenda of agricultural research. Rather than undertaking public investment, the government seeks large volumes of FDI to develop modern supply chains in terms of the development of storage, warehousing, transportation and other logistic services, in order to meet the requirements of agriculture and food-processing industries. It is in line with this understanding that the retail trade sector and warehousing is being opened up for FDI.

While the carrot of access to international markets is being dangled before the Indian farmers, what is being concealed is the fact that such market access available to the global retail chains has nowhere benefited the producers from the developing countries since the latter are unable to secure a fair price for their produce in the face of enormous monopsony power wielded by the multinational giants. The terms of trade for producers in developing countries, especially for the primary products, have been worsening steadily even as agricultural exports have risen in volume. Mexico offers a classic case where massive increases in horticulture exports in volume terms have not translated into any benefit to the farmers due to sharp decline in the unit value of exports and the control exercised by the US-based agribusinesses.

Moving towards Capital AccountMoving towards Capital AccountMoving towards Capital AccountMoving towards Capital AccountMoving towards Capital Account

The latest step by the prime minister to further his “liberalisation” agenda is the attempt to introduce full capital account convertibility. While the NCMP does not mandate this controversial move, the prime minister argued that the “comfortable” position of the Indian economy, both “internally and externally”, warrants a “revisiting” of capital account convertibility, which was shelved after severe currency crises hit the south-east Asian countries in 1997-98. It is widely held that India could insulate from the contagion of currency crises at that time only because of the extant capital controls.

Out of the comfortable foreign exchange reserves of $ 143 billion being celebrated by the prime minister, $ 44 billion, i e, over 30 per cent is on account of the FIIs. The equity holdings by the FIIs currently comprise over 13 per cent of market capitalisation in the Indian stock market in contrast to less than 3 per cent in China, while the latter annually attracts more than 10 times the FDI that flows into India. The external commercial borrowings by domestic companies have also risen steadily to nearly $ 15 billion in 2005-06. According to the RBI, the ratio of volatile capital flows (defined to include cumulative portfolio inflows and short-term debt) to reserves, which was 36 per cent on March 2004, had increased steadily to 40.5 per cent on September 2005. In contrast, the share of net FDI in total private capital inflows was only around 10 per cent. Far from generating any sense of comfort, such rising proportions of volatile capital inflows increase the possibility of financial turbulence.

In fact, the combination of an unsustainable stock and real estate bubble fuelled by “hot money” inflows, currency appreciation and a widening current account deficit, being witnessed in India currently, look eerily similar to the situation prevailing in the south-east Asian countries in the period preceding the currency crises of 1997-98. Introducing capital account convertibility at this stage would only encourage such speculative inflows and reckless external commercial borrowing and make the Indian economy vulnerable to financial crisis.

The UPA regime has been making systematic attempts to undermine the Reserve Bank of India, which unlike most conservative central banks across the world has advocated a cautious approach as far as financial liberalisation is concerned. On several occasions, first on the issue of raising the FDI cap on the ownership of domestic banks, then on the issue of further deregulating FII inflows and now on the question of capital account convertibility, a reluctant RBI is being steamrolled into submission by the government. This missionary zeal displayed by the UPA

Table 4: Expenditure on Agriculture,Table 4: Expenditure on Agriculture,Table 4: Expenditure on Agriculture,Table 4: Expenditure on Agriculture,Table 4: Expenditure on Agriculture,
Rural Areas and Farmers in ChinaRural Areas and Farmers in ChinaRural Areas and Farmers in ChinaRural Areas and Farmers in ChinaRural Areas and Farmers in China

(In $ million)

2004 2005


32,400 36,700 42,000

Table 3: Revenue Receipts and Total Expenditure GDP in India and ChinaTable 3: Revenue Receipts and Total Expenditure GDP in India and ChinaTable 3: Revenue Receipts and Total Expenditure GDP in India and ChinaTable 3: Revenue Receipts and Total Expenditure GDP in India and ChinaTable 3: Revenue Receipts and Total Expenditure GDP in India and China

India China
2005-06 2006-07 2005 2006
Revenue receipts as per cent of GDP Total expenditure as per cent of GDP 10 14.6 10.6 14.8 17.3 19 18 19.5

Source: Figures for India based on Economic Survey, 2005-06 and China on the report on the Implementation of the 2005 Plan and 2006 Draft Plan. The GDP growth rates of India in 2006-07 and China in 2006 are both assumed to be 8 per cent.

Economic and Political Weekly June 10, 2006

government in pursuing “liberalisation”, is scarring its “human face” beyond any recognition. The crucial commitment in the NCMP to reduce the “vulnerability of the financial system to the flow of speculative capital” is being violated in the process.


The economic policies of the UPA government, far from being able to address the central problems of unemployment and the agrarian crisis, are adding new ones for the Indian economy. Disillusionment among the people whose aspirations were raised with the UPA coming to power, is fast turning into discontent. Those at the helm should realise the disconnect between the well-being of the people and liberalisation, with or without a human face, and abandon such fallacious strategies in favour of one which enables the government to genuinely meet the commitments related to people’s welfare made in the NCMP. The failure on the part of the UPA government to bring about a course correction would lead to the same fate that consumed the NDA.




[This is an abridged version of a paper titled ‘The Poverty of Economic Philosophy: A Critique of the UPA Government’s Economic Policies’, published in The Marxist. Comments on the draft by Prabhat Patnaik, Jayati Ghosh and Prakash Karat are acknowledged.]

1 The option of mobilising resources through disinvestment has not been possible so far in any significant manner due to the resistance by the Left parties. While opposing moves to disinvest shares of profit-making PSUs, the Left parties had made the following argument, “Selling off stakes in a profit-making PSU is in effect equivalent to running a budget deficit. While in the latter case interest payments have to be made by the government in the future against a one-time borrowing, in the former future streams of income from dividends are forgone against a one-time receipt from the sale of stakes. In fact, the latter is worse since it involves transferring state-owned assets to private hands, which is not the case when the government borrows from the market.” The government has not been able to come up with a response to this argument so far.

2 All facts and figures on China are based upon People’s Daily reports on the recently concluded session of the National Peoples’ Congress of China available in the Online edition of the People’s Daily, http://

Economic and Political Weekly June 10, 2006

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