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Inclusive Growth in Neoliberal India: A Facade?

The Congress-led United Progressive Alliance's commitment to inclusiveness is a facade that attracts the aam admi, but obscures the ugly reality - India is on track to become another oligarchy like post-Soviet Russia. The super-rich now have an important voice in the formulation of government policies. The government has failed to fulfil the common minimum programme agenda on inclusiveness. Its claim to have raised substantially the aggregate tax-gross domestic product ratio does not stand the test of scrutiny. The credit needs of small borrowers from agriculture and small-scale industry remain unfulfilled. The move to extend social audit to plug the loopholes in the rural employment guarantee programme has been scuttled, while measures for social security for the unorganised workforce financed by the budget promise to open up new markets for businesses in insurance and healthcare.


Inclusive Growth in Neoliberal India: A Facade?

Nirmal Kumar Chandra

The Congress-led United Progressive Alliance’s commitment to inclusiveness is a facade that attracts the aam admi, but obscures the ugly reality – India is on track to become another oligarchy like post-Soviet Russia. The super-rich now have an important voice in the formulation of government policies. The government has failed to fulfil the common minimum programme agenda on inclusiveness. Its claim to have raised substantially the aggregate tax-gross domestic product ratio does not stand the test of scrutiny. The credit needs of small borrowers from agriculture and small-scale industry remain unfulfilled. The move to extend social audit to plug the loopholes in the rural employment guarantee programme has been scuttled, while measures for social security for the unorganised workforce financed by the budget promise to open up new markets for businesses in insurance and healthcare.

An earlier version of the paper was prepared for the conference organised by the Centre for Budget and Governance Accountability, New Delhi, 8-9 December 2008. I had many fruitful discussions on the subject with Sudip Chaudhuri, Sushil Khanna and Mritiunjoy Mohanty, and benefited from probing comments on an earlier draft by Amiya Bagchi, Rajani Desai and N Krishnaji.

Nirmal Kumar Chandra ( retired as a teacher in economics from the Indian Institute of Management, Calcutta.

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1 Introduction

n contrast with the then ruling Bharatiya Janata Party’s election slogan of “Shining India”, the United Progressive Alliance (UPA) led by Congress came to power in 2004 with a common minimum programme (CMP), promising a sustained gross domestic product (GDP) growth of “at least” 7-8% and generating in the process “employment so that each family is assured of a safe and viable livelihood”. The CMP made the following commitments: (1) A National Employment Guarantee Act that “will provide a legal guarantee for at least 100 days of employment to begin with on asset-creating public works programmes every year at minimum wages for at least one able-bodied person in every rural, urban poor and lower middle-class household” (emphases added). (2) “The UPA government will [double] the flow of rural credit… in the next three years”, and institutional lending to small and marginal farmers would be “expanded substantially”. (3) Public spending in education will rise in a phased manner “to at least 6% of GDP with at least half this amount being spent on primary and secondary sector”. (4) Public spending on health will rise “to at least 2-3% of GDP over the next five years with focus on primary health care. A national scheme for health insurance for poor families will be introduced”. (5) “Household and artisanal manufacturing will be given greater technological, investment and marketing support. In the past few years, the most employment-intensive segment of small-scale industry (SSI) has suffered extensively. A major promotional package for the SSI sector will be announced soon”.

At the same time, the UPA reiterated “its abiding commitment to economic reforms with a human face, .. [to] stimulates growth, investment and employment”. It proposed to adopt

a range of policies including deregulation, where necessary. Incentives to boost private investment will be introduced. FDI [foreign direct investment] will continue to be encouraged…The UPA government is deeply committed, through tax and other policies, to the orderly development and functioning of capital markets that reflect the true fundamentals of the economy. Financial markets will be deepened. FIIs [foreign institutional investments in the capital markets] will continue to be encouraged while the vulnerability of the financial system to the flow of speculative capital will be reduced.1

In pursuit of inclusive growth the UPA government made, no doubt, some progress, if one goes by the popular verdict at the parliamentary elections in May 2009. For the first time in decades, an incumbent coalition came back to power with an enhanced majority. In states where the centre’s CMP was implemented with some seriousness, the ruling party(s), whether in the UPA or in the BJP-led alliance, won popular mandate. Among the three left-ruled states, only in Tripura did the CPI(M) made vigorous efforts and retained its mandate, but in the bastions of Kerala and West Bengal, the party’s commitment to the CMP was lukewarm, and it lost heavily. It would be absurd to project this factor as a sufficient explanation, but there is little doubt that people’s desire for “inclusiveness” played a significant role in the election. According to the National Post-Election Survey of the 2009 polls, nearly two-thirds of rural voters reported to have benefited from at least one of the five welfare schemes of the UPA, including the National Rural Employment Guarantee Scheme (NREGS) (Rai 2009).

On the other hand, the media and the business lobby saw in the UPA’s victory, despite the withdrawal of support from the left parties, an endorsement of the reforms agenda. However, The Economist (11 July 2009) remarked: “[A]s Mrs Gandhi knows, Congress was returned to power with a mandate that did not include liberal reforms, which most Indians mistrust”.

Hence, an appraisal of the UPA’s performance on social welfare measures envisaged in the CMP in light of the overarching neoliberal macroeconomic policy is necessary. The present essay is such an attempt. In Section 2, I explore the vulnerability of the Indian economy, in view of the twin deficits – fiscal and external payments. In Section 3, I examine the trends in the centre’s tax collection. The following section highlights the contraction in the centre’s expenditure and the stagnation in social expenditure by the centre and the states. I also probe separately two innovative schemes of the UPA government, namely, employment guarantee and social security for the poor. Section 5 is on bank credit to disadvantaged sectors, particularly, agriculture and small-scale industries. The next examines the high concentration of wealth and income in contemporary India, suggesting that a process of “inequalising” growth is the predominant characteristic of the present polity. In the concluding part, I offer some reasons why the CMP’s rather modest goal of “inclusiveness” did not make much headway.

2 India’s Vulnerability

Nearly all emerging nations since the early 1980s to this day, including India in 1991, faced an external payments crisis for two reasons, namely, deficit in the current account (CAB) of the balance of payments (BOP) and gross fiscal deficit (GFD).2 I discussed the subject at length in an earlier paper (Chandra 2008), indicating that India remained quite vulnerable, though a payments crisis was not imminent. After recapitulating briefly the earlier findings, I take note of latter developments.

The Reserve Bank of India (RBI) claimed that “volatile” foreign capital, consisting, above all, of the cumulative net investment (CNI) in equities by the foreign institutional investors (FII), and short-term external debts, amounted to just 38.2% of foreign exchange reserves (FER) at end-March 2007. I preferred market capitalisation of equity stocks held by the FIIs as a better indicator of India’s liability; for other elements of volatile foreign capital, I also differed with the RBI, but these were relatively minor items. I reckoned volatile capital at 93% of FER at end-2006, rising to 108% at end-2007. Contrary to its position on the adequacy of FER, the RBI augmented it by as much as $138 billion from end2006 to May 2008, while the CNI and other components of volatile capital changed very little.


The situation changed greatly after the global meltdown. The market capitalisation of FII equity stocks plunged from a high of $255 billion at end-2007 to $180 billion at end-September 2008 reaching a low of $85 billion in April 2009; then it nearly doubled to $157 billion at end-September, and rose slightly $168 billion at end-December 2009.3 By contrast, the CNI was rather flat; from $67 billion at end-2007, it fell to $55 billion at end-April 2009, and recovered to $73 billion at end-December 2009. The magnitude of volatile debts did not change much over the period. From mid-2008 to the end of 2009, the FER exceeded volatile capital by a highly fluctuating margin, and the RBI has been quite cautious, reducing FER by a small amount of $30 billion from the peak of May 2008 to end-December 2009.4

A major reason why the RBI has been holding large reserves is that India’s external payment situation has been deteriorating over the past couple of years (Table 1). As a percentage of GDP, trade deficit increased sharply from -7.8 to -10.3; so did the deficit in CAB from -1.5 to -2.6, while net capital inflow nosedived from

Table 1: Trade, Current Account and Capital Account Balances as Percentages of GDP

2007-08 2008-09 Q1/2008-09 Q1/2009-10 (% of GDP) (% of GDP) ($ Billion) ($ Billion)

Trade balance -7.8 -10.3 -41.4 -26.0
Current account net -1.45 -2.57 -9.0 -5.8
Capital account net 9.20 0.79 11.1 6.7

Source: Calculated from Macroeconomic and Monetary Developments Second Quarter Review 2009-10, Table 3.7.

9.2 to 0.8. Comparing the first quarter of the current and previous years, one finds that the dollar magnitudes of the deficit in trade and CAB improved, but the net capital inflow fell even more.

As explained earlier (Chandra 2008, Table 4), India incurred a drain in foreign exchange to the tune of 2.7 to 4.7% of GDP, owing to the large size of FER that earned too little in interest, the profits and capital gains of the FII, the cost of external loans, bypassing domestic institutions, by Indian firms, etc. The size of the drain, I guess, remains as high as before.

The argument about vulnerability is reinforced if one looks at the state of the fiscal deficit. Earlier, I showed (Chandra 2008, Chart B) that since the mid-1980s, the consolidated GFD of the central and state governments was consistently high as a proportion of GDP, though the level fluctuated. The five-yearly average stood at 9.09% during FY 1987-91, came down subsequently, but shot up to 9.14% in FY 1998-2002. Official data indicate a fall since then. However, off-budget items blurred the picture in later years. Major subsidies like those on oil and fertilisers, estimated at a minimum of 2% of the GDP (The Economist, 29 November 2007), were funded by the centre through equivalent bonds offered to the suppliers; these amounts should rather be deducted from the centre’s tax revenue; as indirect taxes on these items were very high.

The situation has worsened of late. The Union Budget for FY 2010 revised the centre’s revenue deficit in FY 2009 to 4.4% of the GDP as against the budget estimate of 1.0%; the corresponding GFD figure was raised from 2.5% to 6%. Adding the states’ deficits and the off-budget items, most analysts put the GFD at about 12% for the current year and the next.5 The current deficit level is worse than that of the crisis years of 1989-91, and is among the highest in the world. Fitch, a major credit rating agency, gave India a rating of “BBB minus”, the lowest in the investment grade, “with a negative

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outlook”; other agencies fol-Table 2: Public Debts as Percentages to GDP

Centre States Consolidated

lowed suit. With rising defi

1991 55.2 22.5 64.7

cits, the percentage of gov

2001 56.6 28.3 70.6

ernment debt to GDP went up

2004 63.0 33.2 81.4

as shown in Table 2. How

2005 63.3 32.7 81.3

ever, the rating agency, S&P,

2006 63.1 32.6 80.4 put the current public debt 2007 61.2 30.2 77.0

to GDP ratio at 85%. India’s 2008 61.5 28.4 77.0

Source: RBI, Annual Report, 2008, Table 2.41.

debt level is one of the high

est among the main emerging countries.

It is interesting that in the decade after 1991 the centre’s debt ratio was relatively stable, but that of the states went up by nearly 6%. As many observers noted, the states were starved of resources, while their commitments on various social welfare schemes were far higher. In the three years, 2001-04, of high GDP growth that created the illusion of “Shining India”, the ratio for the centre rose by as much as 6.4%, while that of the states increased by 4.9%. Since the UPA government came to power in 2004, the centre’s debt fell marginally, but that of the states fell by as much as 4.3%.

Isaac and Ramakumar (2008) provided an important clue. Following the Fiscal Responsibility and Budget Management (FRBM) Act, the states have to limit their fiscal deficit to 2% of their respective GSDPs (state-level GDP), and their market borrowings are determined by the centre. As a result, in the recent past, the states have been holding huge cash surpluses that are invested in lowyield (maximum 5%) short-term Treasury bonds, while they borrow funds from centre (or its agencies) at 8.1-9.5% to meet their requirements. On 21 November 2008, the states’ cash surplus amounted to Rs 70,000 crore as against a cash deficit of nearly Rs 7,900 crore. Consequently, the states were obliged to reduce their deficits, but the centre as the moneylender earned a fat income to boost its revenue and reduced the deficit!

Here I must put in a caveat. The size of the fiscal deficit need not be a cause for undue concern in the absence of cross-border capital mobility. Following Keynes, deficits should be high in a situation of excess capacity, provided there is little of “import leakage”. As the UPA government seeks to encourage two-way capital flows, and encourages “inessential” imports (gold, luxury consumer goods, etc) despite a chronic deficit in CAB, it is perilous for it to follow the Keynesian prescription. Among the emerging economies, China is the only one to take that road; for, she has a huge surplus in CAB, erects non-tariff barriers against imports competing with domestic products, and controls cross-border capital flows.

3 Taxation

In official discourse, credit is claimed for an improvement in the aggregate tax-GDP ratio. From Chart A one finds that the ratio has recovered from the trough of 1999-2001, and crossed the earlier peaks of the late 1980s in FY 2007 and 2008. However, the rise in the last couple of years has a windfall element, namely the spike in oil prices. If the “hidden” subsidies were deducted from tax receipts, the recent tax-GDP ratios would be lower than in the late 1980s. This argument is strengthened if one looks at the other line in the chart on the ratio of taxes to non-agricultural GDP (NA-GDP); it shows no improvement at all. Even with the windfall gains of the past two years, the percentages at 11.4 in 2007 and

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12.2 in 2008 were below the 1988 level of 12.7. There are sound reasons to prefer NA-GDP to GDP as the denominator. Most of the taxes, direct or indirect, are collected from non-agricultural households and institutions. There is no income tax on agricultural income, although plantation companies form a minor part of the agricultural sector and contribute a small part of the centre’s taxes. For direct sale in local or urban markets, a farmer pays no indirect tax. Indirect taxes on agricultural commodities are

levied when these enter Chart A: Tax Revenue as Percentage of GDP and Non-Agricultural GDP (1971-2008)

the regional or national

14 network of distribution 12 and augment the incomes


of non-agriculturists. Of


course, the farmers do


% non-agricultural GDP
% GDP 4

purchase industrial inputs

and consumer goods on

1971 1976 1981 1986 1991 1996 2001 2006

Source: Handbook of Statistics on Indian Economy 2008.

which indirect taxes are levied. Since the share of agriculture in the GDP has steadily shrunk from 42.3% in FY 1971 to 17.8% in 2008, the contribution of agriculturists to indirect taxes should be negligible.

Among the major central taxes, as shown in Chart B, the percentage share of indirect taxes fell steeply from well over 10.0 of NA-GDP during the late 1980s to an average of 5.7 in 2001-07. As part of the reform agenda, import duties that accounted for a large part of the overall tax revenue, were slashed drastically after 1991. Even if one grants that many earlier tariffs were too high, there are questions about the new rates; those on industrial inputs were often higher than on finished goods, including capital goods, and this led to excessive imports at the cost of domestic production. At the same time, to encourage the domestic consumption of durables and other consumer goods (barely purchased by the masses), excise and other taxes on these items were also lowered significantly, while the tax burden on food and other items of “basic necessity” remained unchanged.

Chart B: Personal Income Tax, Corporate Tax and Indirect Taxes as Percentages of Non-Agricultural GDP (1971-2008)

0 4 8 12 Indirect tax Corporate tax Pers inc

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

Source: As in chart A.

By contrast, direct taxes appear to be a success story. As a percentage of the NA-GDP, personal income tax collection rose dramatically from 0.35 in 1998 to 2.43 in 2008, as against an earlier peak of 0.56 in 1989, a year of tax amnesty that led to large-scale, voluntary tax disclosures. But the ratio is still quite low. On the positive side, the number of individual taxpayers has increased at a fast pace thanks to a new scheme that allowed traders and other self-employed to pay a fixed (modest) sum with an unwritten assurance that no probes would be conducted. The number of individual assesses jumped from 3.5 million in 1991 to 18.6 million in 1999, and further to 30.0 and 31.9 million, respectively in 2003

45 and 2007. On the other hand, tax rates were reduced in tune with neoliberal tenets; as a result, “tax payable” as a percentage of total income of all assessees fell precipitately from 18.2 in 1991 to just 8.3 in 2000. The corresponding percentages for the top group with a taxable income above Rs 1.0 million were 45.3 and 21.4 over the same years; in 2002, these were 10.6 for all assesses, and

32.0 for the top group. It is a sad commentary on tax administration that data for later years remain unpublished.6

While the government claims that corporate income tax yields have gone up sharply in recent years, a closer look at the figures hardly supports the view. As a percentage of NA-GDP, it fell from

1.9 in the early 1980s to 1.6 at the end of the decade, thanks to taxcuts in the middle of the decade; thereafter it fluctuated, rising to a peak of 3.9 in 2008. However, NA-GDP is not the appropriate denominator. A better one, though far from ideal, is the national accounts data on the “operating surplus” (OS) of the “organised sector”. The latter comprises companies in the private or public sector, the cooperatives as well as public administration, including defence. By definition, the last has no operating surplus. However, the OS for the organised sector includes “mixed income”, namely the income of proprietors as well as the income of the self-employed in proprietary firms. The self-employed may be paying personal income tax. Hence, the denominator may not be perfect, but is still the best one available. It is worth noting that in

Chart C: Corporate Income Tax as a Percentage of ‘Operating Surplus’ of the Corporate Sector (1981-2006)







1981 1985 1989 1993 1997 2001 2005

Source: As in Chart A and CSO web site for operating surplus.

the organised sector the percentage share of employees’ compensation fell sharply from 75 in 1980 to around 60 between 1990 and 2001, and further to 54 in 2005. From Chart C one finds that the ratio of corporate tax to operating surplus averaged almost 14% in 1981-84, then fell to a low of 9.8% in 1994; despite improvement in later years, it was still 13.3% in 2006, the latest year for which data are available.

The low yield from various taxes arises from tax cuts and widespread tax exemptions.

Table 3: Revenues Foregone (Rs Crore) and

The Union Budget FY 2010

Share (%) in Aggregate Tax Collected, estimated that owing to var-FY 2008 and 2009

2008 2009

ious exemptions, the effective

Corporate income tax 62,199 68,914

tax rate for a sample of over

Personal income tax 38,057 39,553

4,00,000 companies in 2008

Excise duty 87,468 1,28,293

was only 22.2% as against

Customs duty 1,53,593 2,25,752

the statutory 33%. The fig-

Total 3,41,317 4,62,512

ures on “revenue foregone”

Less export-related 56,265 44,417

(RF) under the main heads of Adjusted total 2,85,052 4,18,095 central taxes for the last two Adjusted total as % of years are given in Table 3. aggregate tax collected 48.16 68.95


There are good reasons to exclude the export-related exemptions in respect of indirect taxes as these are meant to create a level playing field for Indian exporters and their foreign rivals. But the exemption of profit from exports that was introduced in the late 1980s to encourage higher investment in export industries, has little justification (Chandra 1986). For, most of our manufactured exports consist of labour-intensive products, and the same is true for information technology and related services. Exports in these cases are limited, not by the size of investments, but that of the foreign markets.

Adjusted RF now exceeds two-thirds of total tax revenue, up from 48% last year. This is a big increase, and may go up further. For, in spite of the precarious fiscal position, new tax sops are being offered by both the centre and the states to investors, while the latter clamour for more. Among the most controversial of these is the Software Technology Parks of India (STPI) scheme for information technology-enabled services (ITes) firms that was to have ended two years ago, but got extended. The special economic zone (SEZ) scheme was also hotly contested. The Ministry of Finance estimated in 2005 the loss of central taxes owing to the SEZs at Rs 1,02,600 crore in the next 4-5 years against the projected investment of Rs 1,00,000 crore (RBI, Annual Report 2005-06, Box 1.2). In the wake of the appreciation of the rupee in 2007-08, Indian exporters of labour-intensive manufactures found their competitiveness eroded; the centre promptly announced a slew of new subsidies but also requested the states to offer more. To the best of my knowledge, most of these remain, although the rupee depreciated from Rs 39 to Rs 50 per US dollar at one stage, and now stands at Rs 47. The argument was that exports were falling owing to the global meltdown and such sops were needed as stimulants. That reminds one of a favourite motto of many alcohol lovers – one must drink to beat the heat, and one must not forget to celebrate the arrival of rains!

Moreover, India’s tax/GDP ratio is one of the lowest among the major developing countries. In trying to prevent, following the neoliberal prescription, the public sector from “crowding out” private firms, the central and state governments have for all practical purposes become a tool in the hands of big capital, foreign and domestic. The official claim of an overall gain in tax efficiency after 1991 is hollow from a macroeconomic perspective, but is quite true if one looks at the world through the prism of the so-called “wealth creators” – the affluent and the rich across the borders.

The neoliberal tax cuts and tax sops for individuals and corporations across the world, including India, follow from two interrelated premises. One, the lower the tax rate, the greater is the incentive for tax compliance, and hence the tax yield goes up. The Indian experience summarised above flatly contradicts this assertion. Moreover, with deregulation in various sectors and de facto transition towards free cross-border capital flows, there is evidence that in recent years millionaires everywhere, including India, have found offshore tax shelters to avoid paying any tax at all. Two, neoclassical theory posits that a firm’s investment depends on its post-tax income. Generally, this has not been true, as loan capital and equity capital raised in the marketplace across countries and historical periods contributed far more to firms’ investments. Perhaps the best examples are those of Japan and South Korea in

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their years of high-speed growth, when the investment rates reached dizzying heights although profit rates were minimal by Anglo-American standards. It is ironical that the theory got wide currency in the 1990s when a frenzy of mergers and acquisition (M&A) activities was sweeping through the US and west Europe, largely with funds borrowed from financial institutions. As the US financial meltdown revealed, some of the iconic firms in investment banking had a debt-equity ratio exceeding 30:1. Since 2007, several Indian firms (Hindalco, Tata Steel, Tata Motors, etc) went for big-stick acquisitions in Europe and the US on the strength of massive foreign currency loans at a low cost.

The tax cuts and tax sops for big business have three drawbacks. First, these have hardly any justification from a socioeconomic perspective and are hence an uncalled for transfer of resources from the national exchequer to private investors. Second, these sops encourage big firms to invest recklessly, and the costs are eventually borne by the taxpayers. Last but not the least, tax sops lead to excess capacity as the cost of capital is in effect subsidised; at the same time, production becomes highly capital-intensive to the detriment of labour.

4 Budgetary Expenditure

Coming to the expenditure side of the central budget, Chart D shows trends in total expenditure as a proportion of GDP. For FY 2008 the book transfer of

Chart D: Centre’s Total Expenditure as a the shares of the State Percentage of GDP (1971-2008)

Bank of India from the 25 centre to the RBI for a 20 sum of Rs 35,000 crore 15 was shown as capital ex-10

1971 1976 1981 1986 1991 1996 2001 2006

penditure in the budget;

Source: As in chart A.

it has been excluded in my computation, reducing both capital and total expenditure.

Total expenditure as a percentage of GDP increased more or less steadily from 13.1 in 1971 to a peak of 22.2 in 1987, stayed around 20 in the next four years, and fell gradually, with fluctuations, to a low of 15.4 in 2007 and 15.7 in 2008. The decline is remarkable for two reasons. First, it is one of the lowest among the major developing countries. Second, India is following literally the neoliberal prescription of squeezing the public sector for the benefit of the private segment, while in Organisation for Economic Cooperation and Development (OECD) countries there has been no such trend since 1980.

The lion’s share of the centre’s expenditure now consists of revenue expenditure with the percentage rising steeply over the years from 57 in 1971 to around 88 in the last few years, as shown in Chart E. The share of interest payment rose even faster from



Chart E: Revenue Expenditure, Interest Payments and Capital Expenditure as Percentages of Centre’s Total Expenditure (1971-2008)

20 40 60 80 Capital Interest
Source: As in Chart A. 0 1971 1977 1983 1989 1995 2001 2007
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11% of total expenditure to a peak of 30.5 in 2001, but has since come down to 25.6 in 2008. Consequently, capital expenditure has witnessed a big fall – from 44% of the total in 1971 to just 12-13% during 2006-08.

Ever since the economic reforms of 1991, the opposition, comprising the left parties, and, depending on which party is in power, the BJP or the Congress, harshly criticised the neglect of the social sectors in successive budgets. The CMP of 2004, one

Chart F: Percentage Share in GDP of Central and State Government Outlays on Social Services, Including Education and Health (1986-2006)



Social services




0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Source: Prowess database of CMIE.

may recall, envisaged “public spending” on health, as a proportion of the GDP, to rise over the next five years to at least 2-3%, and that on education to increase in a “phased manner” to at least 6%. Since very large parts of outlays in these sectors are made by state governments, one must consider the combined outlays of the centre and the states. As I could not find a consistent time series from the Annual Reports of the RBI or from the Ministry of Finance sources, I relied upon the CMIE. Chart F depicts expenditure on the revenue and capital accounts of the centre and the states on “all social services”, covering education, medical and public health and 10 other heads of expenditure. The coverage in CMIE is somewhat less than that of the “social sectors” in the Annual Reports of the RBI; the latter as a percentage of GDP was 7.8 in 2007, somewhat higher than 7.2 for “social services” in Chart E. However, the trends are quite similar. In fact, all the ratios in the chart moved within a narrow band over the years 1987 to 2007. The subject has been explored in depth by Ramakumar (2008).

Table 4 reproduces RBI Table 4: Expenditure of Central and State Governments on Social Sectors as

data for the last five years on

Percentages of GDP

social sector spending by the Total Social Services
centre and the states as per All Education Medical and Public Health
centages of GDP. The total 2005 7.4 5.7 2.7 0.8
outlay in the budget for FY 2006 7.6 5.8 2.7 1.3
2009 is almost 1% higher 2007 7.8 5.8 2.8 1.3
than in 2006, but those on 2008 RE 8.2 6.5 2.9 1.4
education and health are 2009 BE 8.5 6.8 3.0 1.4

Source: RBI, Annual Report, various years.

way below the CMP targets.

One may now discuss the two flagship schemes of the UPA, namely, employment guarantee and social security for workers in the unorganised sectors.

4.1 Employment Guarantee

The National Rural Employment Guarantee Act (NREGA) was implemented from 2006 in 200 districts; two years later the scheme covered the whole country. Under the Act, the state is obliged to provide work at the statutory minimum wage for up to 100 days in a year for one member in every rural family that demands work; if the administration fails to find such employment, the applicant is entitled to compensation at half the wage. Since this right to work is legally enforceable, it marks a radical departure from the old system of “food for work”.

In barely three years, the scheme made significant progress in several states. In those regions, the scheme has promoted grassroots democracy by raising the consciousness of the rural masses, and raised their standard of living. The NREGA Survey 2008 of workers in 10 districts in six northern states found that 46% of the sample workers received the statutory minimum wage; project work was done, generally without contractors; machines were rarely used; for 71% of all respondents the work opportunity was “very important” for them. Further, 69% thought that it helped them to escape hunger; 57% could avoid migration; 47% could cope with illness thanks to the extra earnings; and 35% could stay away from demeaning or hazardous occupations. In short, the scheme led to empowerment of the beneficiaries. Further, official figures up to January 2009 for the country as a whole, show that women accounted for 48.1% of person-days, and the percentages for scheduled caste and scheduled tribe participants were 29.6 and 25.1, respectively. On the other hand, even in regions of success, the survey noted, there were many deficiencies. The situation was much worse elsewhere with workers not getting their dues and many other types of corruption prevailed. Nevertheless, these flaws can be combated politically (NCEUS 2009, Tables 9.3 and 9.4. Dreze and Khera 2009; Dreze and Oldiges 2009).

From the official web site one finds that during 2008-09, about 1,000 million person-days of employment were provided, benefiting

26.4 million families, or an average of 37.8 days per family. Of the total employment, the percentage shares of scheduled castes, scheduled tribes and women were 19.4, 22.9 and 45.5, respectively. The average daily wage was Rs 89. Actual employment was thus just a fraction of the potential demand, as noted below.

Ambasta et al (2008) made a useful contribution by estimating the costs of the scheme for the whole country; it came to Rs 55,000 crore. However, the authors made some questionable assumptions, namely that demand for work for all 100 days would come from only 80% of rural labour households. From the NREGA survey, as well as one official data, one finds that many non-labour rural families across the states actually took advantage of the scheme to supplement their income. Further, nearly all respondents in the survey wanted work for 100 days. Besides, nearly 80% of the workforce in the unorganised sector is poor or vulnerable, earning Rs 20 per day or less (NCEUS 2006b). I assume that 75% of 160 million rural households would seek work for 100 days at the statutory minimum wage of Rs 100/day. In that case, the wage bill comes to Rs 120,000 crore; adding other non-labour costs at 30% of the total, the cost to the exchequer would be Rs 1,70,000 crore, or 3.5% of the GDP. There is every reason to doubt whether expenditure in the near future will come anywhere near the figure.

While the NREGA is confined to the rural areas, the CMP had promised work opportunities for “every… urban poor and lower middle-class household”. Though NCEUS did not provide a ruralurban break-up of 127 million non-agriculturists in the unorganised sector, I assume that a large proportion of them would be urban. There are several problems in estimating the probable number of workers and the overall costs of an urban employment guarantee scheme (UEGS). If the daily wage is fixed at, say, Rs 125, nearly all unskilled urban workers would seek a job card, as they generally earn much less and are rarely engaged round the year. On the other hand, there are few labour-intensive schemes offthe-shelf to build public assets in urban India today. Most activities like road or building construction are now highly mechanised and executed by big private contractors. It would require major, almost revolutionary, institutional and policy changes to design and execute socially useful projects without contractors. It is no wonder that Keynes could think of nothing better than digging trenches to fill them up repeatedly to provide jobs in a deep depression. NCEUS (2009) proposed measures like training, but their effectiveness has to be proved at the ground level. In any case, a job guarantee scheme for urban areas could require higher budgetary outlay than NREGA.

Politically, opposition to NREGA came from vested interests in local areas that did not have cohesive bodies organically linked to established political parties in different states. On the other hand, UEGS will threaten big private contractors who have virtually monopolised the infrastructural sector through public-private (PP) partnerships. They have a major voice in policymaking at the centre and the states across the political spectrum. Thus, UEGS is unlikely to see the light of day owing as much to the fiscal problem of the present government as to the opposition from within and outside the major parties.

4.2 Social Security

NCEUS was mandated by the UPA to suggest measures for the social security of workers in the unorganised sectors. It recommended a National Minimum Security for 300 million of such workers, including 69 million officially below the poverty line (BPL) and 145 million above-the-poverty-line (APL) persons. For each worker the premium per day would be Rs 3, to be contributed equally by the worker, the employer and the government; in the absence of an identifiable employer, the government would make up the shortfall. The annual premium of Rs 1,095 would be utilised as follows: (a) Rs 380 for the health insurance of the earner, including a maximum of five persons in the family, entitling them to hospitalisation costs not exceeding Rs 15,000, and maternity benefits of Rs 1,000 per delivery; (b) Rs 180 towards the life insurance of the earner; entitling the family to receive Rs 25,000 in case of accidental death; and (c) Rs 565 for old-age (>60 years) pension of Rs 200 per month for a BPL earner. For APL workers the latter sum would go into a Provident Fund. NCEUS proposed that the scheme be introduced gradually over five years, 2007-11; in the final year when all workers would enjoy social security, the cost for the central and state governments, including administrative expenses, would be Rs 25,401 crore, or just 0.7% of the GDP in 2007 (NCEUS 2006a). How did the government respond to this modest scheme?

A draft bill went to a parliamentary committee that endorsed the proposal of NCEUS, but widened its ambit to include unpaid family workers among the insured. The Unorganised Workers Act, 2008 ignored, however, major points of the two reports. The Act merely authorises the government to formulate future programmes (NCEUS 2009). However, the government has recently launched

february 20, 2010 vol xlv no 8

two new schemes, namely, Rashtriya Swasthya Bima Yojana to the expenditure is calculated at “international” dollars, or the
provide health cover to BPL workers, and another towards life in purchasing power parity (PPP) of the currencies, the respective
surance for rural landless households. The coverage of both these figures are 189 and 100, and the gap rises to 89%. Now, the ratio
is so far limited, and the government has been dragging its feet in of total expenditure at PPP to that at the current exchange rate is
view of the fiscal deficit. 3.71 (=189/51) for Sri Lanka and 2.76 (-100/36) for India; the
Though the NCEUS scheme represents a big improvement over numbers are broadly similar for government expenditure and
the status quo, it fails to attain the CMP’s objective, namely to “assure private expenditure in the two countries. These ratios suggest
a secure future for [all] families [in the unorganised sector] in that one dollar, converted into local currencies at the market rate
every respect”. Let me focus on healthcare as a key component of of exchange, of expenditure in 2005 fetched several times more
“a secure future”. India’s aam admi surely deserve health facilities of health goods and services in these two countries than in the
comparable, not to those in rich OECD countries or in socialist US, the country of reference for PPP estimates. As the ratio was
Cuba, but at least to those in neighbouring Sri Lanka. Though it is significantly higher for Sri Lanka, health costs were correspond
nearly as poor as India, has an economic system quite similar to ingly lower than in India. While the quality of health goods and
ours, and its government embraced neoliberalism about a decade services in these countries might be inferior to those in the US, it
before ours did, the small island has for long been acknowledged is difficult to argue that the quality in India is superior to that in
as an exemplar on the health front. Thus in 2005 the life expectancy Sri Lanka. After all, the former has a better health record.
at birth was 73.1 years, against 63.7 for India and 77.9 in the US. There is a strong presumption that lower costs in Sri Lanka
Table 5 captures some of the key factors that may explain the were due to the high 46% share of the government in the country’s
superior performance of Sri Lanka. Though the access to potable total outlay, as against only 19% in India. Contemporary global
water is somewhat higher for the Indian population, there is a wide experience amply confirms it. Thus in 2004 the US, where the
gulf in respect of sanitation. It reflects not so much the paucity of private sector dominates, spent 15.4% of the GDP on health
public funds, but the absence of social awareness. The responsi against Canada’s 9.8%, the per capita figures at “international”
bility lies with all social and political organisations, including dollars being 6,096 and 3,173 respectively. As for the state of
those running the government at the centre and the states. health, in 2005 life expectancy at birth (in years) stood at 80.3
Table 5: Key Indicators for the Health Systems in India and Sri Lanka (2005) years in Canada and 77.9 in US. West European countries, Japan,
India Sri Lanka etc, with national health insurance, have figures comparable to
A Financial indicators (in current $) Canada’s (HDR 2007-08).
1 Per capita government expenditure on health 7 24 2 Per capita private expenditure on health 29 27 3 Per capita total expenditure on health 36 51 4 Private share (%) in total expenditure on health 81 54 5 Total health expenditure as % GDP 5.0 4.1 “America’s healthcare is the costliest in the world, yet quality is patchy and millions are uninsured. Incentives for both patients and suppliers need urgent treatment”, wrote The Economist (25 June 2009), highlighting “sheer waste” (30% of health spend-
B Physical indicators ing), overuse of medical facilities encouraged by private insurers,
6 Population with access to potable water (%) 89 82 and perverse incentives for doctors, leading to unnecessary
7 Population with access to improved sanitation (%) 28 86 patient visits (to doctors and specialists) and so on. In addition,
8 Hospital beds@ 7-8 29 there is no mechanism to evaluate the cost-effectiveness of new
9 Physicians@ 6 6 drugs, devices and treatments.
10 Nursing and auxiliary staff@ 13 17 11 Pharmacists, etc@ 6 <1 12 Other health service personnel@ 7 <1 @ per 10,000 population. In India, the private sector dominates different areas of health, according to three senior officials, Rao, Nundy and Dua (2005). Three-quarters of the human resources and advanced medical
Source: WHO Core Health Indicators 2009. technology, 68% of a total of over 15,097 hospitals and 37% of
The second major handicap for India is that the number of hos over 6,23,819 beds in the country are in the private sector that
pital beds per head of the population is grossly inadequate by a provides 81% of all outpatient, and 46% of inpatient care. Lack
factor of 3-4. To close the gap very large investments, public or ing resources, the state has increasingly been entering into
private, are required. I shall return to the question shortly. PP partnerships, offering a string of incentives like excise duty
Third, on a per capita basis, the number of physicians is identical exemptions, free land, etc, in lieu of their treating free 10% of in
in the two countries, and the same is true for the aggregate work patients and 40% of outpatients. However, many such hospitals
force in the health sector. Looking at the category-wise distri did not fulfil their part of the bargain and were pulled up, not by
bution of the latter, one is struck by the relative paucity of nursing the government, but by the courts at a much later date (The
and auxiliary staff, and the over-abundance of pharmacists and Hindu, 23 September 2009).
“other health service personnel” in India. The latter categories As for government health facilities, across the country there are
are no doubt indispensable for the system; but if Sri Lanka can many hospitals that once had a good reputation but have hardly
manage with so few of them, the overwhelming bulk of such any patients today. Innumerable primary health centres all over the
personnel in India would appear to be redundant from a clinical rural areas barely function. Routinely, a large proportion of patients
perspective. Why does India need them? in government hospitals are advised to seek treatment in private
Consider the financial indicators in Table 5. Total health ex establishments, and those who stay in government hospitals often
penditure per capita in Sri Lanka was 41% higher than in India; if buy medicine from private stores. Despite repeated attempts over
Economic & Political Weekly february 20, 2010 vol xlv no 8 49

the years to centralise purchase of the World Health Organisation’s list of essential medicines to minimise the cost for the consumer, vested interests, at various levels, have thwarted them. The paradox is that while India is known for cheap, world class generic drugs, many of our retail prices are higher than what Britain’s National Health Service pays.

India’s health insurance companies, public or private, follow the American model, allowing all expenses, medically justified or not, for hospitalisation and for medicines within the overall limit for each person. They do not question the appropriateness of fees charged by hospitals, laboratories or specialists, replicating all that is unwell with the American system. Noting the major deficiencies in our health system, Selvaraj and Karan (2009) observed that it has led to “deepening health insecurity” over the past three decades. They also remarked that under the PP partnership scheme, the state is not so much “withdrawing” from healthcare owing to the resource crunch, but is gradually “handing over vital national assets (public health facilities) to the private sector”.

The fault line obviously lies in India’s health system. Unless the state takes the driver’s seat and becomes the main service provider, alters drastically its fiscal and other policies to encourage low-cost high quality private hospitals like LifeSpring Hospitals (a chain of small maternity hospitals with modern facilities around Hyderabad) or Aravind, Madurai (the world’s biggest eye-hospital chain), and enforces strict regulation over the entire sector, the health insecurity of the masses will persist. Simply funding health insurance as proposed by the NCEUS may bring some relief to many in the unorganised sector, but a good part of the payout from the insurance companies is likely to be wasted, if other things in the system remain unchanged.

5 Credits to Agriculture and Small-Scale Industry

Modern financial institutions in India were created in the early 19th century to serve rich individuals, large firms in various sectors and the government, leaving the mass of cultivators and other petty producers at the mercy of traditional sources like traders, moneylenders, “friends” and relatives. In the past two centuries, the economy has changed vastly, and financial institutions now account for 7% of the GDP, or a little less than 10% for “registered” manufacturing. Yet economic units engaging over 90% of the country’s workforce cannot reach the portals of financial institutions.

Nationalisation of private domestic banks in 1969 was aimed at altering this landscape. Credits were extended to many sections of the population that were previously reckoned “unbankable”. Two groups deserve special attention, namely, agriculturists and those in small-scale industries (SSI). As noted earlier, NCEUS (2006b) estimated the number of agriculturists at 235 million, and the SSI workforce at 29 million. In June 1969, just before the bank nationalisation, the percentage shares in total bank credit was 1.3 for agriculture and 8.5 for SSI; for the rest of the unorganised sector employing 98 million persons, no data exist on bank credit. Moderate progress was made in providing credit to these sectors over the next two decades, followed by a reversal after the economic reforms of 1991. Although the reform in the financial sector was aimed at removing the distortions in the credit market caused by

50 state directives so that credit would flow to all clients at a “single” price, the reality was very different. By the early years of this century, a crisis emerged. The CMP, as noted above, promised to rectify the situation.

How far were these objectives realised? The trends in credits to agriculture and SSI as percentages of non-food gross bank credit from 1980 to 2008 are shown in Chart G. Let me first look at agriculture. Historically, the farmers never obtained from

Chart G: Share of Agriculture and SSI in Bank Credit (1980-2008, %)


10 15 Agriculture SSI


1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Source: As in Chart A.

banks their “due” share of credit, if one goes by the sector’s contribution to GDP. However, there was a perceptible improvement in the 1980s when the percentage rose from 14.5 in 1980 to a peak of 18.4 in 1987; thereafter it fell over the years to a low of 11.9 in 2003. However, the absolute size of credit to agriculture rose dramatically from over Rs 90,000 crore in 2004 to over Rs 2,73,000 crore in 2008. Yet, the sector’s percentage share at 12.4 was still 6% below that of 1987. After a detailed analysis of data, Shetty (2008) observed that the bulk of the incremental credit during the three-year period, 2005-07, have been: (a) in the form of indirect credit for input suppliers, etc; (b) credit extended by urban and metropolitan branches; and (c) large size loans with credit limits of Rs 1 crore and above.

Agricultural credit is classified by RBI as either “direct” that goes to cultivators, or “indirect” that is channelled to private firms, commission agents, non-bank financial institutions, etc, to finance agricultural activities. Chart H shows the trends in the share of the two components in credit from all scheduled banks,

Chart H: Percentage Shares of Direct and Indirect Credit in Total Bank Credit to Agriculture (1972-2006)







Indirect 0 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Source: As in Chart A.

cooperatives, regional rural banks and the Rural Electrification Corporation during 1972-2006. Over the entire period, there was a drastic fall in direct credit from 83 to 54%, and a corresponding rise in indirect credit. There were two sharp breaks in the series

– during 1993-95 when the share of direct credit nosedived from 79 to 61%, and again during 1999-2001 when it fell from 60 to 45%. There was a partial recovery in the next five years to 2006.

How far indirect credit helps the mass of farmers is open to question. Ramakumar and Chavan (2007, Table 5) noted that in 2005 more than 84% of indirect credit went to big accounts (>Rs 1 crore), while small loans (<Rs 25,000) accounted for a

february 20, 2010 vol xlv no 8

mere 0.9%. It is unlikely that a substantial part of the big loans was eventually transmitted to small farmers.

Before 1991, the public sector banks (PSB) were directed to expand rural branches for the benefit of depositors and borrowers, especially the small ones. The policy was abandoned in the early 1990s as part of financial reforms with its accent on banks’ profitability. As a result, the number of rural branches came down from 35,360 in 1993 to 30,561 in 2007 (NCEUS 2009: 290). Recently, the focus in official policy shifted to microfinance institutions to meet the needs of the rural poor. PSBs with their high human-power costs, it was argued, can hardly offer loans of a few thousand rupees to millions of small borrowers, and ensure timely repayment. On the other hand, if there are some reputable NGOs to assist the small farmers as intermediaries, the PSBs can entrust them with loans to be passed on to the small borrowers. The selfhelp groups (SHG), with a collective responsibility for repaying loans, should minimise the chances of default.

Indeed, the model SHG, Grameen Bank of Bangladesh (GBB), has been internationally acclaimed for its success in alleviating poverty among member-borrowers, and Mohammed Yunus, the founder, was awarded the Nobel Peace Prize. The RBI has facilitated the growth of microfinance institutions, especially SHG, by advising PSBs to promote them directly, or indirectly through intermediaries like NGOs and “reliable” individuals. Actually, the GBB has a fair number of critics, the most recent being Anu Muhammad. (a) Even as the GBB and its affiliates, usually large for-profit enterprises, claim to cater to 65% of the poor families in the country, other studies put the coverage at barely 10%. As many rich individuals use poor women as proxies, it is not easy to calculate the number of poor borrowers. (b) The persistence of high poverty ratios in the official statistics of the country belies the claim of Mohammed Yunus that 5% of the borrowers get out of the poverty threshold every year. (c) A survey found that as against the apparent annual interest rate of 26.6%, the effective cost of borrowing from GBB was 30.5%, and nearly 45% for loans from other institutions. (d) Despite a phenomenal rise in disbursement of loans in 2005 and 2007, the default rate remained low. A survey found that nearly one-half of the respondents repaid their loans by borrowing from other sources at higher rates of interest or sold some asset in view of the Shylock-like approach towards repayment of the GBB.

It is unlikely that Indian courts would tolerate such draconian measures of loan recovery. Yet RBI facilitated the growth of microfinance institutions, including SHG, by encouraging “no-frills” accounts to be opened at PSBs; there was a rider – there would no ceiling on interest rates charged on loans to the depositors. The RBI also seemingly approved the range of annual interest rates fixed by the SHG. A survey by an RBI affiliate for 2005 indicated a wide variation in the percentage within and across states, e g, Andhra Pradesh 17.0-32.5, Karnataka 12-40, etc. The upper limit in most cases is not very different from those extracted by moneylenders. What is more, as the EPW editorial (2007) as well as Shetty (2008) ruefully observed, the RBI suggested the mainstreaming of private moneylending activities and strengthening of the synergies between the formal and informal segments, ostensibly by eliminating its negative characteristics and usurious rates of interest (p 12).

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february 20, 2010 vol xlv no 8

Returning to our banks’ direct credit to agriculture, its distribution is also skewed in favour of bigger landholders as shown in Table 6. Thus marginal farmers (<2.5 acres) constituting 41% of borrowers obtained only 25% of the total, while the corresponding figures for the small (2.5-5.0 acres) and the medium-large groups (>5.0 acres) were 30% and 49%. The contrast is sharper when one looks at the latest National Sample Survey (NSS) data on the distribution of operational holdings; the proportion of farms in the bottom group was 70%, while that at the top was 14%. More than 95% of the marginal and nearly 88% of all cultivators

Table 6: Credit to Farmers According to Different Size Classes of Landholding and the Overall Distribution of Landholdings

Credit to Farmers in 2005-06 Landholdings 2002-03
Number of Farmers Credit to Farmers
No in mn % Rs Crore % No in mn %
Marginal 5.004 40.5 16,823 25.1 71 70
Small 3.670 29.7 17,619 26.2 16 16
Medium-large 3.670 29.7 32,682 48.7 14 14
Total 12.344 100 67,124 100 101 100

Source: RBI, Handbook of Statistics on Indian Economy 2008, Table 59; and NSS Report No 492, Table 3.4.

had no access to bank loans. Ramakumar and Chavan (2007, Table 7) also underlined the highly unequal distribution of direct credit. However, among the recipients of direct credit, as shown in Table 5, the distribution was far less skewed than in the case of indirect credit. It follows that an increase in direct rather than indirect credit is generally more beneficial for small farmers.

The squeeze on direct credit, after adjusting for inflation, during 1995-99 created a crisis. The nation was stunned by innumerable indebted farmers across the states committing suicide. A study by K Nagaraj (, 27 November 2007) put the number of such suicides, mostly from Maharashtra, Andhra Pradesh, Karnataka, Madhya Pradesh and Chhattisgarh, at 1,50,000 between 1997 and 2005.

One of the first acts of the UPA government was to offer a palliative by waiving Rs 60,000 crore of small farmers’ loans taken from the PSBs. Dogmatic neoliberals dismissed it as dangerous populism that would encourage “moral hazard”. They ignored conveniently numerous tax exemptions and other bounties for the rich and the corporate sector amounting every year to several times the one-off loan waiver. Former RBI governor, Y V Reddy (2006) also lamented the neglect of farmers by commercial banks in their lending. Although credit flow increased since then, suicides by farmers continue to this day, and as many as 1,267 deaths were reported in Vidarbha during 2008 (Tehelka, 18 July 2009).

One major factor behind the farmers’ distress has been the resurgence of moneylenders in the countryside as the PSBs retrenched rural branches. This is brought out in Table 7, based on

the decennial All-India Debt Table 7: Distribution of Outstanding Loans of Cultivators from Different Sources (percentages)

and Investment Surveys. In

Non-institutional Institutional

1951, the percentage share

Total Moneylenders Ttotal Banks

of moneylenders in the 1951 92.7 69.7 7.3 0.9

outstanding debt of culti-1961 81.3 49.2 18.7 0.6

vating households was as 1971 68.3 36.1 31.7 2.4 1981 36.8 16.1 63.2 28.8

high as 69.7 as against 0.9

1991 30.6 17.5 66.3 35.2

held by the banks. Just af

2002 38.9 26.8 61.1 26.3

ter the 1969 nationalisa-

Source: Report on Currency and Finance 2006-2008,

tion of banks, the latter’s Table 6.4.

51 percentage share in 1971 was still meagre at 2.4, while that of moneylenders had come down to 36.1. By 1991, the banks’ share reached a plateau of 35.2%, while moneylenders had 17.5% of the total. The decade of financial reforms put the clock back. By 2002, moneylenders raised their share to 26.3%, while that of banks shrank to 26.8%. And now efforts are made in official circles, as seen above, to whitewash the business of moneylending.

Satish (2007) hit the bull’s eye with the title: “Agricultural Credit in the Post-Reform Era: A Target of Systematic Coarctation”. The Concise Oxford Dictionary defines coarctation as the congenital narrowing of the aorta, i e, the main artery of the body, supplying oxygenated blood to the circulatory system of a human being. Satish showed how the drying up of bank credit from the early 1990s contributed to the protracted crisis of agrarian India, affecting in particular small and marginal farmers.

Coming to SSI, Chart G depicts a trend that is as disturbing as that for agriculture. By 1980, the SSI share of bank credit at 13.8% had improved considerably from 8.5% in 1969, and there was a further rise to a peak of 15.9% in 1987 and 1988. Then followed an almost unbroken stretch of years of decline, and it was more precipitate since 2000. Under the UPA regime bank credit (in Rs crore) to SSI did jump from about 66,000 in 2004 to nearly 1,56,000 in 2008, but the percentage share in total bank credit actually fell from 9.0 to 7.1 over the same years.

The discrimination against SSI comes out in bold relief when one considers its contribution to GDP. Medium and large industry accounted for 11.3% to the GDP in 2008 as against 5.0% coming from “unorganised” manufacturing. Bank credit to “industry” was 39.6%; excluding the SSI share of 7.1%, medium and large industries cornered 32.6%, or nearly three times their GDP share.

Furthermore, the data on credit to SSI, though I have so far used the same, are not comparable over the years. The upper limit on investment in plant and machinery for an SSI unit was regularly enhanced by the authorities over the years – from 7.5 in 1970, to 10 in 1975, 20 in 1980, 35 in 1985, 60 in 1991, and 300 in 1997, all figures being in Rs lakh. In 1999, the limit was for once scaled down to Rs 100 lakh. In 2006, the old system was replaced. The Micro, Small and Medium Enterprises Act created three new categories, namely, micro (25), small (500) and medium (1,000) enterprises, the figures in parentheses being the respective thresholds in Rs lakh as before. The Act also extended the scope of SSI to include units producing services; the upper limits on the value (in Rs lakh) of investment in equipment were 10 for micro, 200 for small, and 500 for medium enterprises. One must note that under the new Act, manufacturing units with investments of Rs 1-5 crore came under the ambit of SSI; moreover, units in the service sector were included in SSI for the first time. A good part of the unprecedented 2.4-fold rise in credit allocation between 2004 and 2008 should have been due to the definitional changes, implying that the SSI share under the pre-2006 definition fell more than Chart G suggests.

The definitional changes came after a sustained campaign against the SSI in the reform era. On the one hand, the reservation (under industrial policy) of many industrial product lines for the SSI sector over the decades up to 1991, was blamed for the reluctance of successful small units to expand and realise the benefits of scale economies; for, they could lose the benefits of SSI units. At the same time efficient large units, many of them export-oriented,

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found their growth path blocked by such reservation. Consequently, several hundred products, out of an earlier list of 869 at the peak, were “de-reserved”, and simultaneously, the official definition of SSI became more elastic over the years.

The distribution of credit to SSI by size classes in 2007 is given in Table 8. In the table, I have clubbed together “artisans and village and tiny industries” and “other small-scale industries”. While over 1.5 million or 83% of borrowers with credit limits up to Rs 2 lakh obtained 6% of total credit, the top 0.9% of borrowers with credit limits above Rs 1 crore received 47.4% of the total. The top group of six borrowers received one-quarter of the amount that went to the bottom group of almost one million borrowers. In view of this astounding skewness in distribution, the share of SSI in overall bank credit hardly reveals the woes of myriads of petty producers.

Table 8: Distribution of Credits to Small-Scale Industries by Size of Credit Limits

(March 2007)

Size Groups No of Amount Cumulative Percentage
(Rs Lakh) Accounts Outstanding No of Amount
(Rs Crore) Accounts Outstanding
<0.25 9,84,378 964 53.1 1.3
0.25-2 5,47,426 3,666 82.6 6.0
2-5 1,20,720 3,463 89.1 10.5
5-10 74,444 4,638 93.1 16.6
10-25 62,497 8,420 96.5 27.5
25-50 30,793 8,922 98.1 39.1
50-100 18,268 10,322 99.1 52.6
100-400 13,485 19,881 99.8 78.4
400 -600 1,542 5,807 99.9 86.0
600 -1000 1,117 6,371 100.0 94.3
1000 -2500 438 4,152 100.0 99.7
>2500 6 240 100.0 100.0
Total 18,55,114 76,843 100.0 100.0

Source: RBI, Basic Statistical Returns of Scheduled Commercial Banks in India, March 2007, Table 5.4

An NCEUS Task Force made a comprehensive report on the economics of the unorganised sector. Two of its findings on the credit scene may be highlighted (NCEUS 2007, chapter III). (1) Not more than 5% of such enterprises had access to bank finance and about 96% of these borrowed money from friends, relatives and moneylenders. (2) The banks in 2007 charged around 15% as interest from the SSI, as against 7-8% from large-scale industries owing to the latter’s high creditworthiness. Further, Chavan (2007) highlighted the plight of dalit households in accessing bank credit.

Regarding the micro and small enterprises just defined, their percentage share in bank credit fell from 4.2 in 2003-04 to 1.8 in 2007-08, while that for the micro group dropped from 2.2 in 2002-03 to 1.2 in 2006-07, and recovered partially to 1.6 in 2007-08 (NCEUS 2009: 283). NCEUS recommended the creation of a statutory body, National Fund, with a capital of Rs 500 crore to cater to the needs of the micro or tiny enterprises. It is yet to be implemented by the government.

Sarma and Nikaido (2007) have argued that the SSI units face an additional constraint since the RBI decided to adopt the “Basel norm” on capital adequacy for a commercial bank evolved by the Bank for International Settlement (BIS). The adequacy is measured by the ratio of capital to risk-weighted assets held by a bank, and the risk is assessed by “independent” credit rating agencies (CRA). In the wake of the 2008 sub-prime credit crisis in the US, the agencies have lost public confidence everywhere, and yet they

Economic & Political Weekly

february 20, 2010 vol xlv no 8

flourish. If a borrower does not approach a CRA, and few SSI units or small farmers can afford their fees (even though the government subsidises 75% of the fees), banks assign a high risk ratio to the loan. That may explain why banks are reluctant to increase their exposure to the SSI and others among the weaker sections, forcing the latter to turn to private moneylenders.

A piquant situation has arisen for Indian banks after the global meltdown. The RBI intervened, through a variety of measures, to inject liquidity into the financial markets and reduce the policy rates – just as the authorities in the US and Europe did. Yet, barring China, banks are everywhere reluctant to lend, preferring to hoard cash or invest in low-yield government securities. The Indian situation is depicted in Table 9. On 4 December 2009,

non-food credit accounted Table 9: Outstanding Aggregate Deposit, Non-food Credit and Investment in

for just over two-thirds of

Government Securities of Commercial Banks deposits, the remainder on 4 December 2009, and Variations,

Year-on-Year (Rs ‘000 crore)

going predominantly into

Outstanding Variation, Year-on-Year government securities. If on 4 December 2009 2009 2008

one considers incremental A Deposit 4,203 651 628

2,876 540 C Investment 1,385 278 150

magnitudes over the pre- B Credit 284

vious year, there is a sharp

Ratio B/A (%) 68.4 43.6 86.0

contrast; the credit-deposit

Ratio C/A (%) 33.0 42.7 23.9

ratio fell by one-half be-

Source: Weekly Statistical Supplement, RBI, 25 December 2009.

tween 2008 and 2009, while the investment-deposit ratio nearly doubled. The RBI played a supporting role by keeping up the “reverse repo rate”, i e, the interest on the idle funds parked by banks with RBI. In the absence of such facility, the banks would be compelled to lend to somewhat riskier clients.

At the other end, EPWRF (2009) has shown that in the recent past, RBI targets for bank loans to agriculture, SSI and the weaker sections remained unfulfilled to the tune of Rs 70,000 crore. Further, if one adds to it, as the NCEUS proposed, an additional target of 10% of bank credit earmarked for these groups, the total shortfall is as high as Rs 1,80,000 crore – roughly 8% of non-food credit outstanding as at the end of March 2008. Just this small amount of bank credit disbursed to the informal sector would greatly help to widen the demand base of the economy as such sectors account for the employment and livelihood of over 80% of the country’s population. This is by no means an extravagant suggestion. RBI (2007, Box IV.4) has approvingly cited one estimate of the credit needs of India’s poor households at Rs 4,50,000 crore.

The National Fund proposed by the NCEUS could spawn a large number of small banks, rural and urban. Drawing on the east Asian experience, Justin Lin (2009), the World Bank’s Chief Economist, called for the creation of a large number of small local banks to meet the credit requirements of small producers. Bearing in mind the difficulties faced by farmers and small enterprises, China decided in 2007 to set up 100 village banks. During an impromptu visit to one such bank in Zhejiang Province in August 2009, Premier Wen was informed that its deposits and credits amounted to 220 million yuan (about $30 million) and 187 million yuan, respectively. One client, for instance, obtained a loan of just 5,000 yuan without any collateral at an interest rate of 4% per annum (Xinhua, 24 August 2009).


Nevertheless, India’s neoliberal policymakers are enamoured of giant universal banks through mergers of PSBs and disinvestment of large chunks of their equity capital. It is not difficult to decipher the motive. Big business, Indian or foreign, can, at a later date, buy a relatively small part of the equity of the giant PSBs and dominate the banking sector as in the UK or US. The existence of a relatively large number of small and medium banks, public and private, would spoil the show. Interestingly, Mathur (2007) showed that the performance of PSBs was at par with those in rich countries.

6 Concentration of Wealth and Income

The most dramatic outcome of three decades of neoliberalism across the world is the spectacular rise in the concentration of income and wealth in most countries and at the global level. There is a growing literature on the subject, of which one may cite two notable studies, namely, those by Milanovich (2002), and by Davies et al (2006) from the World Institute for Development Economics Research. These are based on household income surveys for developing countries and income tax returns in industrial countries, and all point to a rising Gini coefficient. In many countries, it is currently above 0.4 – generally reckoned as a “danger” mark for social stability. The Economist (4 April 2009) published “a special report on the rich” with several entries that used evidence that is more recent across the countries, and underlined the gravity of the situation.

India is no exception to this trend, though one does not have any reliable and comprehensive statistics on the distribution of household or individual incomes. Most authors, including the multilateral institutions like the World Bank, calculate the Gini coefficient from the NSS data on the distribution of household consumption. From its inception, NSS focused on consumption rather than income for the simple reason that the rich are unlikely to reveal their actual income for a variety of reasons – in particular, to avoid the attention of income tax authorities. It is also widely known that the proportion of net savings in total income rises almost monotonically with the level of income. Clearly, the Gini coefficient should be significantly lower for consumption than for income. Moreover, almost any sampling formula covering a large population cannot but understate the income or consumption levels of the top group since the distribution among the latter tends to be particularly skewed. Indeed, one finds that aggregate consumption estimated from NSS has fallen increasingly short of household consumption as revealed in the official national accounts statistics. In the absence of a reliable Gini coefficient for income, one has to look at alternatives.

For people at the top of the pyramid, as I noted earlier (Chandra 2009), Capegimini, a leading asset management company, has been putting out since 1996 annual World Wealth Report on HNWI (high net worth individuals), having assets of at least $1 million. The total wealth in 2007 of 1,23,000 such persons in India was $369 billion. Allowing for a modest 10% rate of return on assets, the annual income of the HNWI would be 3.7% of India’s GDP in 2007. More frequently cited in the media, is the annual list of the global rich, published by the Forbes magazine. Its list of 40 richest Indians in 2007 showed an aggregate wealth of $351 billion that fell sharply to $139 billion in 2008, and recovered to $232 billion


february 20, 2010 vol xlv no 8

in 2009. Although the wealth of the super-rich nosedived in 2008, their income need not have come down to the same extent. Thus while the Sensex fell by over 20% between March and December 2008, the price-earning ratio also fell from 20.1 to 13.7 over the same period; if a share was worth Rs 100 in March, its value would fall to Rs 79 in December, but the earning would rise from Rs 5.0 to Rs 5.8 over the same months.

The Indian capitalists have been playing a major role in the formulation of policies by main political parties even before independence, and have continued to do so. Immediately after 1991, many of them were openly critical about the reform. Nevertheless, the government managed to regain their confidence through an ever-widening range of fiscal and other concessions. In recent years, there is an intimate collaboration between the government and big business. The situation is aptly captured by Raghuram Rajan, former Chief Economist at the International Monetary Fund. He observed that Germany and India had the same number of billionaires, though the former’s GDP is four times higher than India’s. “We have extremely efficient private banks and telecom companies that obtained their start from a government contract or licence… If Russia is an oligarchy, how long can we resist calling India one?” (The Economic Times, 12 September 2008).

7 Conclusions

Recapitulating the earlier discussion, India remains vulnerable to external shocks thanks to her high fiscal and external payments deficit, despite her enormous foreign exchange reserves that yield low returns, while the country may be losing 3-5% of its GDP to ensure the inflow of cross-border flow of capital in various forms.7 Yet India’s current rating by the global CRA is the lowest in the investment grade. The government cannot afford fiscal deficits beyond a “safe” level as adjudged by these agencies.

Although the government has claimed to have raised substantially the aggregate tax-GDP ratio in recent years, it does not bear a close scrutiny. An increase in indirect taxes on non-essential goods and services would affect adversely the effective demand of the affluent, which constitutes an important driver of GDP growth since the mid-1980s. A rise in direct taxes, a cutback in tax exemptions, including a stricter regime of tax-deductible perquisites, would again reduce the consumption of the same group. Taking away various incentives for investors would certainly lower private investments – perhaps the main engine of growth in last few years. In any case, any measure to enhance the effective tax rates would encounter strong opposition, not only from these quarters, but also invite a negative evaluation by the CRA. Nor can essential goods and services be subjected to higher taxation in a country with the poor and vulnerable making up 80% of the population.

Central government expenditure, and particularly capital expenditure, as a proportion of the GDP remains well below the peak of the late 1980s. As for social sectors like education, health and so on, the combined outlays by the centre and the states have remained sticky at 6-8% of the GDP from mid-1980s to the present, with no significant increase. Fulfilment of the CMP agenda on inclusiveness would require a manifold increase in such outlays that is hardly feasible for a neoliberal government.

Economic Political Weekly

february 20, 2010 vol xlv no 8

One comes to a similar conclusion from an analysis of bank credit to agriculture and SSI. The two groups along with other branches of the unorganised sector contribute the lion’ share of the GDP, but receive a small fraction of total credit. The distri bution of such credit is highly skewed. As a result, the petty producers depend largely on traditional sources like moneylenders. Actually, the aggregate credit needs of the former are enormous. Despite the fact that the banks’ deposits far exceed their commercial loans, they prefer to invest in safe low-yield government/RBI instruments.

As shown in Section 6, the super-rich from India have entered the global billionaires club, and have an important voice in the formulation of government policies. Naturally, they push for measures to expand the turf for private enterprise – the major objective of economic reforms across the world.

All this leads me to ask: What is the real import of the CMP? While the new schemes bring tangible benefits to segments of the weaker section of the population, systematic efforts are made to tailor them in such a fashion that widens the scope for private enterprise – the main goal of neoliberal reforms. Thus, the rural employment programme has been a partial success in certain regions, but the move to extend social audit to plug the loopholes has been scuttled. The new proposal to induct NGOs for a more effective implementation, bypassing the local panchayats, may reinvigorate the contractor raj. Similarly, various NCEUS measures for social security, once they are put in place, can open up new markets for businesses in insurance and healthcare financed by the budget. PP partnerships, the latest buzzword in official circles, are likely to expand manifold.

Though the subject was not discussed so far, I must note the proliferation of commercial institutions at all levels of education over the past couple of decades. Presently, the government is contemplating a large-scale expansion of higher educational institutions for which the bulk of capital expenditure will come from the exchequer, but the management will remain in private hands, another variant of PP partnership. In fact, the government has been offering subsidised land to private educational institutions without making any serious effort to regulate their quality or fees charged from the students. The Planning Commission (2006) mooted the idea of state funding through vouchers of the tuition fees of poor students admitted to expensive private schools. As Bagchi et al (2006) pointed, there is no guarantee that the management would not charge “extras” from the poor students. More important, these schools would now expand and attract a larger pool of talented teachers and students at the expense of public schools. Had the same funds been used instead to improve the infrastructure of public schools, the outcome in terms of educational attainment of all school-going children could be far superior.

Finally, the banks have fulfilled the CMP targets for total credit to agriculture and SSI. But the small borrowers have not fared any better. Indeed, the RBI policy of encouraging banks to engage individuals, NGOs and other bodies as intermediaries to channel loans to the poorer sections should strengthen the position of old and new types of moneylenders.

In short, the UPA’s commitment to inclusiveness is a facade that attracts the aam admi, but obscures the ugly reality – India is on track to become another oligarchy like post-Soviet Russia.


1 The quotations are from National Common Minimum Programme of the Government of India, May 2004. I have taken the liberty of correcting some obvious mistakes.

2 Korea in 1997 did not have a fiscal deficit. 3 It was calculated from the Prowess database of the centre for Monitoring the Indian Economy. The database give the daily market price of equity stocks of all quoted companies in the Bombay Stock Exchange and the National Stock Exchange. Quarterly data on FII holding in each company is also provided. 4 This may explain why India did not set up a Sovereign Wealth Fund that became quite fashionable in 2007-08, though the Finance Ministry was positively inclined. 5 “India’s fiscal deficit to be highest in the world: Goldman”, PTI, 20 February 2009. www.rediff. com. “India’s fiscal deficit a concern: Fitch Ratings”, 16 February 2009, “New fund, old fundamentals”, The Economist, 30 April 2009,, 8 July 2009. “India’s budget”, The Economist, 11 July 2009. 6 Indian Public Finance Statistics 2004-05, Ministry of Finance, Delhi, Table 7.1. Also, www.indiastat. com for the last year. 7 The argument is elaborated in Chandra (2008).


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