The crisis in the Indian economy is deeper than it seems. Otherwise the stock markets would not have the violent adverse reaction they did the day after Lok Sabha passed the Food Security Bill with an easy majority. To blame the market’s three per cent fall on August 27 on the extra `34,000 crore, which will be needed to give subsidised foodgrains to a majority of the people in the country, is to miss the significance of our vulnerability to international finance capital.
This vulnerability has been allowed, even encouraged, to increase by depending on foreign inflows for the “irrational exuberance” that has kept our stock markets at unsustainable levels, and led to undue influence of market players on the country’s affairs. Various finance ministers, to give the new economic policies the sheen of success, have given every possible incentive to foreign financial institutions (FIIs) to invest in India.
They, in turn, have come in droves, putting in some $168 billion in our overvalued markets. The only year they removed their money was 2008, $14 billion according to Securities and Exchange Board of India (Sebi) the Bombay Stock Exchange (BSE) Sensex crashed from 20,000 levels to 8,000 in less than a year. FIIs now hold a substantial part of the free floating stock in the market and their view of the economy will determine how the market and the rupee fare. This was amply demonstrated in the past month when heavy selling of $10 billion in government securities sent the rupee in a free fall as they repatriated the money.
Some people, including former Reserve Bank of India (RBI) governor Y.V. Reddy, called for the imposition of Tobin tax to curb volatility in our financial markets, especially in the currency segment. (Tobin tax, named after American Nobel laureate economist James Tobin, is a levy on short-term cross border capital flows.) Unlike foreign direct investment (FDI) in productive assets, which has increased at a brisk clip in the last eight years to $117.5 billion, investment in equities is “hot” money which can be taken out at any time.
The government is entirely at fault for allowing this situation to develop by not controlling the fiscal deficit and allowing a runaway rise in the current account deficit (CAD). The fiscal deficit could be controlled, not by curbing entitlement progammes for the poor like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), or those that put additional income and food on their plates, but by targeting subsidies aimed at farmers, the middle class or the corporate sector.
The CAD could have been lowered by coming down on the free import of gold and imposing an import duty of at least 20 per cent, by removing all subsidies on petroleum products to reduce demand, by building a competitive manufacturing base for exports and domestic consumption and by exploiting our ample coal reserves so that this essential source of power generation does not need to be imported.
The fallout of the international financial crisis in 2008 was handled very well by pumping money into the economy and letting the fiscal deficit go up.
At a time when the world’s economies either had falling growth rates or were in recession, India was sailing at a gross domestic product (GDP) growth of eight per cent. The momentum carried us through for another couple of years, but then when the slowdown started, instead of tightening our belts we let the fiscal deficit and the CAD bloat.
There are no easy choices, but emphasis can vary on which section should take the brunt of the measures. The talk in the media and amongst analysts is that the entitlement programmes of the poor should take the hit. Despite problems of poor implementation in parts, and of leakages between funds released and those that reach the people they are meant for, these entitlement measures promise hundreds of millions a better life and should not be stopped. This is very different from subsidies given to other sections.
The subsidy and short billing because of power theft is the main reason for the fiscal deficit and the collapse of state power distribution companies. No reliable estimates are available of the loss since the subsidies are granted by each state but are likely to be above `1 trillion (or lakh crore). In agriculture, it leads to power guzzling pumpsets, wastage of water and lowering of the water table to unsustainable levels. Similarly, the Energy and Resources Institute (Teri) estimates the subsidy on liquefied petroleum gas (LPG) for the middle class was over `20,000 crore in 2011, but with the depreciating rupee and the rising oil prices due to the crisis in Syria the subsidy would be much higher now. Diesel had a subsidy of nearly `35,000 crore in 2011, but for the same reason would be much more now.
The subsidies that are never talked about are those given to the corporate sector. Among the Budget documents is one called “Revenue foregone under the Central Tax System”. The measures include special tax rates, exemptions, deductions, rebates, deferrals and credits collectively called “tax preferences” and the document notes that “such preferences can also be viewed as an indirect subsidy to preferred taxpayers.” The total revenue foregone in 2012-13 was `5.74 trillion, more than the entire fiscal deficit of `5.42 trillion.
According to the the Budget document “Revenue foregone under the Central Tax System”, the break-up of the revenue foregone to the corporate sector in 2012-13 was `2.06 trillion for excise duty; `2.54 trillion foregone and lost as customs duty; subsidy for corporate income-tax was `0.68 trillion, subsidy for personal income-tax was `0.45 trillion. While companies are meant to pay a statutory tax rate of 32.45 per cent, companies with profits of `500 crore and above paid an effective tax rate of just 21.7 per cent. Moreover, a major loss was because of accelerated depreciation amounting to `37,800 crore. The highest customs duty foregone was for gold and diamonds — `61,035 crore or over 20 per cent of the customs duty foregone.
From all this it is not difficult to see who the major subsidies are aimed at.

The writer is a Mumbai-based freelance journalist