This blog is authored by Nargees Basheer, a fourth-year law student pursuing BA.LLB (Hons.) from The National University of Advanced Legal Studies (NUALS), Kochi.
Budget 2021-22 has unfolded many questions of curiosity. It has been commented to be ‘reformist’ due to the wide array of changes it has proposed to make to the economic structure of the country. However, discussions and debates have taken center stage to determine whether the budget, which provides much scope for liberalization and privatization, is best suited to the current economic scenario. In this context, it is fitting to re-examine the contours of socialism or ‘welfare state socialism,’ as is envisaged by the Constitution of India. Does India truly uphold the ideals of socialism as envisaged by the 42nd Amendment to the Constitution? Moreover, is such socialism the need of the hour? This article intends to examine the answers to these questions.
Socialism according to the Indian Constitution
The Preamble to the Indian Constitution declares India to be ‘socialist’ inter alia. In this context, it is understood as the State being in control of the ‘commanding heights of the economy’ to ensure the welfare of its people. This would mean tackling poverty, income inequality, unemployment, etc. by the active intervention of the State. What was intended to be developed in India was a system of democratic socialism that would help uplift the society and economy through welfare measures in a way that would not result in the evils of state capitalism and bureaucratic tyranny. In simpler words, an all-powerful state was not desirable. The government has, on the face of it, upheld socialist principles by setting up public sector enterprises in major sectors, devising welfare schemes and developing regulatory regimes. Whether the socialist pattern has been successful in the past forty-five years is questionable and will have to be answered in the negative in light of the impending doom of corruption and bureaucratic inefficiency that runs through the system.
The major reforms proposed by Budget 2021-22
The Budget seeks to make a lot of changes among which few, primarily pertaining to major economic policy changes, may be discussed. The Finance Minister has proposed that there will be huge divestments as a part of which two public sector banks (PSBs) and one general insurance company will be divested. Though this news has been received well by the stock market, bank unions have opposed the decision. It is contended by them that “privatising them means handing over the people’s money to private hands with vested interests.”
There have been mixed reviews regarding the positive effects of disinvestment of PSUs. While some argue that privatization improves labor productivity and even profitability of PSU's, others disagree and opine that public and private sector firms perform the same when subject to competition and better regulation. It is true that PSBs have not been performing well in India. However, these banks are instrumental in implementing government schemes and in implementing measure to provide liquidity and fiscal stimulus during the pandemic. Further, one of the major issues surrounding PSBs is the high number of Non-Performing Assets (NPAs). It is argued that privatization might not do much to solve this issue unless there is a change in managerial capacity. These NPAs were created in pursuance of the implementation of numerous welfare schemes whilst also competing with private sector banks in various financial parameters. It is also argued that PSBs are a source of support during times of crises since it is backed by the government. It could be at the cost of the welfare schemes and making available banking for the poor that PSBs are earmarked to be divested.
Another major change proposed is an increase of 35% in capital expenditure of the government with a special focus on infrastructure development. Even though it is expected that this will generate employment opportunities, such a positive outcome will depend on the efficiency with which the budget is implemented. In this regard, it may also be noted that the private sector needs to be incentivized for the infrastructural development programmes to be successful. An implication of increased capital expenditure is that the fiscal deficit is expected to increase. It is expected to go up to 6.8% of the GDP of 2021-22. This is not advisable especially when the Fiscal Responsibility and Budget Management (FRBM) Act prescribes a maximum limit of 3%. An implication of this is that Global Rating Agencies will consider downgrading India’s credit rating.
Investment in infrastructure has been proposed in the areas of education and healthcare whereby this increase in fiscal deficit is argued to be justified. Regardless, an increase in fiscal deficit is believed to lead to a rise in inflation.
Though in the area of agriculture, this budget has done justice in terms of infrastructural development, there has been a 13% drop in the allocation for PM Kisan Scheme which provides income support to farmers. The budget allocation for the Department of Agriculture, Co-operation and Farmers’ Welfare has also been slashed.
Allocation for education is not very impressive. There has been allocation for the debated New Education Policy but nothing significant for the educational sector especially when there exists a digital divide and the State may be required to step in to equip students with internet and devices. With respect to healthcare, when the budget focused on mitigating the pandemic, it fell short of allocating for the major public health schemes.
Is State intervention the need of the hour?
A recurring trend that may be observed in this budget is that it can be considered a gamble on providing direct benefits to the poor and unemployed. It is argued that direct benefits will lead to an increase in consumption which is not desirable. This budget has attempted to build long term and permanent solutions to these issues. The intentions may have been pure but it is necessary for the budget to cater to the needs of the hour when the GDP has crippled to dismal levels in the past year. It cannot be forgotten that the pandemic has increased the income inequality in the country. This brings us back to the discussion on the need for socialist measures in India at present. Many countries across the globe have upped their interventionist schemes and even capitalist economies such as the US provided a portion of its citizens with a watered-down version of the Universal Basic Income. When viewed against this background, it seems that the State needs to take a step back and adopt measures more in consonance with the welfare objective of the Constitution. The economy needs to be revived from the crisis of the day and it is only the State that is capable of undertaking such a task without any vested interests.
Apart from the issues brought about by the pandemic, the success of the budget also largely depends on how efficiently it may be implemented. On paper, it seems to have the ability to produce job opportunities and the increase in capital expenditure may be indicative of economic development. Regardless, issues such as an increase in fiscal deficit beyond the recommended levels and the efficiency in the actual implementation of the budget whereby jobs may be created are also to be taken into consideration. Privatisation might be a viable solution in an economy where there are takers for what the government is offering. However, in India where the book value and market value of PSBs differ largely, it is to be seen whether private takers will be as enthusiastic as the government. A solution that may be suggested is to revamp the PSBs to function more efficiently and to tackle the issues that come with bureaucracy. This may be a better solution than the short term benefits that accrue from cleaning the books of the enterprises by creating a ‘bad bank’ or seeking help from private players.
It may seem that the country needs to tilt more in favour of socialism as envisaged by the constitution in a time like this. As discussed, socialism has not been completely successful when one traces Indian history. To improve India’s state effectiveness, it is believed that it must further reduce its scope of intervention and instead build up the capability of the State. It does not seem like Indian socialism is ready to retire from the scene yet, as its people are in need of welfare measures on behalf of the government to help them rise to a standard of living that will equip them to contribute to economic growth.