Governance of the Indian Economy under UPA Rule-3: The Happy Middle Class and the Salaried Members in the Government Sector

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Over last two decades, our middle class cheered up with a “feel good” factor as they now had more choices than ever before. People engaged in the service sector also saw a  “Shining India” and it was the sector that drove the growth process. The public servants had a golden era as they saw gigantic jumps in their payments due to the recommendations of the different Pay Commissions in the era of liberalisations.

There is something very interesting to note about these Pay Commissions constituted in India so far. The First Pay Commission 1946 recommended an assurance of minimum wage for government employees at lowest ranks. The subsequent pay commissions 2nd, 3rd and 4th  (1987)also tried to rationalise the pay scale of the government employees as the  pay of these employees were lower than what their counterparts would receive in the private sector.

Then came the year 1991 Balance of Payment crisis that is still considered as a milestone in the history of economic crises in India. The situation was so worse that the then Prime Minister Mr. Chandrasekhar with advise from his supporting alliance Congress Party under the leadership of Shri PV Narasimha Rao, had to pledge the entire gold reserve of the country in order to overcome the crisis. The nationalist sentiments over pledging of gold outside the country created a huge unpopularity for the Chandrasekhar Singh government and a month later some gold was actually shifted to outside the country, Congress withdrew its support from the Chandrasekhar Singh Government and  Mr Narasimha Rao took over the regime in June 1991 introducing Dr. Manmohan Singh (the present prime minister of the country) as the Finance Minister who carried out the process of economic reforms and the structural adjustment programmes. It is further interesting to note that India could actually mobilise around $ 600 million (approximately around Rs 17 billion at that time) by pledging a total 67 tonnes of country’s gold (47 tonnes to Bank of England and 20 tonnes to Union  Bank of Switzerland). Subsequently the issues of fiscal prudence and need to reduce deficits etc emerged in the public discourse.

But hardly three years after the balance of payment crisis was faced, the Fifth Pay Commission gave its recommendations for a massive salary hike for the central government employees along with a proposal for reduction in the workforce in the government sector. The implementation of the Fifth Pay Commission for the central government employees followed by the state governments for their own employees actually increased the financial burden for the exchequer by a tune of Rs 599.48 billion (more than 30 times the money collected from gold pledging in 1991). Interestingly, this happened when Dr. Manmohan Singh, the fiscally prudent finance minister of that time was supposedly trying to correct the economic anomalies with his experiments of economic reforms. After the fall of Congress government and the subsequent regimes of United Front and the National Democratic Alliances, Congress again came to power in the form of United Progressive Alliance (UPA) and Dr. Manmohan Singh as the Prime Minister in the new conglomeration.  Within the first two years of the UPA regime, the Sixth Pay Commission was announced that imposed an extra financial burden of around Rs 200 billion on the exchequer. It is worthwhile to note that the same UPA government had shown its commitment to the Fiscal Responsibility and Budget Management Act with annual and overall targets set for deficit control. Now the Seventh Finance Commission has also been announced by the government on 25th September 2013 to be implemented from 2016 onwards. The estimated financial burden is yet to be asserted.

Figure-1

Pay COmmissions

The point what we are trying to make here that the so called ‘feel good’ factor about the growth of the economy have been experienced by only a few of the work force engaged in the public sector and in the organised private sector especially the services sector. To digress for a moment from the discussion, a rough estimate may give a glimpse of what the amount of burden of such extent would mean for the economy.

Figure-2

salaried class aspirations

Assuming that there is a flat rate of income taxation of around 30 per cent on all government employees (which never is the case with so many tax exemptions and schemes to evade tax by the government employees, and most of it collected as tax would go back to the same class), an additional increase in the wage bill of government employees to the tune of around Rs 600 billion would eventually mean that Rs 400 billion would be collected from the people who are not in the government sector. Assuming an approximate of one third of the population in the labour force, an additional increase in the salaries of the privileged class would account for around Rs 1600-Rs 1700 per year per worker who have actually paid from their own pocket every year to finance the salary hike of the government employees. So, in a sense, the expansion of the fortune base of the privileged class under UPA rule has actually been paid by the common people.

Figure-3

Who pays for salary hike

Notwithstanding the so called spectacular growth in GDP and notwithstanding the increase in revenue receipts, tax collections and increased tax GDP ratio as claimed by the UPA regime, the tax expenditures on account of concessions and exemptions in taxes to be collected from the privileged sections have gone up under the UPA rule. Between 2005-06 and 2012-13, the total tax revenue foregone under the central tax system only went up from Rs 2.44 lakh crores to Rs. 5.75 crores. This amounts to an almost 2.4 times increase in total tax revenue foregone. But, the larger proportionate increase had been in case of personal income tax and the excise duties. While the exemptions in personal income tax accrue to the middle class on account of various tax incentives for investment and similar purposes such as housing loans, fixed deposits etc., the exemptions in excise and customs duties are largely on account of consumption of goods used largely by the same middle class only.

 

Revenue Foregone in 2005-06

Revenue Foregone in 2012-13

Increase in tax revenue foregone in 2012-13 as multiple of 2005-06

Corporate income tax

34618

68008

2.0

Personal income tax

13550

45464

3.4

Co-operative sector

1632

1167

0.7

Excise duty

66760

206188

3.1

Customs duty

127730

253967

2.0

Total

244290

574794

2.4

Source: Union Budget documents, various years

Figure-4

Increase in Tax RevenueForegone

In a sense, all these discussions hardly show anything if we do not compare these with how the government have actually been able to maintain its growth of GDP.  The following points need worth mention

(a)    The growth in GDP has not been uniform across different sectors of growth

(b)   Manmohan Singh’s GDP growth had grossly neglected the agricultural sector

(c)    It is largely the sectors like, (i) Financial, insurance, real estate and business services and (ii) trade, hotels, transport and communications that have shown an increase in the growth rate

(d)   Such increase in the growth rate of the sectors specified may be because of the increase in the income and aspirations of the salaried class as well as those workers engaged in these specific sectors.

(e)   The real beneficiaries of the tax expenditures of the government under UPA regime have not been the poor farmers purchasing a few kilograms of urea, or the poor housewives cooking on subsidised LPGas cylinders, or the poor households purchasing subsidised food grains through public distribution system or the poor students who are aspiring to get a certification from highly subsidised institutions like Jawaharlal Nehru University. Rather, it is primarily the middleclass and the corporate sector that have enjoy unprecedented amount of tax exemptions and tax expenditures.

Manmohan ghoda

 

All these discussions show the class character of the present UPA regime. It is no surprise that the UPA regime has enjoyed an uncritical acceptance for its policies that had no economic sense in 1990s and hardly have any sense in the present era.  So if as an economist, Dr Manmohan Singh is complacent about the achievements in the growth of GDP in the country and is talking of inclusiveness of his economic policies, he is actually driving a wooden horse with blind folded eyes and in reality, the is leading the economy to nowhere from where we started. Rather, the implications of these wrong economic policies have been grossly painful for the majority of the country and the masses have suffered immensely under the UPA regime. In the forthcoming section, we shall discuss the misnomer called the “emerging Giant”, as referred by some prominent people about the prospects of the Indian economy.  




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