Budget 2012-13: Class bias revealed, again

My article on Union Budget 2012-13, which appeared in Asian Age, dated 18 March 2012.

Read original here... or text below...

A widely heard comment on Budget 2012-13 was that it has given increased attention to the social sectors. That, clearly, is a claim overstated. Further, the meagre rise in social sector expenditure has come at a cost; the expenditure on crucial economic sectors has been cut.

To understand the budget better, it is important to understand its broad fiscal contours. Given his government’s misplaced commitment to reduce budget deficits, Pranab Mukherjee had some medium-term fiscal targets to meet. He had to reduce his revenue deficit from 4.4 per cent in 2011-12 to 2 per cent in 2014-15. His fiscal deficit had to decline from 5.9 per cent in 2011-12 to 3.9 per cent in 2014-15. At the same time, his government is an utter failure in revenue generation, particularly from the corporates. As share of GDP, his gross tax revenue is set to rise from 10.1 per cent in 2011-12 to just 10.6 per cent in 2012-13, and further to 11.7 per cent in 2014-15.

Thus, Mukherjee was stuck between two dogmas, both of which mark the political economy of his government. He had to cut deficits to please international investors, even as he was unable to tax the holy corporate cows enough to be able to follow a revenue-led deficit-reduction path. Mukherjee, then, had to cut expenditure somewhere.

Mukherjee has decided to go slow on raising revenue expenditures (RE). If the RE grew at 11.6 per cent between 2010-11 and 2011-12, it is to grow at a slower rate of 10.7 per cent between 2011-12 and 2012-13. Within the slowly growing RE, which is split into “Social Services” and “Economic Services”, Mukherjee has shuffled his priority items. Between 2010-11 and 2011-12 (RE), the spending on social services had sharply declined by -14.3 per cent, or Rs 16,559 crore. In this budget, Mukherjee has reversed the trend by increasing the spending on social services by Rs 19,603 crores, or 19.7 per cent. Thus, if we compare 2010-11 and 2012-13, the nominal spending on social services rises by a meagre Rs 3,044 crores, or just 2.6 per cent. In real terms, this is stagnation.

At the same time, spending on economic services has hardly risen between 2011-12 and 2012-13; the percentage rise is only 0.6 per cent, or Rs 2,419 crore. Within economic services, the spending on “crop husbandry” has fallen in absolute terms by -9.5 per cent. The spending on rural employment had fallen in absolute terms by Rs 4,840 crore between 2010-11 and 2011-12. Mukherjee has raised this expenditure by just Rs 2000 crore between 2011-12 and 2012-13. Thus, there is a fall in net spending on rural employment by Rs 2,840 crore between 2010-11 and 2012-13.

If we dissect this pattern further, the reason for the fall in growth of revenue expenditure is a sharp cutdown of major subsidies. Major subsidies are to absolutely fall by a whopping Rs 28,949 crore between 2011-12 and 2012-13. Fertiliser subsidies are to see the sharpest cut of Rs 6,225 crore, while food subsidies are budgeted higher by a meagre Rs 2,177 crore. Within both food and fertiliser subsidies, it is rather outrageous that the Budget is pinning hopes on the Aadhaar project, which stands thoroughly discredited today.

Let us take the Aadhaar project. Consensus is growing that the introduction of Aadhaar in social sector schemes has long-term implications to their inclusiveness. It is becoming clear that Aadhaar is being used by the government to hasten the dismantling of the public distribution system (PDS), and replace it with food coupons and direct cash transfer schemes. While the real challenge in PDS is to expand its coverage to newer sections and universalise it, Aadhaar is showcased as an intervention that would actually make PDS as narrowly targeted as possible.

Further, the legal basis of Aadhaar scheme itself is in doubt, with the Standing Committee of the Parliament recently rejecting the UID Bill. This Committee report had torn apart the faith placed on biometrics to prove the unique identity of individuals. It had noted that “the scheme is full of uncertainty in technology” and is built upon “untested, unreliable technology”. The report concluded that, given the limitations of biometrics, “it is unlikely that the proposed objectives of the UID scheme could be achieved”. However, in gross disregard to the sanctity of Parliamentary ethics, Mukherjee has announced that “a public distribution system network is being created using the Aadhaar platform”.

As mentioned earlier, the deficit reduction strategy in the Budget is flawed primarily because the process is expenditure-led and not revenue-led. The interest shown by the Budget in cutting subsidies and deficits is hardly to be seen in collecting revenues/taxes. Between 2009-10 and 2010-11, the total revenue foregone of the government (by way of tax exemptions) was 4.59 lakh crore. Between 2010-11 and 2011-12, another Rs 69,727 crore had been added to this uncollected revenue; the total revenue foregone in 2011-12 stood at Rs 5.29 lakh crore. Out of this, Rs 51,292 crore was taxes foregone through corporate tax.

The mantra of inclusion repeated in the budget is just rhetoric. The budget clearly aims at withdrawing the state further from public provisioning to the poor, and leaving them in the lurch at the marketplace. While doing so, it goes the extra mile to ensure that corporate honchos are in good humour. Social scientists call this “class bias”.


(There were two errors in the original article in Asian Age, which have been corrected here.)

Adieu, Rahul...

So, finally, Rahul Dravid is going. Cricket, specially test cricket, will never be the same again. 

While I have always been a fan of Sachin Tendulkar, I have never been a "great" fan of his. I think that Tendulkar is many times over-rated in his abilities to take his team to victory, which is what a team sport is all about. The media has always been overly kind to him, a previlege not always extended to many others. And they were always terribly unkind to Rahul. He was always considered second-down to Sachin, who could never make a mistake, and who could never be dropped. Yet, Sachin has won much lesser number of matches for India than Rahul. But who cares? Its an unkind world to all, but to Sachin (even Raju Bharatan, one of my favourite circket writers, wrote a piece in Sportstar called, "The Sachin Fact and the Laxman Factor"). But the same Bharatan was forced to write in the mid-2000s: "I have seen so many incredible things happen in Indian cricket, on my 50-year cricket beat, that I would hate to see, for some obscure reason, Rahul Dravid's being subjected to pernicious pressure at this advanced stage in his career." It was again the same Bharatan, who wrote after Rahul's historic partnership with Laxman against Australia thus:

The unvarnished truth about Eden, of course, is that Laxman batted Australia out of that second Test in a style that lent substance to Rahul Dravid's `smack-on' 180. Rahul here played better than he had ever done before. Still Dravid played with fire when, upon reaching his 100, he let his upheld bat do the baiting - in a straight helmet-raised confrontation with the media in India. In that `pay-off' moment, Rahul sowed the wind. The whirlwind never is far off, with the media, in India, always in an air-conditioned position of comfort! What Sourav and Rahul must never forget is that this `sudden-death' game is, at all times, a stern reminder of James Shirley's famous line of thought: ``The glories of our blood and state, Are shadows, not substantial things; There is no armour against fate: Death lays his icy hand on kings.''

I have been a great fan of Dravid, right from his first Lords test in 1996 (followed by Trent Bridge). I was actually upset with Sourav for having walked away with all the praises for that century, depriving Dravid of all that he deserved. I loved the way the man put his foot forward. I loved the way he put his bat in front and hit the ball on the middle. I loved his perseverance. I loved his method; textbook batting? I never cared! It was always a treat to watch. He was never a run-getter, but always a run-gatherer. As the famous Siddhuism goes, "Confidence of Dravid grows in the garden of patience". As Vijay Lokapally writes: 

He was a connoisseur's delight. His footwork was assured and unrivalled, shoulder, elbow and head, all in flawless position. Old-timers tell us he was quite like the three Vijays — Merchant, Hazare and Manjrekar — technically accomplished and blessed with tremendous character and temperament. He was a picture of what some former greats professed — correct batsmanship. Modern cricket did not see a better batsman who knew which ball to leave.

The Amul ad on Rahul captures the point so well. 

My problem with Sourav got worse when Dravid went over-generous and said: "on the off-side, there is god and then Sourav". Sourav? Who ran scared of any rising ball, and who only had a fantastic timing in hitting the ball on the off-side, apart from being a fiery captain?

Four years down his debut, Rahul was the vice-captain in 2000. When Sourav was the skipper, Rahul always played a loyal second fiddle. And whenever he took over from Sourav in between, he showed his class as a skipper: he attracted praise for "the air and flair with which this solo-looking performer conducted the orchestra, each time he took over the baton from Sourav", as Bharatan put it. He effortlessly won tests for India in Multan against Pakistan, Mumbai against Australia and so on. Bharatan wrote in Sportstar that, "each time Rahul led India, he brought a rare mental toughness to the task. Without turning the game into a slanging match" (as did Sourav). But yes, his team let him down at the World Cup. His own form suffered. He was a defeated man! He still, probably, hasnt recovered. 

Having said all this, let me rest my case more in "reason". I like all three, Sachin, Rahul and Laxman, though I love only Rahul. Dileep Premachandran once wrote that Indian cricket was blessed with the famous three: Sachin, the genius; Rahul, the builder; and Laxman, the artist..."united by a common purpose". I dont disagree. But I love Rahul, of the three!

I remember Faking News had an old posting, which said: "If Cricket is a religion, it's polytheistic, and Rahul Dravid is a God."

Adieu, Rahul...We will miss you...

On the "Economics" of Nurses' Strike

My friend, V. Santhakumar, has chosen to discuss the economics of the ongoing nurses' agitation in Kerala in his article in Mathrubhumi dated 27-02-2012.

Read it here...

Here is my reply to him. Santhakumar being a neo-classical economist, though often seen as claiming himself to be a new institutional economist, my reply to him requires some excursion into the literature within neo-classical economics itself.

I am sure Santhakumar is aware of the great neo-classical economist Robert Solow's booklet titled "Labour Market as a Social Institution"; his three lectures on the Royer Lecture Series at the University of California in 1989. Here, you have a neo-classical economist pointing out for the first time that the labour market is not like any other market for commodities. He says that economists have for long ignored matters of "fairness" and "social status" as factors influencing labour market outcomes. Solow is careful to see that his argument is not subversive to mainstream economic theory; yet, he posed some important questions that neo-classical economists are yet to answer.

Fairness is extremely important in the labour market, in this text of Solow. It is akin to the idea of "just price" in economics. Here, workers feel that they are underpaid and that they deserve a particular level of earnings. This is because a labour market is located in a social context; as he notes: "employment and the income it brings are not simply equivalent to a set of bundles of consumer goods".

I just cite this text to bring to Santhakumar's attention the movement of neo-classical economists towards the idea of "just price" and "fairness". This provides, also, answers to why underbidding may not occur even in the midst of unemployment; a good social security policy may only exacerbate the lack of underbidding, and that is indeed a good thing. That is also why you see "discouraged worker effect" in action in Kerala even as it might not operate in other States of India; the presence of a good social security system may be an answer.

Having placed the importance of fairness of wage on the table, let us now go on to see the neo-classical literature on the market for nurses. The whole literature on the "market for nurses" in the United States (US) has focused on the importance of monopsony, or oligopsony. That is, the lack of buyers/employers. Further, the fact that nurses are often married and are women constrains mobility and this adds to the problem of monopsony/oligopsony. This substantial monopsony power of hospitals (employers) in the short run, and even over a longer time horizon, signifies significant market power. Daniel Sullivan, summarising the results of studies in a paper, notes that the inverse elasticity of supply over one-year periods is 0.79 and over three-year periods is 0.26 (Daniel Sullivan, "Monopsony Power in the Market for Nurses."Journal of Law and Economics 32, no. 2 part 2 (1989)). In Sullivan's own argument, if a hospital cuts wages by 1 percent, it would lose only about 1.3 percent of its nurses in the short run, showing substantial power over wages for hospitals. 

Sullivan then argues, "even if the inverse elasticity over longer periods of time were somewhat lower than that found above for three-year changes, a reasonable conjecture would be that a cost-minimizing hospital would find it in its interest to pay wages considerably below its nurses' marginal product." This mark-down of wages can be expected to stabilise at roughly 10 per cent below their marginal product. This deficit in wages does not go beyond 10 per cent (thankfully!) because the long-run elasticity is lower than the short-run elasticity; if wages fall by 1 per cent, over three years (the long run), 4 per cent of the nurses may leave. 

So, we have two points to make from neo-classical theory itself: (a) the monopsony power of hospitals over nurses is very high; and (b) given the supply of nurses, this monopsony power allows hospitals to pay nurses far below their marginal product. 

There are two additional issues. First, what complicates this state of affairs is that multi-speciality hospitals everywhere are known to collude, or set wages in consultation with each other. That is why Sullivan remarks that "the antitrust enforcement authorities might want to reconsider their rather tolerant attitude toward attempted collusion by hospital administrators". Secondly, the other factor that may be made variable here is the presence of unions that push wages up to, or above, the marginal product. 

These two appear to be feasible solutions globally itself: 

(a) public regulation of private hospitals in terms of wages paid. Minimum wages is one way of doing it, and here minimum wages are not like NREGS wages but a socially acceptable wage floor that is "fair" and "just" and what nurses feel they deserve, both on an absolute scale and on a relative scale. 

b) encouraging collective bargaining on the part of nurses. 

Santhakumar's reply to my argument would be, I assume, that no where in India, minimum wage legislations have succeeded in raising wages and employment; in this case, a quick increase in the supply of nurses or the readiness of other nurses to work at lower wages (because the supply of nurses is large) will neutralise any incentive to pay minimum wages on the part of hospitals. That is why he says: "ഇക്കാര്യത്തില്‍ സമരം കൊണ്ടോ അല്ലെങ്കില്‍ സര്‍ക്കാര്‍ നടപ്പിലാക്കുന്ന ഒരു മിനിമം വേതന നിയമം കൊണ്ടോ എത്ര മാത്രം ഗുണമുണ്ടാകും എന്ന കാര്യം നാം വിവേകപൂര്‍വ്വം ചിന്തിക്കേണ്ടതുണ്ട്."

My reply would be two-fold. First, the question of effectiveness of minimum wage legislations arises when nurses would actually underbid. Such underbidding is also dependent on whether the nurses' movement achieves strength at the national level. Look at Maharashtra; there is a massive nurses' movement developing slowly, though Congress politicians are trying their best to collude with hospital authorities and kill the struggles. If these struggles develop at the national level, the possibility of underbidding may diminish. In other words, if wages of nurses converge nationally, as part of a progressive wage policy, across the country. Lets fight for that.

Secondly, unlike Santhakumar, I do not believe that there is anything wrong in basing a development strategy primarily on decent or fair wages. The reason why minimum wages legislations are a failure is not because they are instrinsically bad, but its implementation by the powers-that-be has been terrible. 

With that, I unburden myself of that neo-classical hat! Phew!