Mains Paper 3: Economy
Prelims level: Fiscal Deficit
Mains level: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. Government Budgeting.
• The government has adduced no reasons for the proposed privatisation of several public sector assets other than to generate resources for its spending.
• Nobody buys public sector assets by skimping on consumption. Nor does one buy such assets by skimping on investment: Current investment expenditure depends on decisions taken in the past and is more or less pre-determined.
• It is only investment decisions that are taken today for fructification tomorrow that may be scaled down by such a purchase; and if investment decisions taken today are scaled-down, then it is an authentic case of “crowding out” and such a strategy should be avoided anyway.
• Selling public sector assets therefore does not “release” any resources from private use for government spending. The resources the government obtains by spending the sale proceeds of public assets are none other than the resources lying idle in the economy.
• Output that could have been produced by utilising idle capacity and unemployed labour, but is not produced because of lack of demand, now gets produced as demand gets generated by government spending financed by the sale of public assets.
• One can visualise the entire process as follows. The government borrows say Rs 100 from banks, uses it for spending, and then sells public assets worth Rs 100 to raise this money and return it to the banks, so that its net indebtedness does not go up.
Not different from fiscal deficit:
• It follows that financing government spending by selling public sector assets is basically no different from a fiscal deficit. In the latter case, the government puts its bonds — directly, or indirectly via banks — in private hands; in the former case, the government puts its equity (held in public sector assets) in private hands.
• The only difference between a fiscal deficit and selling public assets lies in the nature of the government paper that is handed to the private sector, but the macroeconomic consequences of a fiscal deficit on the economy are no different from those of selling public assets.
• Finance capital, and institutions like the IMF, do not recognise this fact, and treat the sale of public assets on a different footing from a fiscal deficit, for ideological — not economic — reasons, because they ideologically favour a dismantling of the public sector.
• In a situation of demand-constraints, where unutilised capacity and unemployed workers exist aplenty, if an appropriate monetary policy is pursued, it can have no adverse effects whatsoever, except one: It gratuitously increases wealth inequality in society.
• Abstracting from foreign transactions for simplicity, a fiscal deficit generates an excess of private savings over private investment exactly equal to itself.
• The government expenditure financed by the fiscal deficit creates additional aggregate demand that increases output and incomes until the additional savings generated out of such incomes exactly match the fiscal deficit (with private investment given).
• These additional savings accrue to the savers without their having to reduce their consumption, compared to the initial situation (that is, prior to government expenditure increase).
• Since savings represent additions to wealth, this amounts to putting extra wealth gratuitously into the hands of the rich (who are primarily the savers).
• If the same government expenditure was financed by taxation, no matter who was taxed, then there would be no addition to private wealth, and hence no increase in wealth inequality.
• Avoiding a fiscal deficit is important for this reason, which is why tax-financed government expenditure should always be preferred to fiscal-deficit-financed government expenditure, even when such taxation does not reduce either private consumption or private investment compared to the initial situation.
Impact of selling public assets:
• Selling public assets, which is analogous to a fiscal deficit, also increases wealth inequality; and it does so by putting into private hands not just wealth in the form of claims on the government (as a fiscal deficit does), but in the form of public assets, and that too at prices well below the capitalised value of earnings (for otherwise private buyers would not accept them).
• Instead of taxing away the additional wealth that a fiscal deficit puts into private hands, this strategy actually puts public assets into private hands.
• This increases wealth inequality for two reasons: First, it does so exactly as a fiscal deficit does; and second, the public asset it puts in private hands is under-priced.
• As a bulwark against multinational corporations’ propensity to arm-twist a third world country; in making loans available (via public sector banks) to a much wider spectrum of the population than would have occurred otherwise (which had made the Green Revolution possible); and so on. But, even purely as a fiscal strategy, the privatisation of public assets for financing government
expenditure, is utterly inexcusable.
• It betrays either poor economics or a determination to increase wealth inequality.
Alternatives in front of government:
• The obvious one is wealth taxation. Taxing away the private wealth additionally and gratuitously created by a fiscal deficit leaves private wealth inequality unchanged at its initial level; it does not exacerbate it. Nobody, therefore, should object to it, or even to what comes close to it, namely a larger taxation of profits.
• If the government is unwilling to impose higher wealth or profit taxes, it can raise GST rates on several luxury goods, after consultation with the states.
• Assuming that working people consume what they earn — and abstracting from foreign transactions — such an increase in indirect taxation matched by an equivalent increase in government expenditure, will still leave post-tax profits in real terms unchanged, while increasing employment and output in the economy.
• Selling public assets to finance government spending is thus both undesirable and unnecessary.
• “The government has no business being in business”, The Government needs to be reminded that it is a government that cannot manage the country’s finances that cannot generate jobs that is unable to ensure inclusive growth, that has to sell the nation’s carefully built-up assets to survive that has no business being in government.
• Disinvestment Process supposed to improve efficiency and performances of PSU, provide better service to customers, and do away political interference and raise adequate resources for government to meet it diverse needs.
Q.1) Consider the following statements:
1. More than half of the faculty positions reserved for the OBCs in Central institutions of higher education are vacant.
2. Less than 1% of the 1,062 professors in Central universities are from the ST communities.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Q.1) Privatising public assets is poor economics, impetus to greater wealth inequality. Critically comment.