In his eighth budget, expect a mix of an economist obsessed with numbers and a politician obsessed with an ambition...
Two weeks ago, a close friend of P Chidambaram’s family laidout the political future of the finance minister. “By the end of 2013, RahulGandhi will indicate that he wants a role like his mother’s, Sonia, whichepitomises power without responsibility. With Manmohan Singh out of theequation, Chidambaram will emerge as the consensus PM candidate for UPA-III in2014.”
Although this scenario seems a bit far-fetched at themoment, the FM does harbour such dreams. In private talks, time and again, hehas told friends and journalists that he is a better ‘reformer’ than ManmohanSingh, and that he can lead the country better than any other Congress leader.It is in this context that Chidambaram is going to present his eighth budget.
What, then, should we expect from this budget? He has beenhailed as a great economic reformer and, yet, he has taken some of the worsteconomic measures. He has produced a ‘dream budget’ (1997) and also severalnightmarish ones (for example, 2008).
We present a report card of what Chidambaram has done in hispast seven budgets and, therefore, what to expect from budget 2013.
Tax cuts versus new taxes
One has to look at only his 1997 budget to be convinced howChidambaram has made life easy for the middle-class and business communities.Later, he claimed in the 2008 budget that his policies to lower taxestranslated into higher government revenues.
A recent article in the Economic Times concluded that low-and middle-income earners and entry-level employees have been the “biggest beneficiaries”of the tax cuts in the past 10 years. It added that the “effective tax rate ofa person earning Rs 3,00,000 a year has dropped from 14.1% in 2003-04 to 3.4%now….” In these ten years, Chidambaramhas presented the budget five times and, hence, can claim most of the creditfor this dramatic turnaround in the tax rates.
But, in the same breath, the FM has forced existingtaxpayers to pay more in other ways. One of them is service tax, which has beenexpanded to several sub-sectors and whose rate has gone up steeply from 5% in1996 to almost 12.5%. In addition, even as the FM has dropped some rates, hehas imposed new taxes on those to whom the reliefs were given.
Prediction:Chidambaram has publicly said that he will follow a stable tax regime thistime; so there will be no hikes in the existing rates. But since he has toshore up revenues, he may plug several loopholes, do away with exemptions, andintroduce new taxes as he has done in the past.
Pro-business versus anti-businessmen
Not many people realise this, but the FM has been at theforefront to defend corrupt businessmen. Not many people remember this, but hewas the one who announced the much-controversial voluntary disclosure of incomescheme (VDIS) in budget 1997. In one stroke, it allowed tax-evadingentrepreneurs to convert their huge stash of black money into white and, thattoo, with the government’s blessings. In fact, almost everyone criticised thisscheme.
Chidambaram was accused of doing the same in the recent pastfor his role in the 2G spectrum scam, and his defence of the PM’s allocation ofcoal blocks (2004-08). It was the same FM, who allowed firms that were allotted2G spectrum in 2008 at the cheap rates of 2001 to sell off their stakes toforeign investors at a huge premium. And it was Chidambaram who publiclyclaimed that there was absolutely no loss to the exchequer, contrary to CAG’sconclusions, due to the coal allocation policy.
His role in the postponement of general anti-avoidance rules(GAAR) announced by his immediate predecessor, Pranab Mukherji, in budget 2012to plug tax loopholes in cross-border mergers (like the Vodafone buyout ofHutch-Essar mobile operations) has also been questionable. While most foreigninvestors have welcomed Chidambaram’s delaying tactics, most corporateobservers have said that this only allows foreigners to consistently evadelegitimate taxes.
But it has to be conceded that Chidambaram has tightened thetax noose around businessmen. A sterling example of this aspect of his was themove to introduce minimum alternate tax (MAT) in budget 1996. Even the uppermiddle-class and rich people have not escaped the FM’s hawk eyes. In 1997, heforced them to compulsorily fall into the tax brackets.
Prediction: Since today corruption and black money havebecome huge issues, the FM is unlikely to give any sops to businessmen. If atall, he may slightly tighten the screws on them.
Reforms versus welfare schemes
There can be no doubts that Chidambaram has been as good areformer as Manmohan Singh, if not better. The height of his pro-market imagewas the 1997 budget, in which he replaced the draconian Foreign ExchangeRegulation Act (FERA) with a much milder Foreign Exchange Management Act(FEMA), de-reserved several sectors meant for the small scale firms, andrationalised the tax rates.
Then, in 2004, he hiked the foreign direct investment (FDI)caps in telecom, aviation and insurance. The next year he gave a huge boost tothe microfinance sector which, unfortunately, led to huge scandals.
He has talked of cutting subsidies, especially fuel andfertilizers, and targeting them to poor families to reduce corruption. In the1996 budget, he said that he would “restructure” the public distribution systemto achieve these objectives. In 2004, he introduced a pilot project to issuefood stamps that would enable the real beneficiaries to buy food from theration shops. And, in 2005, he converted the food-for-work programme into thenational rural employment guarantee scheme (NREGS).
Sadly, Chidambaram is also known for some of the mostaudacious welfare schemes, which had no economic, and only political, logic.This was clear from the election budget speech in 2008. In the last UPA-Ibudget before the 2009 general elections the FM announced a grand loan waiverscheme for farmers, which cost the banks, mostly state-owned, Rs 60,000 crore.
During his 2004-08 stint as the FM, Chidambaram focused onwelfare schemes as UPA-I talked about inclusive growth after NDA’s defeat in2004 despite its ‘Shining India’ campaign. In his 2006 budget speech, the FMsaid the bulk of the resources must go to the UPA government’s eight flagshipwelfare programmes.
Prediction: Since this too is the last budget before the2014 elections, like in 2008, expect several welfare sops like Food SecurityBill and increase in expenditure on NREGS. But since most reforms have alreadybeen announced in the past few months, expect only a few customary measureslike the implementation of Goods & Services Act, which requires a change inthe constitution.
In conclusion, one can only say that like we have seen inthe past, do not expect the real Chidambaram to stand up as he presents hiseighth budget this February. What you will see is a mix of an economist,obsessed with numbers, and a politician, who wants his party to regain power.
