Surprise,
Surprise !
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| Finance Minister P Chidambaram |
India’s
Finance Minister P Chidambaram is a past master of surprises and he certainly
lived up to his reputation with his Monday morning interim budget even if it
was at the cost of a smart piece of statistical jugglery.
Ignoring
MPs trying to shout him down as he read out his 17-page speech, a page shorter
than that read out by President Pranab Mukherjee in his interim budget of
2009, Chidambaram announced he had managed to squeeze Government’s
fiscal deficit to 4.6 per cent against a target of 4.8 per cent of GDP, on the back of
a successful auction of telecom airwaves and huge spending cuts. “Well below
the red line I had drawn last year,” as he glibly told Parliamentarians.
Critics
however, point out that what was left unsaid was that the Government would
roll-over the fourth quarter oil subsidy bill of around Rs 35,000 crore to the
next financial year, in a sleigh of hand described as `routine’ for the past
few years, to keep the deficit for this year under a lid. The petroleum subsidy being paid out in 2013-14 is
Rs 85,480 crore. If the Rs 35,000 crore bill which has been rolled over to the
next financial year is added, the real fuel subsidy bill would have been Rs 1,20,000 crore !
However,
at the same time the finance minister has set a tough target for his successor,
of pruning the deficit to 4.1 per cent of GDP for the next fiscal, while drastically reducing the
amount of money available as fuel subsidy. In effect, the next Government if it
tries to live up to his targets will have to run against popular opinion and cut
fuel subsidy drastically or else live beyond its means. The petroleum subsidy allocated for 2014-15 stands
at Rs 63,426.95 crore, of which Rs 35,000 crore will be spent on paying back
subsidy due this fiscal ! In reality, this will leave the Government with just
over Rs 28,000 crore to pay for the fuel subsidy for the whole financial year
or about a fourth of what Chidambaram spent in a year on this count.
Stimulus : His
and Mine
 |
| President Pranab Mukherjee |
The
finance minister’s other big announcement was of slashing of excise duty or
ex-factory taxes on automobiles by a fifth to a third, which could make cars,
motorcycles and sports utilities, cheaper. As well as duty cuts on capital and consumer
goods from 12 per cent to 10 per cent and a slashing of duty on mobile phones
from 6 to 1 per cent, if tax credit for inputs are not sought or 6 per cent
with tax credits, was hailed by India’s industrial barons as a `visionary stimulus’. The duty cuts will be
available for a short period till end-June this year, possibly because a new
full year budget will have to be presented by a new Government in June this
year.
A
number of media analysts are now gleefully pointing out that Chidambaram is
replicating what his predecessor Pranab Mukherjee, now India’s President, did
in 2009 when he cut excise by 4 per cent across the board. Uncomfortable for the
finance minister who in the past had slammed “certain decisions that we took
during the period 2009 to 2011,” (when Mukherjee was at the helm of
affairs in the finance ministry) which he felt pushed the fiscal deficit
upwards.
Both
were gifting tax-give-aways, in the hope that it would reduce prices, revive
demand and in turn bail out a faltering manufacturing sector which has been
consistently shrinking for the last eight months.
Populism : Tough to Live Down
Budgets
are always as much political statements as they are financial. Chidambaram
tried to live up to that maxim with the few sops he announced. But more than
that, he also announced sops which may prove to be financial booby-traps for
his successor. Chidambaram promised a Rs 2,600 crore interest relief for 9 lakh
students who took loans before end-March 2009, with the Government paying
interest till end-December 2013. He also promised to to let old soldiers enjoy
the benefit of a scheme which calls for `one rank, one pension’. Some 2.4
million retired defence personnel were paid pension at differing rates
depending on when they left service, creating heartburn among older
soldiers.
While
this will cost him chicken feed in this financial year (an estimated Rs 500
crore), in coming years this will be a big ticket item in the defence
expenditure budget and a source of headaches for Mandarins trying to balance books.
Right-drive
Vision
However, the minister did more than lay out fiscal booby-traps for incoming
ministers, he also laid out a long term vision for economic development with
which his right-wing opponents in the BJP may have few or no quarrels. (Of
course India’s Communist parties as well as regional parties would find this
vision absolutely unacceptable on many grounds).
Among
others, he sought reduction in fiscal deficit to 3 per cent by 2016-2017 obviously
through deep subsidy cuts; a policy to encourage foreign investment without too
many constraints; a balance in monetary and fiscal policies between price
rise-busting and economic growth, which may mean that inflation which hits the
poor more should be tolerated to let India grow faster; a slew of fiscal sector
reforms which could open up banking and finance to more domestic and foreign
investors; a stress on manufacturing and exports with state and central taxes
on all exported goods either waived or slashed and tariff walls to incentivise
domestic manufactures and most controversially - more centre-state sharing of
spending on flagship programmes like job guarantee schemes and literacy. Currently
these schemes are almost entirely under-written by the Centre. This move would
certainly not win him any brownie points with the likes of Mamata Bannerjee or
Nitish Kumar or for that matter even Karunanidhi.  |
Whether
Chidambaram gets a chance to live through with his agenda for the future is
however, something which the country would decide in the coming summer. But
then the pointers will remain for the next finance minister to wade through.
