POLITICAL BAGGAGE: Chidambaram enters Parliament to present the budget

On June 3, a few days after assuming office, Palaniappan Chidambaram made his maiden visit as finance minister to Mumbai. Dressed in an informal shirt and trousers, he described himself as the "minister for investment" to the financial capital. But when he rose to present the first budget of the United Progressive Alliance Government on July 8, he was dressed in the preferred veshti and shirt. One way to interpret the contrast was the finance minister's inevitable obligation to be both Mr Populist and Dr Reformist. Torn between being Dr Jekyll and Mr Hyde, he had to do the tightrope walk between the demands of a coalition that came to the power denouncing what it called the "reckless LPG (liberalisation, privatisation and globalisation)" yet not rock the pace and direction of economic reforms.

That the budget would be a political statement was anybody's guess. But known to be a reformer by instinct, the hope was that Chidambaram would be able to address the two contrasting concerns of his political and economic constituencies quite well. After all he had presented a Dream Budget in 1997 as part of another coalition-the United Front. But obviously it was not the same Chidambaram who presented the budget in 2004.

THE POLITICS FIRST

It is not easy being the finance minister in a Government of 13 parties that includes Laloo Prasad Yadav's RJD. It gets worse when the fragile edifice is literally supported from the outside by 62 MPs from the Left Front. The Harvard-educated lawyer from Sivaganga must have inherited more than his share of Chettiar genes to walk the tight rope.

In an attempt to please and perform, Chidambaram has tried to choose initiatives that could also address economic concerns. So the Rs 3,225-crore plus package for Laloo's Bihar has been explained as an attempt to redress regional disparities. And just as MPs protested the special treatment for Laloo's case and called for similar packages for other states, Chidambaram announced a proposal for a Rs 25,000 crore Backward States Grand Fund. So it was not all populism. But again the move to revive the Hindustan Antibiotics Ltd in Pawar's backyard of Pimpri (near Pune) or the Rs 508 crore package for the revival of public-sector telecom company Indian Telephone Industry are indefensible economically but have undeniable political payoffs.

The pressure to address deprivation is both economic and political. There can be no quarrel with the emphasis on keeping children in schools through mid-day meal schemes, subsidised food (wheat at Rs 2 per kg, rice at Rs 3 a kg) through the Antyodaya scheme or food-for-work programmes for the rural unemployed to stave off starvation. But the question is, can the Government deliver? After all it was none other than Chidambaram's first prime minister Rajiv Gandhi who pointed out that only 15 paise of a rupee spent on rural development actually reaches the beneficiary. More interestingly, the Planning Commission revealed in a report that "rural poor families have remained constant in number at 55 million in the past 20 years despite high growth and high investment in IRDP and wage giving programmes".

The Central and state governments together spend roughly Rs 42,000 crore a year on poverty alleviation programmes. In a sense, if the five crore odd poor families in the country were to be sent money orders, each would get more than Rs 8,000 per annum, lifting them out of the poverty trench. Clearly, re-initiation of the mai-baap sarkar is not the answer. Chidambaram's concerns for the poor would have sounded more credible if he had come up with an innovative delivery system to ensure that what the Government spends actually reaches the intended beneficiaries.

REFORMS NOT ABANDONED

To be sure, though the finance minister has taken extra care to please his allies, he hasn't abandoned reforms altogether. To be able to raise foreign investment limits in sectors like civil aviation (from 40 per cent to 49 per cent), insurance (from 26 per cent to 49 per cent) and telecom (from 49 per cent to 74 per cent)-all of which were mulled over by the NDA government for months and objected to by the Left-is not a mean achievement. Says Asim Ghosh, managing director of Hutch India: "Raising the FDI limit in the telecom sector is a positive move. It helps flow of funds which in turn will increase teledensity in the country." Adds Shikha Sharma, CEO, ICICI Prudential Life Insurance: "The increase in the FDI limit in insurance to 49 per cent is good news. We weren't expecting it."

FRIENDS INDEED: FM had to keep the concerns of the allies in mind

Even more bold is the decision to move 85 industries out of the small-scale sector reservation. And then, of course, is the mother of all anti-populist measure-the decision to cut the revenue deficit of the government (the difference between government current consumption and current income) to just 2.5 per cent of GDP. The revenue deficit has never been so low in over 10 years. The deficit reduction target is more credible than just a simple wish because according to the Fiscal Responsibility and Budget Management Act, Chidambaram has to explain to Parliament the reasons for missing his deficit reduction targets every quarter in a financial year.

So while reforms may not have won big on July 8, they haven't lost much either. Says Kumar Mangalam Birla, chairman, Aditya Birla Group, "The finance minister has done a fine balancing act. He focused on fiscal prudence, defence modernisation and the setting up of an industry Commission is a positive step. But, more could have been done for infrastructure."

The panic in the stockmarket over the rather unexpected imposition of a transaction tax (0.15 per cent on every sale) on all financial transactions washed out-at least temporarily-the positive impact of raising FDI caps, hiking limits of FII investment in debt markets and abolishing the long-term capital-gains tax.

DO HIS NUMBERS ADD UP?

Rarely has a finance minister assumed such high levels of growth in revenue. Chidambaram is aiming for gross tax revenues of Rs 3,17,733 crore, which is Rs 62,810 crore or 25 per cent higher than what was raised in 2003-4. Sure, there is dividend in growth but even the most optimistic wonder if hikes of 70 per cent in service tax collections (from Rs 8,300 crore in 2003-4 to Rs 14,150 crore in 2004-5), 40 per cent in corporate tax (Rs 62,986 crore to Rs 88,436 crore) and 26 per cent in income tax (Rs 40,269 crore to Rs 50,929 crore) are achievable. A simple calculation shows that these targets are very ambitious. For instance, the finance minister expects corporate tax collections to rise by Rs 39,086 crore in 2003-4. At the tax rate of 20 per cent (which is what companies pay on an average), Chidambaram is hoping for an additional corporate profits of over Rs 1,25,000 crore in 2004-5.

The last time such ambitious targets for growth in tax collections were set was in the 1997-98 budget. And the person to set those targets was none other than Chidambaram. Then the targets were missed by a mile.

The budget calculations are based on an implicit GDP growth rate of between 7 and 8 per cent. There is no cause for concern as yet. Monsoon is projected to be normal and industry will begin to invest soon. But there have been only three instances before this year of 8 per cent GDP growth. Also agriculture's 9.1 per cent growth is really a statistical blip. The average agricultural growth in the past five years has been 2.6 per cent and for industry around 6 per cent. An 8 per cent GDP growth (assuming an 8 per cent services growth) requires industry and agriculture to also grow by 8 per cent. If Chidambaram does manage then he would have provided a model of good politics as good economics.

-with Malini Goyal and Malini Bhupta