Behind the number crunching and the rose-tinted promises, the long shadow of coalition politics loomed over Budget 2005. If the markets were happy, so was the Left, in itself something of a miracle. After its alarmist warnings in the days preceding the budget, the grudging approval of the budget by the UPA Government's left partner was in stark contrast to its earlier threats of its "bite" being worse than its "bark". Hardly surprising, considering that many issues the Left had raised in its 12-point memorandum to Finance Minister P. Chidambaram had been addressed, if only in part. Nonetheless, political and corporate circles are in awe of the manner in which the minister has managed Marx and market. Selling reformist budget proposals to disparate coalition partners-the communist parties, trade unions, a left-of-centre Congress and, of course, a resurgent economy in need of liberal prescriptions-is no mean achievement.

That Chidambaram's budget would be tailored to coalition politics was inevitable. The Left supports the Government from outside on the basis of the National Common Minimum Programme (NCMP) with an emphasis on pro-poor policies. At times the leftists have forced rollbacks on the Government. It helps that there is the National Advisory Council, headed by UPA Chairperson Sonia Gandhi, which meets regularly to monitor the implementation of the NCMP.

Chidambaram realised that the growth momentum has to be maintained and markets kept abuzz. He has further fuelled the strongest economic engine: private consumption. In the biggest direct tax reforms since 1997, he has raised income tax exemption limits and adjusted tax slabs to put more money in the pockets of the middle class. More liberal foreign investment has been promised in mining and pension and a mega mergers of banks has been hinted at.

The Congressman balanced this by taking heed of the wish-list presented to him by the Left-over and above the NCMP. He managed to take care of its concerns while keeping a liberal eye on the bigger picture. Ignoring demands from the Congress that defence outlay be hiked, Chidambaram yielded to the Left's precondition. Unlike in 2004-5 when allocation for the Defence Ministry was increased by a staggering 27.69 per cent, in this budget, defence outlay went up by only Rs 6,000 crore, a modest 7.79 per cent raise. The other areas of Left concern were the Employment Guarantee Scheme and increased public expenditure on rural infrastructure and irrigation, adequately addressed in the budget, as was increased spending on education and health. Similarly, the tax-revenue mobilisation measures suggested by the Left were met to some extent, though not necessarily in the areas they had wanted. Privatisation, the Left's bugbear, was another area where Chidambaram gave in.

CHIDAMBARAM'S TIGHTROPE WALK

WHAT THE MARXISTS GOT A boost for rural credit. Rs 11,000 crore for Rural Employment Guarantee Scheme. Moderate hike in defence budget. No mention of disinvestment. Support for PSUs. Rs 10,280 crore outlay in health. Plan to set up National Rural Health Mission. WHAT THE MARKETS GOT Lower corporate tax and customs duty. Small-scale dereservation in 30 industries. FDI liberalisation in mining and pension. The budget hinted at mergers of public-sector banks. Personal tax reforms to boost consumption.

Chidambaram worked on the Left's psyche by making a major concession ahead of the budget. When the Left was opposing the proposed 74 per cent FDI in telecom, it had also demanded the EPF interest rate be raised to 9.5 per cent. So, on the same day he hiked the EPF interest rate, he also announced FDI in telecom, effectively checkmating the Left. Similarly, allocations on NCMP projects like the Employment Guarantee Scheme and health are ambiguous.

In essence, Chidambaram's third budget has stayed faithful to the NCMP, the bible of the UPA Government. Yet, what is remarkable is that while the finance minister may have kept the Left and the NCMP in mind, he managed to largely satisfy corporate India. "Chidambaram has done his sums cleverly. He has increased the outlay on infrastructure and NCMP on the assumption that not all the money will be entirely used," says Minister of State in the PMO Prithviraj Chavan, who is on the Cabinet Committee on Economic Affairs.

In that context, Budget 2005 is a creditable act of tightrope walking. Chidambaram has managed the impossible, keeping Marx and markets happy at the same time. In many ways, his marriage of politics and economics could be a model for other finance ministers to follow.

CHIDAMBARAM'S DEFENCE

"I do not deliver. Delivery is in the hands of ministries, state governments and panchayats." The budget is an annual financial statement. Over the years though, it has been used to spell out a government's overall policy approach. This is a coalition Government and the budget must reflect its priorities. We must adhere to the NCMP. I have given a lot of attention to agriculture, manufacturing and infrastructure. The thrust has been on investment-led growth. In agriculture, we are trying to stimulate growth through public or private investment. In manufacturing, we want to make Indian industry more competitive. We have identified a few industries like textiles and sugar which require special attention and we have addressed it both on the fiscal and the policy side. On infrastructure, we have come up with a financing mechanism, the Special Purpose Vehicle. We hope to identify projects that can absorb about Rs 10,000 crore of additional investment.   FM SAYS That investments, FDI and FII inflow will continue. That Indian savers will turn into Indian investors as the capital market becomes more efficient. That he will see to it that ministries deliver and will put in place a mechanism to measure outcomes. On direct taxes, the message is simple. There is a threshold exemption, a savings provision and the rest is taxed at rates which are moderate and comparable to international rates. Government-directed investments into various savings instruments is gone now. We have adjusted the tax brackets to the extent feasible and kept the rates moderate. On the corporate tax, I have explained that the effective tax rates of corporates must go up, that both manufacturing and non-manufacturing companies must be taxed equitably, that we cannot lean in favour of capital and against labour and we must do a bit of cleaning up. The budget has given effective tax relief, cleaned up depreciation, made it more in accordance with global practices, conceded one or two demands like mat credit and removed restriction on the expansion to claim initial depreciation. On customs, we are steadily bringing customs duties to ASEAN levels. On excise, we have reaffirmed our desire to go to the CENVAT rate. On services tax, we have maintained the rates but expanded the net. We have let the small service providers-around 80 per cent-go out of the net. We have laid down a reasonably fair and transparent tax regime in which all of you can pay your taxes and still grow and invest. What I like about this budget is that it is neat and without too much clutter. If some clutter is still left, I intend to come up with a bill to amend the tax laws. We have done nothing to dampen anyone's enthusiasm or bullishness. I believe investments, FDI and FII inflow will continue. Indian savers will turn into investors and our capital market will become more efficient to convert savings into investments. The cash-withdrawal tax has been a huge success in Brazil. Someone who advised the government of Brazil is advising me now. My singular worry is outcome and delivery. Ultimately I will have to stand up and answer if the Government fails to deliver. But I do not deliver. It is in the hands of ministries, state governments and panchayats. We will, however, put in place a mechanism to measure outcomes. In every area where we have promised something, I will do my best and follow it up to see that the ministry concerned delivers. Excerpted from P. Chidambaram's speech at the Board of India Today Economists meet.

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