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Chidambaram's budget: Robinhood is alive

The UPA government's last full budget before the next general elections is an exercise in tiding over an year and does not offer long-term fixes for the struggling Indian economy

Dinesh Narayanan
Published: 28, Feb 2013


"Ask not what your country can do for you – ask what you can do for your country'' -- John F Kennedy at his inauguration as US President in 1961.

Being the finance minister of India is an unenviable job. Making the annual budget is even more difficult when everyone wants him to dole out more but are tightfisted when it comes to giving away.

The most telling statistic finance minister P Chidambaram mentioned in his speech was that only 42,800 people in a country of 1.2 billion admitted that they earned more than Rs 1 crore a year. That is an unbelievably small number and perhaps indicates the extent of tax evasion that goes on.

A recent study by the National Institute of Public Finance and Policy reportedly estimated unlawful wealth in India at 10 per cent of GDP or over Rs 10 lakh crore.

It was only fair then that Chidambaram said, ``When I need to raise resources, who can I go to except those who are relatively well placed in society.’’ So saying, he imposed a 10 per cent surcharge on the super-rich for a year. Though quite justified considering the widening inequality in the country, it also tacitly acknowledges the government’s inability to go after evaders and relies on squeezing the honest ones even more.

The finance minister revealed another number. Of the 17 lakh registered assesses under service tax, only seven lakh filed tax returns.  Saying that he cannot go after each one of them, he announced an amnesty for those who would truthfully declare and pay what was due in the past five years.

That said, Chidambaram’s lacklustre budget betrays an eagerness to please as many constituents as possible – women, different castes, tribals, other minorities, farmers. He has also not held back in setting aside money for populist development schemes such as rural job guarantee, roads, healthcare and food security.  But even that he has done cleverly. The percentage increases he has talked about are on revised estimates, which are significantly lower than what were budgeted last year. The NREG scheme, for instance, gets an allocation of Rs 33,000 crore, which is almost the same amount actually spent this year. The budget last year had estimated an expense of a little over Rs 40000 crore.

Thankfully, he plans to reduce the number of central schemes to 70 from the current 173 and also review them every two years.  It will hopefully reduce wasteful spending and improve delivery of the programmes.

What Chidambaram has failed to do, while he had the chance, is to improve the investment climate. There are not many incentives to boost economic activity, except a 15 per cent deduction for those who buy plant and machinery worth more than Rs 100 crore. It would have had a better impact on the broader economy if the incentive was given to small and medium size companies to import machinery.

In fact, higher corporate tax even if only for a year is likely to dampen investment. Besides, a bigger government borrowing programme at Rs 6.29 lakh crore as compared to Rs 5.58 lakh crore would crowd out private borrowers from the market. Remember the liquidity squeeze of 2012? That could repeat in 2013 as well, complicating monetary management for the RBI.

It may turn out to be good for retail investors, though, as banks would have to offer higher interest rates to mobilize deposits even as demand for credit increases.

Most people, including industrialists, have called the budget realistic. They have also welcomed the finance minister's focus on the current account deficit which has been putting pressure on the rupee. Chidambaram has also vowed to contain fiscal deficit at 4.8% next year.

So what was this budget about? It seems it was about getting by for another year when elections will be due. If the government survives, there is always scope to tinker at the economy next year. If it doesn’t, well, you can always sit in opposition and scream how bad the government is at managing the economy.

  • jp

    Tax evasion being rampant in india, making it a criminal offence with the strictest terms for the culprits involved.

    on Mar 4, 2013
  • rkarya

    the budget is prepared in given investment and trade climate. while the investment continued to be slow, there is a need to pick up demand through rationalisation of interest rates, for which fiscal deficit has to reduce. the only commitment to bring down the fiscal deficit can work in tight investment environment, as private companies can leverage the cost of their produce.

    on Mar 1, 2013
  • S. Srinivasan

    Thanks for sacrificing some of your time to watch and write about this budget. It could be argued that a good budget must be so boring that it is forgotten by the same evening. By that reckoning, Chidambaram has delivered a mind-numbingly amazing budget.
    Chidambaram acquits himself honorably from another viewpoint too. In comparison with the recent budgets of developed and developing countries around the world, his financial plan stings less. Most governments are raising taxes abnormally, cutting welfare allocations and eliminating incentives and subsidies. Chidambaram has by and large maintained the status quo. So he shines in comparison with other (disastrous) finance ministers.
    Still, I think Chidambaram failed today. First, he has adopted the position that India's growth slowdown is part of a global phenomenon and he will wait until the cycle turns up and the growth returns on its own. That is sheer defeatism. If I know my Chidambaram well enough, he has never failed to take credit for buoyancy in the economy, markets and investment inflows. After all that, now to abdicate your responsibility to make things happen and spur growth is a crime.
    He should have unveiled big-bang measures to encourage private investment and entrepreneurship as a means of getting out of this rut. We are near the low of an investment cycle and will stay there until such external boost is given. I can understand his logic for why he didn't give big tax breaks. It is not just that the government can't afford it, but also that it could foil its attempts to control inflation. However, there is a bit of dishonesty there. His decision to increase the government's borrowing to a record level, and far beyond the estimates of economists, contrasts darkly with his denial of the same inflation-busting increases to household budgets.
    Just one sample of a long-term issue he could have tackled: India's government has one of the world's lowest productivity. With four million central government employees and five million public-sector staff, the Indian State is a bloated creature. He could have thought of measures to slim down the government and increase per capita productivity. The resultant savings could have been passed on to the economy. He hasn't ventured anywhere near such a path.
    Chidambaram's decision (yet again) to keep fattening the government with more borrowing and taxes is a politically expedient one. His hands aren't tied as he makes it out to be.
    Chidambaram's economic philosophy is to be loyal to the government's cause (get more money for the State). His thirst for increasing taxes is all too well known. There would be nothing wrong with it if he matches such a strategy with an aggressive push to find growth avenues too.
    In this instance, he has proved to be timid. The man who thought up things such as Exim Scrips, the Minimum Alternate Tax and the 10-20-30 formula seems to have run out of creativity. He has become jaded and cautious.
    In other words, for those of us who have closely followed Chidambaram's career for more than two decades, he is a promise not kept. Time to look for the Next Chidambaram.

    on Feb 28, 2013
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