Budget ’07: FM’s tightrope walk

Unlucky finance minister Chida-mbaram: he had to present his budget one day after his Congress Party was thras-hed in state elections in Punjab and Uttarakhand.

Partymen in both states blamed the defeat on inflation, and hence (indirectly) on Chidambaram. The party had been paranoid for a month about rising prices, especially of wheat, dal and onions.

Chidambaram was told to curb other prices by banning futures treading and cutting taxes. He would have liked to wait till budget day to cut taxes, and then be rewarded with applause.

But Sonia Gandhi wanted action before the elections. So Chidambaram cut the price of and taxes on petrol, diesel, metals and chemicals.

Alas, inflation stayed high and his party lost the state elections. This really put the political heat on him. He had to forget any dream budget and focus instead on a two-point programme: inflation hatao, Congress bachao. Losing small states like Punjab and Uttarakhand was tolerable, but the party could not afford a bad loss in Uttar Pradesh, which goes to the polls in April-May.

Did the budget deliver on inflation hatao? Not really. Economists will tell you that inflation is mainly a monetary phenomenon, not fixable instantly by budgetary measures.

Still, Chidambaram cut peak import duties from 12.5% to 10%. He also cut excise duties haphazardly, forgetting earlier resolutions to move towards a single rate for all goods and services in preparation for a national Goods and Services Tax in 2010. He did not dare raise service taxes in an anti-inflation budget.

Yet, his anti-inflationary efforts have yielded poor dividends. Given high world prices, many items (polyester, plastics) look too expensive to import even after lower duties.

Indian manufacturers of steel, cars and cement have actually raised their prices. Chidambaram’s big bungle was a dual-duty system for cement. He raised the excise duty on cement for bags costing over Rs 190 and cut the duty on bags costing less.

Did he really think this would induce companies to cut prices? Dual pricing typically leads to invoice manipulation and blackmarketing.

Some companies will invoice cement at a low rate for the tax break, and then sell it at a higher rate, pocketing the black premium in cash. Other manufacturers will mix more fly ash in cement, yielding a lower price but lower quality too.

The top companies – ACC, Gujarat Ambuja and others – have opted to pay the higher duty and pass it on to consumers: their prices are up Rs 12 a bag. Not what Congressmen expected from an anti-inflation budget.

Chidambaram’s big faux pas was to cut duty on pet foods. This unleashed a thousand witticisms. Prices are rising for humans, but falling for animals. This is a billi-kutta budget. We wanted a budget for the aam aadmi but got one for the aam kutta.

The best witticism of all: Pet food is what is served at meetings of the Congress Working Committee by Sonia Gandhi.

What do you think?