Chidambaram emerges from Manmohan’s shadow

For years, Mr P Chidambaram as lurked, with obvious unhappiness, in the shadow of Dr Manmohan Singh. But after his latest budget he has come into his own. He will now be seen as a statesman and visionary in his own right. He will win the Finance-Minister-of-the-Year awards which international groups earlier gave to Dr Singh. He will certainly get my vote-I think he has produced the best budget for years.

Let this not diminish Dr Singh’s own enormous contribution. He laid the foundation on which Mr Chidambaram is now building, and his was the more difficult task. Dr Singh inherited a bankrupt economy so distorted by high taxes and controls that correcting it was a Herculean task. By contrast, Mr Chidambaram has inherited an economy growing at the fastest rate in Indian history, high foreign exchange reserves, large inflows of foreign capital, and a structure already freed of the worst distortions.

This inheritance has helped Mr Chidambaram perform the apparent miracle of slashing taxes, increasing Plan spending, providing for the Pay Commission award, and still cutting the fiscal deficit to 4.5 per cent of GDP (Dr Singh’s final deficit was 5.8 per cent).

But Mr Chidambaram has gone well beyond the legacy he inherited. He has far outperformed Dr Singh in one key area-keeping expenditure within budgeted limits.

Dr Singh could not control spending ministries. As the table shows, he was able to keep spending close to budgeted limits only for his first two years, when the IMF was breathing down his neck. Then the foreign exchange crisis (and IMF) disappeared, politicking took over, and spending discipline vanished. In his next three years, spending exceeded budgeted limits by Rs 10,530 crore, Rs 9,040 crore and Rs 6,124 crore respectively. This constantly ‘eroded his budgetary reforms, and meant he had to keeping running faster to stay at the same place.

By contrast, Mr Chidambaram has actually spent Rs 2,362 crore less than budgeted in 1996-97. This is mainly because he has postponed Rs 3,000 crore, of Pay Commission liabilities, but even if he had not done so he would virtually have been on target. Had he overspent by Rs 10,000 crore, like Dr Singh, Mr Chidambaram too would have been in all sorts of trouble. But simply by enforcing budgetary discipline, he has thousands of crores more to play around with than Dr Singh. The extra money has enabled Mr Chidambaram to cut taxes, raise Plan spending and provide for the Pay Commission award. It is an object lesson in the value of discipline.

Critics say Mr Chidambaram has been lucky, since a fall in interest rates and a strong rupee have saved him almost Rs 2,500 crore in debt servicing. However, both the fall in interest rates and strong rupee are consequences of good policy. This once again drives home the lesson that if you get the big picture right, many unanticipated benefits will flow from other channels.

Mr Chidambaram has disciplined spending, but that does not mean he has slashed it. On the contrary, he has accelerated spending by 13.48 per cent in his first budget and an estimated 14.77 per cent next year. This is much faster than the 10 per cent growth in spending that Dr Singh averaged. Even better, Mr Chidambaram’s two budgets have increased urgently needed capital investment by 12.74 per cent and 12.60 per cent respectively, in sharp contrast with Dr Singh’s tenure when capital spending stagnated or fell in four out of five years.

Financial discipline does not mean slashing spending across the board. It means sticking to budgeted limits. Too many people think the budget is simply a time for tax changes. They have forgotten the original meaning of the word budget, which means the apportionment of limited funds to different ministries.

Instead, of seeing the budget as setting limits for spending, ministries have come to regard the budget as the starting point for further demands for cash, whereas it should be the end point of any such discussion. Many more budgets of this sort are needed to change the mind-set.

Many people feared that the budget would be a hotch-potch because of conflicting pulls from 13 coalition members. Mr Chidambaram has demonstrated that a coalition government can deliver clear-sighted and radical reform no less than single-party governments. In fact, he is in a much stronger position than Dr Singh ever was. Dr Singh, a political lightweight, could go no further than Mr Narasimha Rao allowed him to. But Mr Chidambaram is number two in the Tamil Maanila Congress, which is indispensable for the survival of the United Front. He is also being wooed by the Congress Party, which cannot attain power without the TMCTS support.

So even if Mr Chidambaram gets much tougher on any issue than the CPM or even Mr Deve Gowda would wish, he can stick to his guns and Mr Gowda dare not sack or reshuffle him. However, he is too shrewd a politician to put purism above compromise (as is evident in his kow-towing to the left on insurance). He strongly supports the case for various farm subsidies, is providing half-priced grain for the poor, and has greatly increased the provision for social spending, all causes dear to the left. Fiscal discipline has enabled him to provide amply for all these causes without losing budgetary control.

By providing so amply, he has destroyed the old leftist notion that high taxes are necessary to finance social spending and anti-poverty schemes. Critics may denounce his tax cuts as inegalitarian. But he has proved there is no connection between high tax rates and helping the poor. Remember too that in Indira Gandhi’s Garibi Hatao phase, the maximum income rate went to 97.75 per cent, yet poverty did not decline at all.

Mr Chidambaram now aims to get Indian tax rates down to the levels prevailing in ASEAN countries. This will benefit not just Indian businessmen but the poor too. ASEAN countries have, despite low tax rates, done a much better job than India in reducing poverty and lifting living standards. By preparing India for eventual integration with ASEAN economies and entering APEC, Mr Chidambaram will help poor and rich alike. Note that tax changes are not enough. ASEAN countries have a much better record than in India in literacy and s good governance. India needs to improve greatly in these respects too.

What do you think?