10th anniversary of the dream budget

Ten years ago, I was among those congratulating Palaniappan Chidambaram on presenting a dream budget. Here’s what I wrote in 1997.

“Chidambaram’s budget has vision. Most budgets make niggling tax changes to meet the limited challenges of the coming year. But Mr Chidambaram is thinking way beyond next year. He has a vision of India’s place in Asia, and indeed in the world community. He has not simply cut taxes to win cheap popularity or appease vested interests. He aims to align India’s income and corporate taxes with those of the miracle economics of South-East Asia. While cutting customs duties, he has said he aims to get these down to ASEAN levels by the year 2000. The message is clear. India is finally bidding to become a fully paid up member of the Asian economic miracle.

“ Critics say Mr Chidambaram has pandered to the wealthy by cutting their taxes. This is the old malaise of looking piecemeal at individual parts of the budget instead of its overall vision. If India can replicate the ASEAN experience even very approximately, its poor will benefit enormously. ASEAN countries with low tax rates have reduced poverty for more dramatically than socialist India. Indira Gandhi’s garibi hatao phase raised income tax to 97.75 per cent, yet the poverty ratio did not go down at all. She, as well as ASEAN countries, proved that high taxes have no connection with reducing poverty.”

I added that the best evidence of the success of the new vision was that Indians, who used to take money out of the country through hawala, were now sending that money back in a flood. Remittances from abroad had become bigger than exports of gems and jewellery. So, “vision has become India’s biggest export.”

Ten years on, it is time to look back and reassess the dream budget. Remember that in 1997, the future of economic reform was unclear. The Congress Party, which initiated the 1991 reforms, had been thrashed in the 1996 election. The new United Front government included parties that had sworn to reverse the reforms if they came to power. Waiting in the wings to form future governments was the BJP, which swore by its own swadeshi economic agenda. So, overall political conditions were not favourable for reform when Chidambaram came out with his 1997 budget.

But his vision—of India going the ASEAN way and joining the Asian economic miracle—was so compelling that it was adopted by all successive governments in the next 10 years. That is the true measure of the power of that vision. It overcame ideological hurdles, the travails of the Asian financial crisis, and changes of government.

Ten years later, the vision stands fulfilled in larger measure than optimists could have hoped for at the time. India’s peak import duty is down from 50% before the 1997 budget to 12.5% today, and should touch the ASEAN level of 8% in the coming budget. India’s GDP growth has accelerated to the old ASEAN level of 7-9 %. And, despite continuing labour policy hurdles, India’s merchandise exports are growing at a compound rate of over 20% per year. India has become a fully paid-up member of the Asian economic miracle.

Indeed, it has gone beyond that. Unlike ASEAN, India has become a world power in service exports, notably computer software and business process outsourcing. Everybody now talks of Chindia—China and India– leading the Asian economic race.

However, shortcomings remain. The 1997 budget brought the peak income tax rate down to 30%, almost on par with ASEAN countries. Since then ASEAN income tax rates have fallen to around 25% while India’s has risen to 33.6% including surcharge and education cess.

But infinitely worse has been India’s shortfalls in social development. India’s literacy rate today is around 65%. But it is over 95% in Singapore, Thailand, Malaysia and the Philippines, and 92% even in Indonesia, the poorest ASEAN country. The infant mortality rate in India is 60 per thousand, against 32 in Indonesia, 28 in the Philippines and 24 in Thailand.

I wrote back in 1997, “These countries have not reduced poverty simply by cutting taxes or attracting foreign capital. They have done infinitely more than socialist India in education and health, and attained far higher agricultural growth rates in their take-off stage. Mr Chidambaram has raised allocations for social spending, but this matters little. Primary education, primary health, rural development and agriculture are all state subjects. And most state governments today are bankrupt and unable to provide decent sums for these vital areas. Corruption and inefficiency mean that little of the allotted money reaches the poor. In these circumstances, India cannot become an Asian tiger.”

I was wrong. India has become an Asian tiger despite poor social development and governance. Yet I am immensely disappointed that what was true in 1997—rising budget allocations but pathetic social outcomes—remains true today. So, on the 10th anniversary of the dream budget, we can give Chidambaram at most two cheers, but not three.

What do you think?