| Bit late to start political surgery
P. Chidambaram looks little different from the youthful image he presented when he became commerce minister 13 years ago; but his heart has been here and there in those years. First, stung by P.V. Narasimha Rao’s perfidy, he tried out the United Front. It fell apart like all previous United Fronts. Then this global citizen sought refuge in a narrowly Tamil party. Now, after Sonia Gandhi reversed Rao’s folly, Chidambaram is back in the Congress to which the youthful Rajiv Gandhi had attracted him. But that Congress is not the one Chidambaram joined long ago. Rajiv had broken away from the embrace of the left that his mother had courted; he was keen on making India a mainstream, modern capitalist country. Now Sonia Gandhi, under the same compulsions as her mother-in-law 35 years ago, has embraced the left again, for the alternative to the embrace is more years in the opposition; and Chidambaram has to reckon with the implications. Even his most sympathetic observers could not escape this fact. That is why the stock market refused to be consoled by his sweet words; that is why those who worry about the budget — and those are generally people with money to tax away — looked forward to it with despondency.
Their fears came true, but not as true as they might have feared. The education cess was in the common minimum programme and hence hardly a surprise; but I had expected it to be 5 per cent, and so was pleasantly surprised by its modest magnitude. The increase in the exemption limit to Rs 100,000 may be regarded as compensation; but it is really a socialist measure. Crores of poor wage-earners pay income tax because the limit is so low. I am sure most members of CITU earn more than Rs 8,333 a month; the rise in the exemption limit will put a few rupees in their pockets.
In so many other respects, Chidambaram has put figures on the promises of the CMP. Farmers get many benefits, and substantial funds have been provided for water-related projects. Primary schools and school meals get the attention they deserve. More will be spent on rural health programmes. As political signals, small amounts are provided for small industries and education of Muslims. The contrast with the budgets of Yashwant Sinha and Jaswant Singh are palpable. The Bharatiya Janata Party highlighted its investment programmes. It took pride in its road construction, and went on to invest in ports and airports. The United Progressive Alliance highlights its subsidy programmes. Even its investment programmes are sought to be given a “progressive” slant.
However, the budget needs to be put in its context. As Chidambaram said, this is a tail-end budget. Jaswant Singh had already presented a budget in February without calling it one; in it he had given out substantial tax concessions to improve the National Democratic Alliance’s electoral prospects. He had also taken advantage of the improved prospects of revenue growth and raised expenditure allocations for schemes and projects of electoral interest. Chidambaram could have gone through these proposals with a toothcomb and cut back some of them. But, as he said, almost a quarter of the fiscal year is gone already, and another quarter will pass by the time the budget is passed. He did not regard it appropriate to start political surgery so late. So this is very much of a carry-on budget.
This is also, on the revenue side, a bureaucrat’s budget. Our tax regime is complicated, and bureaucrats love to make it more complicated. Ministers also receive many proposals from interested parties asking for lower taxes for themselves and higher taxes for their competitors. So every year the finance minister is flooded with many proposals, especially from the Central bureau of excise and customs, for small and often mischievous changes. There are a number of such proposals in this budget. For instance, matches made with machinery were taxed at 8 per cent, and received credit for duty paid on their inputs. Chidambaram has raised the duty to 16 per cent and withdrawn the CENVAT credit. It happens that machine-made matches compete with man-made matches, and that most of the latter are made in Tamil Nadu. There is fierce competition between the political parties in Tamil Nadu for the allegiance of the match producers; here we see a political manoeuvre.
It is not the first one; the government has discriminated against machine-made matches for decades. At one time it had the additional justification that the major manufacturer, Western India Match Company, was under Swedish ownership; those were the days of mindless nationalism. But it is no longer; the Swedes sold it at a throwaway price seeing the government’s partisanship. Matches are a mass consumer good, used by the poorest of the poor. They should not be taxed at all. But in all these years, the government never abolished the excise on them — because it would hurt the matchmakers of Sivakasi.
The abolition of excise duty on tractors was equally uncalled for. India is the world’s largest producer of tractors — or was until just a few years ago. Initially the industry was supported by the green revolution and the agricultural prosperity in Punjab and western Uttar Pradesh. Then farmers elsewhere began to realize the value of tractors, and the demand spread. But most tractors were sold on credit from government banks and financial institutions. When those loans went sour, the credit for tractors too dried up, and the tractor industry went into a spin. Abolition of the excise will no doubt help sell more tractors; but the more that are sold, the bigger will be the agricultural bad debts. The basic problem is the inability of farmers to service loans, and not the price of tractors. Because they could not repay loans, government financial institutions stopped lending to them. They then turned to private moneylenders, who have rougher ways of recovering their money — so rough that many farmers preferred to kill themselves.
Chidambaram promises to triple agricultural loans in three years; unless the profitability of agriculture improves, he will also thereby triple the bad debts in a few more years.
Still, this budget is a first step in what may be a major project of fiscal reconstruction. For Chidambaram has already announced that he will honour the commitments required by the Fiscal Responsibility and Budget Management Act. He will be a year late on the time-table, but since Jaswant Singh had entirely reneged, this is reasonable. If the FRBMA limits are taken seriously, they will fix a ceiling on government expenditure; if, then, the government wants to increase expenditure on something, it will have to reduce expenditure on something else. That will be a very different regime from what the government of India has lived with for decades. Choices will have to be made, and priorities will have to be set. And with Chidambaram at the helm of the finance ministry, we have some hope that there will be an element of rationality behind the priorities. Thus this budget is not the one to judge Chidambaram on. We have to wait another year or two before we can say what difference he can make.