The Telegraph
Since 1st March, 1999
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- Will the budget please the masses and markets alike'

The finance minister, P. Chidambaram, has now an opportunity to present a full budget for a year, after adequate consideration of all options. He had been faced by a shortage of time when he presented the budget for 2004-05 in July 2004. This had led to his making an ad hoc additional provision of Rs 10,000 crore for plan budget support, which meant consequential delays in allocations and implementation. These are handicaps, owing to shortage of time, which he will not suffer from in his forthcoming budget effort.

Fortunately, he has already produced a curtain-raiser with his reports on the Fiscal Responsibility and Budget Management Act as well as the promised report on subsidies. The former report lays out a view from the finance minister's perspective on the Centre's fiscal outlook so far. While it had data only for the first six months, it indicated how the revenues and expenditure were proceeding, tax revenues being less buoyant than expected and capital expenditure being slack. The explanation was advanced that the allocations were communicated rather late, with the Appropriation Act being delayed and the planners taking time to finalize the allotments. The fiscal out-turn was more or less satisfactory, taking the pluses and minuses together. Regrettably, subsidies were rising overall. So was non-plan expenditure. The coming budget should target restrictions in both.

What the finance minister offers on budget day has a mystique, which his earlier pronouncements on the financial situations lack. Budget day has a sanctity, born out of years of experience of tax-payers in the general public. As in all countries, in India, the markets look forward to it with bated breath. The tax-payers expect the finance minister to be generous with both tax-cuts and giveaways ' which is illogical but human. The finance minister has to meet the conflicting demands of many constituencies ' chief among which are the tax-payer, the corporate, the foreign institutional investor and the foreign direct investor. I should not leave out the foreign rating agencies. The FIIs are looking for indications which the budget discloses about growth and stability. The retail investor, in particular, is hoping that the finance minister will not rock the boat with market-unfriendly mis-steps, such as the Security Transactions Tax, which he introduced and modified after the shock effect it caused in July 2004. The markets have, over time, learnt to expect surprises from the finance minister, but they will be happy not to receive shocks. The finance minister has been sensitive to what the markets are likely to expect of fear ' witness his double-quick, albeit prudent, repudiation of Y.V. Reddy's hint about some possible restrictive measures on FII flows.

The finance minister has a difficult task at hand to meet the divergent demands of his coalition partners, who disagree on many things but agree on only one aspect ' to please the populist palate. The finance minister has fortunately made a bold attempt to get the privatization window open, although whether he will be able to carry it out finally depends on the mood of the coalition partners. He has put forward the carrot of using the proceeds for social schemes. Money is after all fungible and any additional receipts through privatization will be of help. In addition to all his existing demands, the finance minister has to meet the demands of various state governments for relief, arising particularly from the tsunami-affected states. These are bound to be a serious challenge for the finance minister.

Yet another task before the finance minister is to accommodate the recommendations of the Twelfth Finance Commission. The commission has had the wise leadership of C. Rangarajan, who would, no doubt, have kept in mind the fiscal travails of the Centre. But, his 'dharma' being to minister to the needs of states, he is bound to have unveiled a package of measures of assistance and devolution, which are friendly to states, but without hurting the Centre overmuch. How will Chidambaram weave in these recommendations into his budget, dovetailing them with the commitment in the national common minimum programme to proffer large devolutions to backward states' Surely, the Centre cannot afford too hefty a package for backward states on the basis of NCMP promises, in addition to the Finance Commission's generous allocations for the same states! I do hope the Centre does not forget the principle that the backwardness of many states is partly because of the failure of governance, which should not be rewarded unduly, leading to penalizing the more prudently managed states for their success.

In addition to the above demands, the finance minister faces the challenge of accommodating the ever-rising demands of defence, given the continuing slackening in India-Pakistan peace talks and confidence-building measures. The fact that the spending on defence has increased substantially in the last two years is evident from the budget numbers. Appetite grows with what is on the table. There is bound to be demand for more. Defence expenditure is often considered sacrosanct, but even in defence outlay one has to consider how much the country can afford. I am reminded in this context of a debate at the secretary's level between a redoubtable defence secretary and the finance ministry in the Eighties. He had pressed for an unconscionably high level of defence capital outlay citing security threats. It was my privilege to point out on behalf of the ministry of finance that his threat that he would not be responsible for the defence of India was not tenable. Because, if his demands were considered, there may not be any India to defend, given the fiscal chaos, which would destabilize the country's economy. This called for intervention by the then prime minister, Rajiv Gandhi, in favour of a more moderate defence outlay.

I am sure that the present situation would also call for the healing hand of the prime minister, who is a veteran of many such battles with the defence ministries. The temptation of stocking up on defence hardware is all the greater, given the competition of first-world armaments manufacturers, who display various items of equipment before the top defence echelons of countries in potential conflict. The answer to such tempting offers lies in the domain of diplomacy. While it is true that success in diplomacy itself can arise only on the back of a relative strength in armed forces, it is difficult not to discount the dangers of a continuing arms race. What matters, however, is that the battle of the budget will be decided not by the demands of the defence ministry but by the success of the confidence-building measures in which the two countries ' India and Pakistan ' are at present engaged.

The finance minister has to deal with the proposal mooted by the deputy chairman, Montek Singh Ahluwalia, about utilizing the country's forex reserves for infrastructure investment. The proposal has triggered a number of debates with some prominent economists discounting the idea as a disguised form of monetization. The influential voice of Raghuram Rajan, chief economist of the International Monetary Fund, has been raised against the idea as he has debunked the proposal. The prime minister has endorsed the idea. The finance minister has suggested that it should be limited to financing of imports. The finance minister's suggestion does not, however, address the problem of shortage of rupee resources, which is the deputy chairman's, and should also be the finance minister's, concern.

One of the problems posed by critics is that if the Reserve Bank of India is to lend the forex to the government of India for investment, it will violate the FRBM provision of not borrowing from the RBI. Again, a doubt has been raised about the advisability of using what are basically short-term capital flows for long-term investment in infrastructure. But there are ways out of both these dilemmas. For one thing, the RBI can invest in equity in the government-sponsored ventures, like the Industrial Development and Finance Corporation. This route does not amount to borrowing from the RBI. So, we are out of the FRBM loop. A special purpose vehicle can be set up in which the RBI can invest part of its forex reserves. The SPV can, in turn, invest in equities of public sector units or public-private partnerships, which can then leverage the equity to borrow from the banking sector. The equity corpus can be the $20 billion and odd, which is of the order of the stable element in forex reserves, being the total current account surplus over the last two years, which is evidently continuing to grow. This itself would be around Rs 80,000 crore or so, which can provide a substantial equity base to the SPV and catalyse the infrastructure investments in India. Surely, the above route is far better than going on canvassing abroad for FDI flows into infrastructure projects ' which anyway seem to find few takers, given our hesitations and the miserable performance of Dabhol.

All said, budget-making is a work of art. Chidambaram is an expert at it. Here is to hoping that he will be able to unveil on February 28, 2005, an attractive budget, which will demonstrate to the world that the government is keen on continuing the reforms and growth impulses. Chidambaram has done it before and let us hope that this time the budget will prove to be a trendsetter, pleasing the markets and the masses alike.

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