| Bored with the budget
The Central budget can be a powerful instrument of economic policy. A finance minister could use it to pursue the macroeconomic objectives that he considers relevant at the moment. There are two issues that might be considered important at the present juncture. First, there is the emergence of inflation in the recent months. Some inflation is always there in the Indian economy, but now it has risen over 6 per cent a year. This should worry the government, not simply because it can have unpleasant or unwelcome consequences, such as a worsening of the balance of payments or destabilization of growth, but also because it makes some people richer and others poorer. Those who sell the goods and services whose prices rise get richer, while those who buy them and those whose incomes do not rise get poorer. Those who get richer enjoy it quietly, but those who suffer can turn against the government, and that can be awkward for the party in power.
Second, there is the growth of the economy. It has grown at a satisfactory rate, around 8 per cent, for the past three years; a finance minister may want to maintain it over a long period, and to raise it. He would then try to take pre-emptive action against events that may threaten growth, or give incentives that would raise it.
How far does the budget presented yesterday by P. Chidambaram serve either of the above objectives, namely inflation control and growth promotion' He reduced a large number of customs duties; one or two may even have a slight effect on consumer prices. He reduced the import duty on sunflower oil from 70 to 55 per cent, so it may become a bit cheaper. But he kept the rest of the extremely high import duties on foodgrains and edible oils unchanged; he did much less than he could have done. He reduced the import duty on plastics from 12.5 to 7.5 per cent, and on polyester from 10 to 7.5 per cent; that may make buckets and tee-shirts fractionally cheaper. But he also reduced import duty on pet foods, diamonds and watch-dials; they are unlikely to benefit the common man much.
However, these are small changes. The way in which the budget can powerfully affect the economy is through the balance between revenue and expenditure, and through the volume of government borrowings. Taxes withdraw demand from the economy, whilst expenditure puts money in the hands of citizens. And government borrowing takes money away from the capital market which could have gone to private entrepreneurs for investment, and tends to discourage private investment by raising interest rates. Conversely, by raising taxes or reducing expenditure, the government can take demand out of the private economy and reduce inflationary pressure; and by borrowing less, it can leave more money for private investment and stimulate creation of productive capacity.
The finance minister did not use these macroeconomic policies to combat inflation. He increased taxes by a measly Rs 30 billion — less than half per cent of the total revenue. And he aimed towards a fiscal deficit no different from what was laid down in the Fiscal Responsibility Budget Management Act.
Why did he do nothing' That is because his civil servants advised him that the inflation was due to inadequate supplies of a few agricultural products, principally foodgrains, lentils and edible oils. Some of them could be imported; but aside from that, nothing could be done to increase their supply, so inflation simply had to be suffered. So he promised some money for the development of high-yielding oilseeds and lentil seeds.
They may become available in a few years. Meanwhile, the Forward Markets Commission has banned forward trading in lentils, and the finance minister said it would soon ban forward trading in wheat and rice. He said it was an independent regulator; but still it is apparently amenable to his persuasion. If there is no forward market, no one can buy a commodity now for sale at some future date, so he will not buy. That, the finance minister’s advisers think, will stop them from buying it now for inventory, reduce the demand and hence the pressure to increase prices. But no speculator is so irrational as to stock a commodity till the next harvest, when the price is bound to come down. So all stocks are likely to be sold off before the harvest anyway; stocking commodities only transfers supply from now to a few months later. If it tends to raise prices now, it does so by reducing prices a bit later. It only affects the time pattern of prices, not their level. But the finance minister would rather be seen to be taking ineffective action than none at all.
How about stimulating growth' If it is accepted that inflation is due to too much demand, its virulence can be reduced by encouraging savings, which are the same as not spending. People would put their savings in banks, which would lend them to businesses for expansion, or in the stock market where they would be picked up by companies for investment; either way, they would increase production capacity. The finance minister could have given stronger incentives for savings — for instance, given a tax rebate on new investment in mutual funds. But he did not; instead, he increased taxes on some dividends.
Thus, Chidambaram did not use the budget to achieve any macroeconomic objectives. Did he then use it to pursue ends that he considers important' Chidambaram is a veteran finance minister. He has presented six budgets; few finance ministers have equalled his record. Nor were they lacklustre, business-as-usual budgets. He is best known for introducing new taxes. Thus he is the pioneer who introduced service tax in the late Nineties, and the securities transactions tax and the fringe benefit tax in his present tenure. I am sure he has his reasons for this fiscal activism; but taxpayers find them extremely vexatious. The service tax brought many small firms into the tax net; they simply hate taxmen walking in and asking for all kinds of books and records. The securities transactions tax created considerable red tape in a fast-moving business. The FBT is an ill-defined tax, which has generated enormous disputes over definition. Business fears Chidambaram because of his penchant for new taxes; that is why stock prices melted in the week before the budget.
But surprisingly, Chidambaram did not introduce any taxes in this budget. He even tacitly acknowledged the nuisance value of the securities transactions tax by saying it may be reviewed next year. That cannot be called a change of heart. But it certainly looks like the loss of passion.
But it is not; it is just the discovery of a new love. It is the love of the common man, or the common woman as the case may be. Inclusive growth, development with a human face, kapda, roti aur makan — these mellifluous phrases have caught him in their net. In them he sees the future — the key to the 2009 general election, and hopefully to another term in power. As finance minister' I doubt it; he is bored stiff already.