P Chidambaram has had a long and distinguished career as finance minister, perhaps the high point being in 1997 when he presented what came to be labelled a “dream budget”. His long innings is about to come to an end because no pollster gives the United Progressive Alliance even a sliver of hope of coming back to power in the next election. So, the interim budget which has just been presented is his last hurrah. Of course, no one expected any fireworks in such an exercise — this was supposed to be a routine exercise which had to be performed in order for the current government to be able to function until the next government takes over in May.
However, the interim budget is not quite the damp squib that one had expected. In a move that can have very far-reaching consequences, Chidambaram has increased the spending power of states quite dramatically by transferring substantial control over expenditure on Centrally sponsored schemes to the states. This move implies that a number of social sector ministries at the Centre, including human resource development, health and rural development could become marginalized since their budgets have been transferred to the states.
All non-Congress ruled states have been demanding greater fiscal autonomy for a long time. This also makes economic sense since greater decentralization is typically a good move whenever the expenditures involved do not have large spill-over effects — in the latter case, some coordination amongst states may be desirable. However, the timing of the move has raised quite a few eyebrows. Why has the UPA suddenly woken up and absorbed the benefits of greater decentralization?
The answer, say its detractors, is political. First, this may well encourage some of the regional parties like the Biju Janata Dal in Odisha to be less antagonistic to the Congress. This does not sound very plausible given the long years of hostility between these parties and the Congress — they are not likely to be fooled by such a blatant move. Second, the Congress may well have thrown in the towel. They know that the Bharatiya Janata Party is going to capture power in May, with the help of some coalition partners. But, in order to retain their support, they will have to distribute patronage — dole out “pork” as it is called in the United States of America. Chidambaram’s move has ensured that the pork barrel is more or less empty, and so the BJP will soon be scraping the bottom of the barrel. This sounds a more reasonable explanation of why Chidambaram has suddenly become a convert to decentralization.
The finance minister has also made a token attempt — in all fairness he could even have skipped this in an interim budget — to provide some boost to the ailing economy. He has cut excise duties on capital goods industries and some consumer durables, the principal beneficiary in the latter category being the automobile industry. These sectors have been languishing for some time.
Unfortunately, like all token gestures, this one too is unlikely to have much effect. The domestic economy has been moving along quite listlessly, ‘surviving’ being about as good a word as any to describe its present state — in fact, pretty much like the UPA government itself. All the dynamism has been sucked out of it. Entrepreneurial confidence is very low. Only the die-hard optimists are willing to start new projects. The lack of new investments has sent the capital goods industry in particular into deep depression. The rate of growth has never really recovered from the post-2008 slowdown. Consumer spending has also been relatively dormant. The only bright spot has been the export sector, which has done really well in the last year and a half. In fact, the economy would have been in serious trouble if the export sector had been dormant.
There is no reason to believe that the situation is going to change in the next quarter. It is not clear that the government did anything to boost the economy during the past year. Much of its efforts were designed to stem crises of various kinds — the sharp decline in the value of the rupee, inexorable rise in prices, particularly of food items, the rise in public debt and threat of a credit downgrade by credit agencies being some of the main fires that it had to put down. Nothing much can be expected of the government in its dying days. Even if it had the best of intentions, the model code of conduct will come into play as soon as the Election Commission announces the dates of the Lok Sabha elections. The government can then no longer announce any major policy initiatives.
The prevailing political environment is also a major contributor to the negative business confidence. Entrepreneurs hate uncertainty. The situation is extremely fluid — it takes considerable courage to make any predictions about which combination of parties will form the next government. Perhaps, the only certainty is that the Congress will not be in command. It is early days yet, but most polls suggest that it will get less than 100 seats. The average prediction for the BJP is around 200 seats. It may not be easy for it to cobble together the 70-odd seats that it will then require in order to command a majority. The remaining possibility is the Third (or is it the Fourth?) Front, which will have as many prime ministerial candidates as it will have parties. Even if a miracle happens, and such a combination manages to win a majority, there is about as much chance of it implementing sensible economic policies as there is of the Indian cricket team winning a Test abroad.