Understanding the finance minister
On 13 May, 2004, the Bharatiya Janata Party conceded defeat in the general elections. It had not done too badly; it had won 138 seats. But its principal partner, Telugu Desam Party, had been virtually wiped out in Andhra Pradesh. A new party, Telengana Rashtra Samithi, had channeled the feelings of neglect in a small and backward region, and garnered 6.8 per cent of the votes – almost equal to the fall in TDP’s share of votes from 39.8 to 33.1 per cent. The first-past-the-post system of elections tends to magnify the impact of changes in vote shares; TDP’s seats in Parliament fell from 29 to 5.
That defeat of this ally destroyed the BJP’s chance of returning to power. It also served as an object lesson of what the electorate thought of capitalist development which Chandrababu Naidu, a liberal reformer, had energetically worked for. It does not matter what the personal beliefs of Manmohan Singh or P Chidambaram about correct economic policies are. As long as they want to stay in power, they have to give the people policies they want, not policies that work.
Vajpayee’s unexpected step-down caused consternation in the Congress, which had neither expectations of coming to power nor seats for doing so. But no other contender emerged. The parties that wanted to keep the BJP out huddled together, and a bargain was struck: the communists would not enter government, but would ensure through their crucial support that a Congress-led government would follow illiberal policies.
Sonia Gandhi’s renunciation of the crown led to another convulsion. But finally on 24 May, Manmohan Singh called a meeting of his new cabinet as Prime Minister. Chidambaram, who shared his colleagues’ sense of wonder at being catapulted to power, said on that day, “As I stepped out on to the balcony of my first floor house today, I thought that a beautiful day had dawned. I hope that every day will be a beautiful dawn and together we will work hard to redeem the promises made to the people during the election campaign. These promises will be reflected in an important document called the Common Minimum Programme (CMP). When the CMP is revealed to the people, I am confident it will enthuse all sections of the people to work harder in order to make India a stronger country, to make the Indian economy a stronger economy, and to ensure better lives for all the people of our country.” He took his cue from what the Prime Minister had said to his cabinet colleagues – that his government must maintain the momentum of growth with stress on three issues – agriculture, employment and manufacturing. This has been the mission of the UPA government. This is what Chidambaram pledged to pursue as finance minister. And this is what he has pursued in his latest budget, come hell or high water.
There is a certain tradition of ministerial autonomy in Britain; but in all other countries, finance ministers are in a straitjacket of Prime Ministers’ or Presidents’ wishes, their parties’ programmes and electoral compulsions. Chidambaram is no exception. There is a strong belief in the Congress Party that there is massive unemployment in villages and that its removal is the key to rural prosperity and to winning the rural vote. I think it is a mistaken belief. A visitor to a village may get the impression of virtually everyone being unemployed because farmers and farm workers have to work only during the crop season. But the National Sample Survey has seldom shown rural unemployment to exceed 5 per cent. Working too little is not a sin; if anyone makes a comfortable living by working an hour every year, that is he should be envied. The villager’s bane is his low productivity, not his lack of work. But the orthodox Congressman finds such a view repulsive; he would rather have the villager breaking stones in the open on a summer day than sleep in shade.
Indians do not have the monopoly of cussedness; they have strong support from the international do-gooder community. And that community has its own shibboleths. It has blind faith in education. No one asks what this education should be. It is well known that children in India’s village schools are imprisoned in poorly built shacks, have to sit on the ground, and are taught to memorize and intone when they are taught anything; most of the time, teachers are away and children are left to their own devices. But these juvenile prisons are regarded as temples of learning; one of Chidambaram’s imperatives is to find billions for this largely pointless activity. It is not for him to question the wisdom of political holy cows, not for him to ask whether children could not be taught much more in much less time of what might be useful to them in later lives, or whether they do not have a right to be better accommodated and more effectively taught. His job is only to fund more of the same mindless activity.
It is an article of faith that India lives in its villages, and that for it to grow, agricultural growth must be raised. People do not want to eat more wheat or rice; despite the enormous growth in incomes, per capita foodgrain consumption has been falling. Villagers remain poor because they are only farming, and no one wants any more or the agricultural goods they produce. For them to get richer, they would have to take up some non-agricultural activities – make industrial components, or maybe set up spas for townsmen to relax in. But agriculture is so holy in our country that politicians will waste billions to increase agricultural output that no one wants and which would have to be subsidized if it were to find a market. Agriculture is our bottomless pit, and it was Chidambaram’s duty to throw money at it. He has done it well.
This is just an illustration of the proposition that Chidambaram’s expenditure proposals were born out of the political religion that he belongs to; his belonging to the Congress sect required that he should indulge in these expensive, symbolic actions. He had more freedom on the revenue side; and here there are signs of a cavalier approach. The changes in customs and excise duties bear signs of lobbying. I wonder which lucky dog led Chidambaram to reduce import duty on pet foods. The differential excise on cement is mbodies an incentive to keep prices below a certain arbitrary figure. It is a shamefaced substitute for price control. I wonder how someone with a reputation as a reformer could even think of it.
India is the home of gem cutting, but the industry is now in danger of migrating to China and Thailand. Once the finance minister decided to reduce taxes on it, it was silly of him to limit the “benign assessment procedure” to those who declare profit margins over 8 per cent of sales. And the application of enterprise and innovation is perfectly industry-neutral; one never knows where a clever entrepreneur will strike gold. The finance minister should not even try to second-guess innovators. His proposal to confine venture funds’ pass-through status to his own favourite industries is quite ill conceived.
I have no idea what Chidambaram means when he says that he has brought horizontal equity, or that taxing dividends brings vertical equity. I suppose the idea is that it is generally the rich who earn dividends, and hence that taxing dividends is vertically equitable. Actually, he has an instrument of vertical equity in progressive income tax. This is the only one he needs, and any further complications are unnecessary. He seems to think that he does shareholders a favour by taxing dividends at a lower rate than the maximum income tax rate, which a rich shareholder would normally pay. Actually, those dividends bore the full corporation tax to begin with; any further taxation of them is double taxation. It encourages people to set up companies and siphon off profits without calling them dividends, or even profits. That is why we have so many millions of companies in this country.
These are just a few examples of what I consider mistakes made by the finance minister. I have always been struck by Chidambaram’s high IQ; every budget day I have been baffled how he could introduce so many measures that look poorly conceived to me. It is in the interests of a finance minister to let his bureaucrats do what they like; they then give him an easy time and oblige him when necessary. It is my guess that Chidambaram decided at the outset to let his bureaucrats make budgets; the mayhem he has wrought is just the havoc finance ministry officials are capable when not controlled by a strong finance minister.