Saturday, December 5, 2015


From Business World of 29 June 2004, on Chidambaram's forthcoming budget.

The budget

THE general expectation was that the finance minister would take some weeks to take the reins - that the budget would not be presented till the end of July. In the event, Mr Chidambaram has decided to seize the bull by its horns — or the bear by its ears — and present the budget on July 9. This is part of his style — he likes to do today what he could do tomorrow. But it also means that the budget will use available ideas, and will not make radical departures. Insofar as it pushes forward fiscal reforms, they may be based on Kelkar's painstaking work done a year and a half ago.This is not a bad idea. There are no serious complaints at the moment about fiscal policy — as distinct from
fiscal administration — and there is a point in maintaining stability. Mr Jaswant Singh presented what was a budget in all but name in February; in particular, he gave generous tax relief to the industries and industrialists that were dear to his government. To that extent he reduced the scope for concessions by Mr Chidambaram. It is, in any case, too early to begin playing politics; a straightforward, no-change budget will do much to stabilise expectations. Mr Chidambaram was one half of the team that began to bring down trade restrictions and make the economy competitive in 1991. It will be good if he reaffirms his mission, especially since the allies of this government give reason to expect the opposite. The finance minister should bring down import duties further; and he should remove some of the anomalies that the past government's policies of industrial

grace-and-favour introduced. This would be a good year to bring down the maximum duty to 12%, and to begin reducingduties on those goods that were left out as exceptions. Mr Chidambaram first introduced service tax; it would not be surprising if he applied it to some more sectors. But more important than its coverage, this tax itself needs a second look. It is akin to a direct tax, but by a ministerial quirk was given to the central board of  excise and customs to collect; the result has been an extremely intrusive and often unfairm system of collection. The tax has also brought into the net a large number of small enterprises — media and advertising for instance — and increased the scope for corruption. There is no time for a comprehensive review now; but once the budget is past, Mr Chidambaram should take a serious second look.The government has already increased the price of petrol and diesel, and to that extent, brought down the losses of government oil companies. But this is not enough. Mr Ram Naik, petroleum minister in the NDA government, was unashamed about exercising arbitrary power over the oil companies. As a part of this intervention, he forced them into reversing the reforms that led to the dismantling of administered prices. His policy cannot be continued. The entry of private companies in oil product retailing is now inevitable. They cannot be forced to give subsidies, and yet subsidies given by public enterprises are bound to distort competition and inhibit the setting of private petrol pumps. Subsidies are not a speciality of the NDA; there must be many in the new government who would love to see their continuation and expansion. It is to be hoped that Mr Chidambaram will firmly put his foot down and force a return to market pricing of oil products. If he does not, the government’s promise to free the management of good government enterprises would mean nothing.Most of the action in the coming budget is likely to be on the expenditure side. It was there that the past government accommodated its favourites. The present government has come in with strong priorities — to agriculture, the poor and the backward classes — which are bound to be reflected in the budget. Whether one calls them priorities or handouts, they are what politics is about, and it would be unrealistic to wish their disappearance. But it is to be hoped that a change of priorities will mean a change in the direction of expenditure — that as new programmes are funded, funds for old favourites will be cut. In particular, food subsidies are poorly targetted, and fertilizer subsidies have held up healthy growth in that industry for four decades. The government is unlikely to meet its objective of cutting the revenue deficit unless it begins to make cuts in undesirable expenditures right now. But perhaps Mr Chidambaram has a surprise up his sleeve. Perhaps the highlight of the budget will not be in its fiscal proposals, but in the broader policy initiatives Mr Chidambaram announces. For with Dr Manmohan Singh as Prime Minister, it is surely time to revert to his practice as finance minister of announcing the entire government's reform programme in the budget speech.