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.
