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.
