Time To Deliver
The Union Budget is a few hours away and whether it turns out to be a pathbreaking one or indeed a non-event we will know soon enough. Eyes, in particular of the corporate world (in and out of India), will nonetheless be riveted on Finance Minister P Chidambaram’s economic master plan as it unfolds today.
The positively inclined will look forward towards a “Dream Budget”, while some quarters would prefer to regard it as a “do-or-die” Budget. TV channels have coined it as “the last flourish”, meaning that the proposals mooted could economically sink the country as has been the case in some European nations or, alternatively, help India emerge out of a falling growth pattern with the Economic Survey released on Wednesday predicting GDP growth at less than 5 per cent for the coming fiscal.
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This being the last Budget before the 2014 Lok Sabha election, the UPA would want to ensure its vote bank is intact by appeasing the masses. But Chidambaram may not be the man with vote-banks on his mind. Left to himself, one can safely assume his decisions would not be motivated by populist choices but that’s not how politics works ~ pressure is being exerted upon him, and there are persistent reports of differences among his Cabinet colleagues on pre-election spending in the run-up to the Budget. PC’s mantra appears to be “austerity”, aimed at shoring up investors’ faith in a troubled Indian economy.
Given the circumstances, the Harvard-educated lawyer appears to be on the right track and this is evident from the fact that there has been no opposition to Chidambaram’s Budget-making plans from either Prime Minister Manmohan Singh ~ the architect of the 1991 economic reforms that led to the “Incredible India” story ~ or the Congress party chief Sonia Gandhi who too may have realized the depth of India’s economic woes. In essence, PC has as free a hand as circumstances allow so he should have no complaints. Today, he must deliver.
What has evidently bolstered Chidambaram’s hopes for an effective economic recovery roadmap has been his ability to convince the Congress leadership that reckless spending would make a sovereign rating downgrade to “junk status” inevitable, which in turn could trigger an economic meltdown. Of course, there is many a slip between the cup and lip and we must wait for a few hours before we can judge if the minister has done what India needs as opposed to what the Congress thinks will help win it the 2014 poll. But restrictions on foreign jaunts by insisting on the use on technology for officials’ video-conferencing in an effort to cut travel costs is just one of the many cost-cutting measures that can be expected in the months ahead.
Chidambaram was the Finance Minister in 1997-98 where he was applauded for his low tax regime and the dropping of surcharge on corporate taxes. Now, though, targeting taxes alone may not be sufficient to revamp a wavering economy. Despite political pundits predicting a voter-centric Budget, Chidambaram may throw up a surprise by showing his loyalty to the country’s economy rather than the party. That, at least, is the hope; whether to be belied or validated is up to PC. The indications, however, that he may actually put India first, as it were, have been apparent by recent moves in the banking sector, initiatives vis-a-vis partial deregulation of the diesel price, opening up of FDI in retail and liberalizing foreign investment norms for various sectors, including insurance.
What seems upper most on the mind of the Finance Minister is the potential threat of another failure to honour fiscal commitments, which could signal the end of the resurgent India story. It would be foolish to believe that we ought not to care about certificates issued by global financial rating agencies because their downgrades can have very adverse effects. In particular, foreign institutional investors are less likely to invest in Indian stocks if the economy receives a thumbs-down signal from these rating agencies. India cannot afford a drying up of portfolio investments; dollars are needed to pay for the yawning gap in the current account.
Chidambaram has repeatedly pledged to lower the deficit to 5.3 per cent of GDP this fiscal year and 4.8 per cent for 2013/14. But with economic growth languishing at a little over 5 per cent after the sharpest slowdown in a decade, the Finance Minister cannot rely on tax revenues to meet his goals. The task before him would be to ensure that investors are not upset, as was the case when last time investors were in a state of paranoia following plans to tax in retrospective effect acquisition deals and/or mergers. Additional taxes can be expected, but those alone will not be the focus. Here’s to looking at the Budget fine print in a few hours.
