Will the real Chidambaram please stand up?

In his eighth budget, expect a mix of a number-obsessed economist and an ambitious politician

alam-srinivas

Alam Srinivas | February 26, 2013




A close friend of P Chidambaram’s family laid out the political future of the finance minister. “By the end of 2013, Rahul Gandhi will indicate that he wants a role like his mother Sonia’s, which epitomises power without responsibility. So he will refuse to be the next PM and, instead, play a larger role in the Congress party. With Manmohan Singh out of the equation, Chidambaram will emerge as the consensus PM candidate for UPA-III in the 2014 general elections.”

Although this scenario seems a bit far-fetched at the moment, the FM does harbour such dreams. In private talks, time and again, he has told friends and journalists that he is a better ‘reformer’ than Manmohan Singh, and that he can lead the country better than any other Congress leader. The caveat, obviously, is that UPA-III comes back to power in 2014. It is in this political-egoistic context that the decisions taken by Chidambaram in the past five months assume gigantic proportions.

More importantly, the FM’s Budget 2013 will be critical to either further enhance his image and credibility among various political, business and social constituencies, both local and foreign, or bust his personal ambitions to become the next PM. By March 2013, after his eighth budget, Chidambaram is likely to emerge as the two-faced Roman god, Janus, with two eyes looking at his past economic performances and the other two at a bright or no political future.

In fact, Chidambaram’s career as the chief economic policymaker (he has presented seven budgets in 1996, ’97, 2004, ’05, ’06, ’07 and ’08) has indicated his abilities to look simultaneously at the past and future. But since he is no economic god or demigod, his budget announcements were strewn with inherent contradictions. What he proposed in one year was overturned the next year, or a few years later. It is, therefore, almost impossible to figure out the real Chidambaram.

He has been hailed as the great economic reformer and, yet, he has taken some of the worst economic measures. He has slashed tax rates and, still, he has burdened the existing taxpayers with additional taxes. He has been known to be pro-business and, yet, he has attacked the business community. He has spoken about fiscal consolidation and, still, he has let fiscal deficits go out of hand. He has produced a ‘dream budget’ (1997) and also several nightmarish ones (for example, 2008).

We present a report card of what Chidambaram has actually done in his past seven budgets and, therefore, what to expect from budget 2013. We also analyse whether his next election budget will be similar to or radically different from his election budget of 2008.

Tax cuts versus new taxes
One has to look at only his 1997 budget to be convinced how Chidambaram has made life easy for the middle-class and business communities. In that one speech, he “decided to lower the rates of personal income-tax across the board”, reduced the “tax rate applicable to both domestic and foreign companies”, and slashed the peak customs duty from 50% to 40%.

Later, he claimed in the 2008 budget that his policies to lower taxes translated into higher government revenues.

A recent article in the Economic Times concluded that low- and middle-income earners and entry-level employees have been the “biggest beneficiaries” of tax cuts in the past 10 years. It added that the “effective tax rate of a person earning '3,00,000 a year has dropped from 14.1% in 2003-04 to 3.4% now….”. In these 10 years, Chidambaram has presented the budget five times and, hence, can claim most of the credit for this dramatic turnaround in the tax rates.

But in the same breath, the FM has forced existing taxpayers to pay more in other ways. One of them is service tax, which has been expanded to several sub-sectors and whose rate has gone up steeply from 5% in 1996 to almost 12.5%. In most of his speeches, Chidambaram has argued that services account for majority of India’s GDP, and “they are products as much as ‘manufactured goods’.” Hence, like excise and customs on manufactured products, services should be taxed similarly.

In addition, even as the FM has dropped some rates, he has imposed new taxes on those to whom the reliefs were given. These came in the form of a levy of 2% on all imports “except those that carry nil rate of duty” in 1996, a cess of 2% on income tax, corporation tax, excise duties, customs duties and services tax in 2004, and a countervailing duty of 4% on all imports in 2006.

In the 2005 budget, he announced that all benefits and perks enjoyed collectively by employees, and which “cannot be attributed to individual employees,” will be taxed henceforth in “the hands of the employers”.

Prediction for Budget 2013
Chidambaram has publicly said that he will follow a stable tax regime this time; so there will be no hikes in the existing rates. But since he has to shore up revenues, he may plug several loopholes, do away with exemptions, and introduce new taxes, as he has done in the past.

Pro-business versus anti-businessmen
Not many people realise this, but the FM has been at the forefront to defend corrupt businessmen. Not many people remember this, but he was the one who announced the much-controversial voluntary disclosure of income scheme (VDIS) in budget 1997. In one stroke, it allowed tax-evading entrepreneurs to convert their huge stash of black money into white — and that, too, with the government’s blessings. In fact, almost everyone criticised this scheme, which allowed the corrupt to go scot-free.

In its report on VDIS, the comptroller and auditor general (CAG) critically observed that the scheme was extremely complex and, thus, allowed the tax evaders “with an opportunity for widespread misuse”. The CAG added that the scheme “provided one more opportunity to dishonest assessees (mostly large companies and business houses) to pay tax at a preferred rate and then retire to the old habit of concealing income.”

Chidambaram was accused of doing the same in the recent past for his role in the 2G spectrum scam, and his defence of the PM’s allocation of coal blocks (2004-08). It was the same FM who allowed firms that were allotted 2G spectrum in 2008 at the cheap rates of 2001 to sell off their stakes to foreign investors at a huge premium. And it was Chidambaram who publicly claimed that there was absolutely no loss to the exchequer, contrary to CAG’s conclusions, due to the coal allocation policy.

His role in the postponement of general anti-avoidance rules (GAAR) announced by his immediate predecessor, Pranab Mukherji, in budget 2012 to plug tax loopholes in cross-border mergers (like the Vodafone buyout of Hutch-Essar mobile operations) has also been questionable. While most foreign investors have welcomed Chidambaram’s delaying tactics, most lawyers and corporate observers have said that this only allows foreigners to consistently evade
legitimate taxes.

But it has to be conceded that Chidambaram has tightened the tax noose around businessmen. A sterling example of this aspect of his was the move to introduce minimum alternate tax (MAT) in budget 1996. Until then, a number of large companies, including Reliance Industries, which earned huge profits each year, got away without paying any corporate tax. It was the FM, who insisted that all profitable firms had to pay some corporate tax to the government.

Even the upper middle-class and rich people have not escaped the FM’s hawk eyes. In 1997, he forced them to compulsorily fall into the tax brackets. He said that the residents of large metropolitan cities, who satisfied any two of criteria such as ownership of car, immovable property and telephone, and who had gone on a foreign trip the previous year “should voluntarily file their tax returns.” Hence, he increased the possibility that they would pay taxes if they had not been doing so in the past.

Prediction for Budget 2013
Since corruption and black money have become huge issues today, as witnessed during the Anna Hazare and Arvind Kejriwal movements, the FM is unlikely to give any sops to businessmen. If at all, he may slightly tighten the screws on them.

Reforms versus welfare schemes
There can be no doubts that Chidambaram has been as good a reformer as Manmohan Singh, if not better. The height of his pro-market image was the 1997 budget, which was rated 9/10 and even 10/10 by leading businessmen and economists. In it, he replaced the draconian Foreign Exchange Regulation Act (FERA) with a much milder Foreign Exchange Management Act (FEMA), de-reserved several sectors meant for the small scale firms, and rationalised the tax rates.

Then, in 2004, he hiked the foreign direct investment (FDI) caps in telecom, aviation and insurance. The next year he gave a huge boost to the microfinance sector which, unfortunately, led to huge scandals in the recent past. In 2006, he claimed how the government’s financial success was based on “unrelenting emphasis on fiscal prudence through enhanced revenues and expenditure control, monetary stability and management of the external debt”.

He has talked of cutting subsidies, especially fuel and fertiliszer, and targeting them to poor families to reduce corruption. In the 1996 budget, he said he would “restructure” the public distribution system to achieve these objectives. In 2004, he introduced a pilot project to issue food stamps that would enable the real beneficiaries to buy food from the ration shops. And, in 2005, he converted the food-for-work programme into the national rural employment guarantee scheme (NREGS).

Sadly, Chidambaram is also known for some of the most audacious welfare schemes, which had no economic, and only political, logic. This was clear from the election budget speech in 2008. In the last UPA-I budget before the 2009 general elections, the FM announced a grand loan waiver scheme for farmers, which cost the banks, mostly state-owned, '60,000 crore. According to some political pundits, it delivered electoral results, as UPA-II returned to power.

During his 2004-08 stint as the FM, Chidambaram focused on welfare schemes as UPA-I talked about inclusive growth after the NDA’s defeat in 2004 despite its ‘Shining India’ campaign. In his 2006 budget speech, the FM said: “…the bulk of the resources must go to the UPA government’s eight flagship programmes: Sarva Shiksha Abhiyan, Mid-day Meal Scheme, Rajiv Gandhi Drinking Water Mission, Total Sanitation Campaign, National Rural Health Mission, Integrated Child Development Services, NREGS, and Jawaharlal  Nehru National Urban Renewal Mission.”

Prediction for Budget 2013
Since this too is the last budget before the 2014 elections, like in 2008, expect several welfare sops like Food Security Bill and increase in expenditure on NREGS. But since most reforms have already been announced in the past few months, expect only a few customary measures like the implementation of Goods & Services Act, which requires a change in the constitution.

In conclusion, one can only say that like we have seen in the past, do not expect the real Chidambaram to stand up as he presents his eighth budget this February. What you will see is a mix of an economist, obsessed with numbers, and a politician, who wants his party to regain power. It will be a mish-mash of a budget, which will combine several elements — mostly from his speeches in 1996,
1997 and 2008.

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