Balancing act

Last Updated: Fri, Feb 22, 2013 21:50 hrs

North Block, the sandstone building where the finance ministry is housed, is well lit round the clock these days. Finance Minister P Chidambaram and his officers are busy adding finishing touches to the budget for 2013-14. By now, most decisions have been taken but everybody would remain tightlipped till Parliament is first told on February 28. North Block will keep wearing the veil of secrecy for few more days. Chidambaram, who some see as the country’s next prime minister, is under pressure from the investor community to not to succumb to electoral populism and fix the government’s finances. At the same time, this will be the last full budget before the 2014 general elections. Faced with numerous scandals and a resurgent Narendra Modi, Chidambaram is under pressure to use the budget to win votes. It will be a tightrope walk for Chidambaram who often behaves like a private sector CEO.

Lobbyists know the United Progressive Alliance is in a mood to please all. “Every section of the society is trying to impress upon the finance minister to get its demands fulfilled in the budget. Since this is the last budget before elections, the (Congress) party may want him to give sops. The finance minister, on the other hand, has his own priorities like controlling the fiscal deficit. He will have to strike a balance between their aspirations and the government’s resources,” says a finance ministry officer. The biggest challenge for Chidambaram may be to find resources for UPA Chairperson Sonia Gandhi’s pet project, the Food Security Bill. It will not cost the government anything around Rs 1 lakh crore.

Officials familiar with Chidambaram’s thinking say he would do everything possible to keep the fiscal deficit at 5.3 per cent of GDP in 2012-13 and 4.8 per cent in 2013-14 to send a strong signal to investors and ratings agencies that India is serious about controlling its expenditure. Keeping the fiscal deficit is important. Otherwise, the credit rating agencies will downgrade India, there will be a flight of capital from the country, foreign exchange will become dearer, imports will become prohibitively expensive and all economic activity will grind to a halt.

The scale has so far tilted in favour of sound economics. In the last seven months, ever since he took over as the finance minister, Chidambaram has, on various occasions, taken tough decisions and ignored political compulsions. He has liberalised diesel prices, capped the number of subsidised cylinders sold to a household in a year at six (later raised to nine), and opened up civil aviation and multi-brand retail for foreign direct investment. “When he is tightening his purse strings how are we going to get votes,” rues a Congress leader. Recently, Human Resources Minister MM PallamRaju shot off a strongly-worded letter to Chidambaram, calling his action to cut his ministry’s budget by 7 per cent “unjustified”.

At the road shows in South East Asia and Europe recently, the way Chidambaram wooed investors it became evident he would not take measures that can potentially hurt foreign inflows into the country. Foreign investors, after all, are the key to his gameplan. Strong inflows means a stronger rupee and consequently a smaller import bill, which will help him rein in the fiscal deficit.

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Though Chidambaram has assured investors of a stable tax regime and moderate taxes, he would find it hard to bring down the deficit without some tinkering in the tax rates here and there. He has made it clear the government cannot borrow beyond a limit and the only way to put the house in order is to do away with wasteful expenditure and widen the tax base by making the tax system more efficient. Tax recovery exercises and warnings issued by the tax department in the last few months have given a clear indication that expenditure cuts are not enough and the government is in dire need of more resources.

But there could be some populism thrown in. Chidambaram wants to protect the poor for obvious reasons, and in order to do so he will need to extract something from the well-off section of the society. This is where the proposed tax on the superrich fits in. Just like his predecessor Pranab Mukherjee, now President, said in his last Budget, “I must be cruel only to be kind”, Chidambaram might also disappoint some with his budget, but he would be extra cautious that his proposals do not create a negative sentiment among the investor community as it happened last year. He would try to address the concerns in international taxation. He has already made an announcement on GAAR. Now the issue of retrospective taxation with regard to indirect transfer of Indian assets would be addressed. A clarity is likely to be provided that in such cases no interest and penalty would be collected—a move that will give reprieve to Vodafone and many others.“This finance minister doesn’t want any litigation with the taxpayers. He believes in providing clear tax laws. A waiver of penalty and interest would at least bring the tax amount to the government which is otherwise stuck for last so many years and may take longer if litigations continue,” says another officer.

As limited resources may now allow him to announce any bigbang scheme, the focus would be on taking small steps in the social sector. The country’s youth can look forward to the budget as it may have announcements regarding employment and job creation, skill development, entrepreneurship education and the use of information technology. The finance minister may not announce a farm-debt waiver the way he did in 2008 before the elections, but some measures for the agriculture sector cannot be ruled out. This year’s budget is likely to highlight the government’s initiatives on direct transfer of benefits and financial inclusion—UPA’s trump card for the elections. Infrastructure, research & development, equity and corporate bond market are also going to be focus areas in the budget.

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For the last few weeks, Chidambaram has been spending most of his time readying the blueprint for the budget. Officers also reach early in case the minister calls them for a clarification on a file. However, coming early does not ensure they can leave early because even a five-minute meeting with Chidambaram needs a lot of preparation. Officers, who are new in the finance ministry or have been given new or additional portfolios, are not hesitating in seeking help from their predecessors. The finance minister may have a good impression of someone but he does not do anything without asking probing questions.

Some of the senior bureaucrats in Chidambaram’s team worked with Mukherjee last year. Finance Secretary RS Gujral, who tried to fill up government coffers last year with his taxation proposals as in-charge of the revenue department, will now have to address the problem from the expenditure side. Revenue Secretary Sumit Bose will have to dispel fears created by last budget. Economic Affairs Secretary Arvind Mayaram and Chief Economic Advisor Raghuram Rajan joined along with their minister in August 2012 and are likely to provide vital inputs for the budget. Financial Services Secretary Rajiv Takru and Disinvestment Secretary Ravi Mathur are new entrants in the finance ministry. DK Mittal, who retired as banking secretary in January, has been appointed finance minister’s budget advisor.

“The number of work hours has gone up, especially for officers in the revenue boards and budget division,” says one of his officers. He adds: “Chidambaram is a hands-on finance minister. His understanding of nuances of budgeting, law and finance is amazing. Nothing escapes his eyes.” It’s not just officers who need to come prepared for an appointment with their minister — even visitors need to be careful about what they say. In one of the pre-budget meetings, Chidambaram told a participant that the data citied by him did not seem correct. “I very much doubt it,” he is believed to have said.

As February 28 nears, timelines are being strictly monitored and officials are on their toes to meet the deadlines. Clear-cut guidelines have been given so that there is no confusion in the minds of the officers as to how the finance minister wants an issue to be tackled. “The finance minister knows that there should not be anything in the budget which is anti-growth or anti-investment, but at the same time he will have to slash the expenditure too. Inputs given by the party cannot be completely ignored. He has a difficult task at hand,” sums up the officer. While, on the other hand, another officer declares: “It is not easy to extract money from Chidambaram.” The party wants freebies for voters, and the industry and the common man want lower taxes and maximum exemptions, but Chidambaram has no option but to curtail the fiscal deficit. He will try to balance to the extent possible, but naturally, someone will have to bear the brunt and industry could be a bigger victim as the government cannot afford to displease the poor at this juncture.

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