The Hindu Business Line : For Chidambaram's balancing act

The challenge is to get resources flowing through reform policies that do not raise the hackles of the Left or the Opposition even while ensuring growth with equity.

The Indian economy is in the pink of health with its macroeconomic fundamentals at their best corroborated by the country's bourses. As the President told the joint sitting of Parliament at the start of the Budget session, "the economy is on the move and the people are on the march".

This mood will get further amplified or attenuated on Tuesday, depending on what the Finance Minister, Mr P. Chidamabarm, presents in his third Budget of the UPA Government headed by the reform architect, Dr Manmohan Singh.

The UPA Government's first Budget, immediately after the coalition took power in 2004, did not come out with any far-reaching measures.

But the second, for 2005-06, set out the Government's intentions by announcing such grand schemes as Bharat Nirman, the National Rural Employment Guarantee Programme, the Backward Area Development Fund, the National Urban Renewal Mission, viability gap financing for infrastructure, Rural Health Mission and augmenting credit to agriculture and rural development, even while bringing down the peak Customs duty to 15 per cent. More services were brought under the tax net to find resources for financing the welfare schemes.

EARLIER INNING

During his first stint as the Finance Minister in the United Front Government in 1996-98, Mr Chidambaram did earn some unpopularity for bringing in the minimum alternative tax (MAT) and the voluntary disclosure schemes (VDS) even as the 1997-98 Budget got him some brownie points for tax reforms that by and large made him the creator of a dream Budget.

This second coming of Mr Chidambaram is seeing him being more accommodative of the Left parties supporting the coalition government from outside and providing outlays for the social infrastructure commitments made in the National Common Minimum Programme (NCMP). In fact, in his second Budget last year, he had to put on "pause" the fiscal-deficit-reduction commitments under the Fiscal Responsibility and Budget Management Act (FRBM).

According to the recently-released IMF Staff Paper on India, the 2005-06 Budget deficit target of 4.3 per cent of GDP falls short of the minimum reduction required by the FRBM Act.

"This reflected significant spending increases for key social and infrastructure needs and higher transfers to the States. The general government deficit is projected by staff to rise for the first time in four years, to 7.75 per cent of GDP," the paper said. How far this will become true will be known when the Budget is presented on February 28.

CURBED REFORMS

It must be noted that with the Left parties expressing concern over the government's market-friendly policy to attract foreign direct investment, the elbow room for further reforms in the Budget may be limited unless Mr. Chidambaram convinces them that investments, both domestic and foreign, are too important to be ignored. Even as the domestic manufacturers, particularly in the apparel segment, seek flexible labour laws to employ people in skill-intensive jobs, the UPA Government is reluctant to broach this issue lest the Left snaps, and too hard.

As a flexible labour policy is the demand of both the domestic manufacturing industry and the foreign investor, the dilly-dallying on this issue is a single significant obstacle dampening investor interests on India.

As this is the terminal year of the Tenth Plan, the Approach Paper to the Eleventh Plan, setting out government priorities for the next couple of years, needs to be spelt out clearly in the Budget. Hence, there is much expectation about moves to sustain the 8.1 per cent GDP growth the economy is likely to register this fiscal.

As the Government's agenda is inclusive growth, how to deliver equitable benefits to all sections is engaging the attention of the authorities, particularly Dr Manmohan Singh.

FOR GROWTH WITH EQUITY

For the Finance Minister, the challenge is to get resources flowing to the exchequer through credible reform policies that do not raise the hackles of the Left and the Opposition and simultaneously ensure growth with equity. This brings to the fore the issue of tax reform, particularly the efficiency of administration and little harassment to the payers.

The sorry state of affairs was reflected when the Finance Minister told the Lok Sabha on February 24 that there were 852 cases in which tax dues of more than Rs 10 crore each, and all aggregating to Rs 71,116 crore, were outstanding. More shockingly, as much Rs 67,026 crore of this may not be recoverable for various reasons, including Rs 23,877 crore outstanding in scam cases where all the assets are in the custody of the Special Court.

The adjudicating mechanism and the long delay in settling tax issues need to be set right if the intention of the Government is to secure what is legitimately due to the authorities.

The various exemptions and concessions put into the tax statute need to be eliminated as they distort the system by encouraging official harassment or favourtism depending on the ability of the assessee to endure, comply or corrupt the system.

The Parthasarathy Shome Committee, the Kelkar Committee and the National Institute of Public Finacne and Policy (NIPFP) have all been against tax exemptions.

For instance, the exemption to small-scale units with a turnover of up to Rs 4 crore or tax payable up to Rs 1 crore are major distortions as they only lead to splitting up of businesses, as an NIPFP study said estimating that the revenue loss of this exemption is a huge Rs 12,500 crore.

AVOID TAX CLUTTER

Besides removing exemptions, the Finance Minister could avoid cluttering the tax statute with additional imposts. For instance, his last year's proposals such as the fringe benefit tax, the banking cash transaction tax and the securities transaction tax drew howls of protests from industry and capital market participants.

In fine, as Mr Chidambaram unveils his Budget package, hope runs high that he will take into account the overarching need for containing the fiscal deficit, ducking populist policies that would cost the exchequer dear without contributing to productive and growth impulses in the economy.

How he strikes a balance between fiscal rectitude and unleashing growth impulses in the economy will be known two days hence.