Election Economics

It was probably the worst time to present a budget. A day earlier, the rulingCongress party suffered thumping electoral defeats in two states to add to itsworries on account of the Q Factor, and only a few were optimistic about itsperformance in the next round of state polls. The night before, global marketshad tanked and the Sensex opened 350 points down. For the past few weeks,inflation had raised its ugly head forcing the government to initiate steps tocurb down prices. In December last year, P. Chidambaram had fractured his toeand wasn't sure if he would be able to stand in Parliament for over 100minutes to deliver his speech.

Going by the immediate reactions, it was probably the worst budget in recenthistory. India Inc dubbed it an average one, and CEOs gave it a rating of 5 on10. An analyst said it would have been worse if it had been presented a coupleof weeks later. Another claimed that the only positive aspect about it was thatit could have been worse. Bharti's Sunil Mittal felt that the FM had donenothing for the corporate sector. Even Chidambaram said hours after his speechthat there were no negatives in his budget for manufacturing, forgetting tomention of course that there were no positives either.

Of the 103-minutes speech, a third was on agriculture, education and health.Another third on infrastructure, employment and inflation. The tax-relatedproposals took a mere 30 minutes -- which included concessions for umbrellas andpet foods. The only reforms the FM announced were to cut peak import duty to 10per cent, use a minute portion -- about $5-6 billion -- of the bulging foreignexchange reserves to fund infrastructure, and allow short-selling by foreigninstitutional investors. That's why one commentator said the speech hadovertones of old-style socialism. For those, who have heard budget speeches fordecades, it sounded like one from the 1980s; and after all almost all FMs ofthat era taxed cigarettes as well.

Why did the FM do what he did? Why did he present such an insipid budget,especially when the economy is doing well, the general elections are over twoyears' away, and he had the opportunity to take some hard decisions? For thosewho can read between the lines, or read PC's lips, the budget gave a clearsignal that the Congress, together with its allies, is gearing up for theforthcoming state elections in Uttar Pradesh and then in Gujarat later in theyear. Therefore, the FM had his eyes turned towards 10, Janpath, whileformulating the various budgetary proposals and allocations.

Given Sonia Gandhi's interest in the lives and affairs of the aam aadmi,there was no escape from doling out sops to the small and marginal farmers,announcing a safety net for workers in the unorganised sector, giving a fewincentives to the small traders and service providers, and making an attempt toboost production and productivity of the farm sector. To be fair to PC, it mustbe noted that he has realised that agriculture is the real laggard of theeconomy, and India can't even dream about double-digit GDP growth withoutsustained growth rates in this area. During the 10th Plan period, agriculturewitnessed an average growth of 2.3 per cent compared to a target of 4 per cent.

The FM had the luxury of not doing anything for India Inc, since it's on aroll and growing at a rollicking pace. As one CEO commented that the Chidambaramgave a thumbs up to the industry and urged it to keep it up, without announcinganything extra for it. Thanks to the expected 9.2 per cent growth this fiscal,the FM also had enough money to give out for welfare schemes like the NationalRural Employment Guarantee Scheme (NREGS). In fact, it isn't surprising thatwithout doing anything, the FM expects to witness an over 17 per cent growth ingross tax revenues in 2007-08, compared to 2006-07. He hopes that customs andincome tax revenues will grow by over 20 per cent each, and service tax by over30 per cent.

Inflation was always going to be an integral part of this year's budget.And that's one area where we see echoes from the socialist past. Thegovernment has virtually forced cement manufacturers to lower prices by having adual excise duty structure; the FM contends it's meant to incentivisecompanies that sell at lower prices. Dual tax structure has invariably led tomisuse and leakages-- as it did with Public Distribution Scheme (PDS)-- and thefocus in the era of reforms should be to simplify the tax structure, rather thanmake it more complicated. The paragraph on the ban on futures trading in wheatand rice was a political bow to Congress leaders, who have been clamouring for aban on all futures trading in food commodities.

Chidambaram tried to enthuse the stockmarkets on a day when a crash wasinevitable due to the biggest ever single-day crash on Wall Street since 9/11following the volatility in Chinese markets a day before. He allowed individualsto invest in overseas markets through mutual funds, gave minor sops to FIIs, andtalked about self regulation under the aegis of SEBI. But the Sensex tanked byover 550 points, thanks to proposals such as the hike in dividends distributiontax, minimum tax on software firms, and fringe benefit tax on ESOPs. The logicwas that the dividend tax at the giver stage was lower than minimum tax that anindividual would have to pay on that income, the minimum tax effect will beminimal, and ESOPs are fringe benefits to employees and should be taxed.

But what has really irked economists and corporate leaders is that despitesaying things to the contrary in his earlier budgets, Chidambaram has indicatedthat the only way to solve a problem is to throw more money at it. For years,the FM has said that allocations for the social sectors and welfare schemes needto be spent more efficiently and the government has to improve the delivery mechanismsto ensure that the money reaches the right people. He said it again this timetoo. However, there has been little indication that this has indeed happened inthe past 33 months.

What was missing in the budget was a vision or even a long-term economicstrategy. Unfortunately, two of India's greatest reformers, who alwaysmaintained that there's an economic consensus in the country on reforms thatcan't be impacted by politics, have been saddled with heavy political baggage -- andperhaps they had no choice but to let politics triumph over economics.