February 22, 2020
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Miracle Budget?

In one stroke, Chidambaram restores hope in the economy, brings cheer to citizens and industry, and makes the UF Government look far more secure. If his high-stakes gamble works, this could be the seminal budget of the 1990s.

Miracle Budget?

WHICH was the first proposal in Budget 97 that made you sit up straight? Was it the 10 per cent across-the-board income tax cut? Or was it the lowering of corporate taxes? Was it the asset-based extension of the tax net, which you had seen discussed in newspaper editorials and turned the page? Or was it some other new policy that sent you scurrying for the phone so you could buy as many about-to-zoom shares as you could?

Whatever your personal jaw-dropping moment was, you would have been in distinguished company. "I couldn't believe my ears," said industrialist Rahul Bajaj later. Businessmen, stockbrokers, the average salaried person across India, found themselves watching with increasing amazement and joy as the finance minister, braving a bad throat, ripped through our taxation system in 90 minutes of suave mayhem. Is there something perverse about this man? Last year, when an anxious nation held its breath, expecting the reformer-haloed lawyer from Chennai to take liberalisation that critical step forward, he did nothing. This year, when a cynical India expected the worst—that is, Nothing II (hadn't he after all shown his true colours in last year's weak-kneed budget?)—he turns around and takes your breath away. As India went to sleep on February 28, the most popular man in the country, arguably, was Palaniappan Chidambaram.

Does he deserve it? Yes.

For his courage to go that extra mile when the people had not expected him to, for his political shrewdness which left detractors speechless (well, nearly) and his Government suddenly looking stronger, and for the brave new visionary strategy he has unfolded, to power the economy into what he refers to as a "virtuous cycle" of growth. He may fail. The reasons could be myriad: he will not be able to control his Government's expenditure; states will continue their profligate populism and accelerate the power sector's descent into hell; and crucially, he could have overestimated the competence of Indian industry and the honesty of the Indian people. He may fail, but he will have his place in history.

Courage: Chidambaram is gambling on the chance that if he meets as many of industry's and the middle class' demands as he can without breaking up his coalition Government, he will unleash enormous positive energy into the economy. The average Indian complains that he evades taxes because the rates are so high. Chidambaram has slashed taxes for everyone and hiked standard deduction so that today a salaried employee earning up to Rs 6,250 a month does not pay any income tax. Corporates have been griping for years about their taxes, so Chidambaram has cut those too. "If even now people don't pay tax, something is radically wrong with them," says Suresh Krishna, chairman, Sundaram Fasteners. Double taxation of dividend—once in the company's hands, once in the shareholder's hands—has been a long-standing grouse. That's gone. The Minimum Alternate Tax (MAT) imposed last year has been bitterly opposed by industry. So that's been redesigned to be far more corporate-friendly. NRIs have grumbled about paying a higher capital gains tax than FIIs. Chidambaram has put them on par. Everyone has always complained about the complexity of our tax laws. They have been simplified. "When the FM speaks your language, industry is denied its opportunity to crib," says Murugappa Group Chairman M.V. Subbiah. "Now we don't have our favourite whipping boy to blame our shortcomings on." Chidambaram has thrown a challenge to a nation of cribbers:now go, dammit, and perform. Will the nation pick up the gauntlet? We'll know in the coming months. Right now, the hosannas are an epidemic. "Path-breaking, path-breaking," says Anand Mahindra, deputy chairman, Mahindra & Mahi-ndra. "We could not have asked for more." "I am absolutely delighted," says M.G. Damani, the tough, curmudgeonly BSE president. "Almost 95 per cent of what the broking community had asked for has been allowed. The response on the bourses will be fantastic." "This is manna from heaven: open, transparent, whatever we were hoping for," gushes the patrician-demeanoured Nimesh Kampani, chairman of JM Financial and Investment. "I am predicting a 22-per cent growth in the corporate sector for the next year." And, says an elated Delhi-based senior advertising executive, tongue firmly in cheek: "If the Tamil Maanila Congress puts up a candidate in my constituency in the elections, I'm going to vote for it." But how firmly anchored is that tongue in that cheek?

Political Shrewdness: Just two days before the Union Budget, Ram Vilas Paswan presented the Railway Budget in the grand Indian tradition of political sops and bad business sense. But since 6:28pm, February 28, when Chidambaram finished his Budget speech, the UF Government looks more secure. You can see that in middle-classeuphoria all around, and in the discomfiture on the faces of Congress and BJP politicians, as they grope to find the chinks in the armour. Chidambaram has managed to achieve three crucial political objectives:

l He has suddenly transformed the UF in the eyes of the middle and upper classes from being a chaotic collection of regional politicians of uncertain intelligence and ability into a government with guts. He may have expanded, at least for the time being, the UF's potential constituency from lower-caste and regional votebanks right up into large pockets of the highest of the higher-income strata. In that perceptual shift, he may have actually lent his Government more longevity than anyone had been expecting. Says Harsh Mariwala, managing director, Mar-ico Industries: "With Budget 97, the UF has pushed the Kesris and other detractors way out of the coalition's centrifugal force. There's no way any party, Congress or BJP,could risk an election soon."

For nine months now, the Government has watched helplessly as policy measure after policy measure has failed to have any impact on the stockmarkets and foreign investment. Clearly, this was more an image problem than anything else. This Budget is a pile-driver into that problem's solar plexus. Obviously, Chidambaram and Deve Gowda have realised that they have nothing to lose, so they may as well go out on a limb, what the hell. Things couldn't get worse, could they? The gamble is working, as of now.

l Alongside the concessions to industry, he has maintained the growth of social sector spending, of food and fertiliser subsidies and other sops so crucial to the average Indian politician's scheme of things. Says Surinder Kapur, chairman, Sona Steerings: "In increasing subsidies, the FM has been a good politician. He has silenced some of his stiffest critics within the UF as well as outsideand bought the freedom to effect some of the more bolder measures in the Budget. " In his last budget, Chidambaram camethrough as a near-genius at balancing diverse political interests minutely. This time round is clear evidence that he hasn't lost that ability. And he's learnt much more.

l He may have even learnt to tackle the carping Left. Nothing exemplifies this better than his partial, but significant, opening of the insurance sector. He has allowed LIC and GIC to form joint ventures and set up other insurance companies, and he has opened up the health insurance market to private players, provided they are at least 51 per cent Indian-owned. His argument to the Left—which sees the 250,000 unionised insurance employees as a valuable vote-bank and has opposed tooth-and-nail every suggestion of liberalisation in the sector—is watertight. LIC remains a monopoly in life insurance, as does GIC, except in health insurance. Joint ventures will bring new management skills to the public sector giants, and a better deal for the consumer: not the Left's objectives. Health insurance is still a minuscule market, which is clearly dangerous for society, and, according to Chidambaram, GIC top brass has admitted to him that they have failed to expand the market. Anyway, all the new players are going to be Indian, so the Left charge of selling the nation's insured soul to the West falls flat.

Some insurance aspirants may have expected more. Said Malcolm Tarling of the Association of British Insurers: "We were waiting for something that could be of interest to us. We've seen nothing." He may be mistaken. Others have seen it differently—and correctly. "This is certainly a step in the right direction," says Duncan G. West, CEO-India, Royal & Sun Alliance Insurance. "We are comfortable operating in health insurance in the short term. In the long term, we need other business and hope this will be just a first step, to be followed shortly by opening competition for other products." Chidambaram has gone to the extent that is politically feasible right now, and by doing so, he has sent a message of gradual liberalisation. Even in his petroleum-related proposals, one can sense a carefully-masked hint at moving slowly out of the administered-price regime to free-market pricing.

Economic Strategy: This bold strategy is based on three pillars: greter consumer demand, industrial growth, and that reasonable tax rates turn people honest. By slashing income tax, he has put more money in people's hands, and hopes a large part of it will go into buying goods, rendered cheaper by excise cuts. He expects demand to grow fast enough to check inflation, which he plans to do with a tight leash on money supply and government borrowings.

Lower corporate taxes mean higher company profits and he wants much of that to be reinvested in the business. To ensure that he has slapped a 10-per cent corporate tax on shareholder dividends as a disincentive to fritter away profits on dividends to earn some short-term brownie points. This revved-up demand-supply cycle could cause robust industrial growth and generate employment, if managed carefully. Chidambaram clearly has no intention of letting the Government generate employment, and quite rightly too. He has given several breaks to the small industries, though, arguably, he could have gone further. This, he hopes, will unleash the Indian's entrepreneurial spirit.

The crucial gamble, however, is that the lower tax rates and extension of the tax base to anyone who fulfils at least two of four criteria—ownership of a four-wheeler or a phone, foreign travel in the last year, a residence above certain fixed criteria—will make tax collectionsgrow. Lower rates-higher tax collections is the Reaganite-Thatcherite strategy. In Reagan's case, it failed; in Thatcher's case, it transformed a society.

So which way will India go? "The new tax rates and simplified procedures deny any justification for tax evasion," says Subbiah.

Any thinking Indian should sincerely hope so too.

And the horizons for a 13-party coalition are never cloudlessly sunny. The nimbus floating there is the oil pool deficit. Sooner or later, the Government will have to raise prices, or it ends up jeop-ardising the health of the public sector oil compa-nies, especially Indian Oil, and ensuring it won't get a good price at disinvestment time. And when the oil prices are raised, the euphoria could vanish as suddenly as it has appeared. But tomorrow's another day. On February 28, the day the UFfinished its first nine months in office, it looked reborn. 


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