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Chidambaram has taken risks in prescribing financial stimulus

comment Updated: Feb 18, 2014 02:36 IST
Chidambaram

When P Chidambaram took over as the Union finance minister in August 2012, he had identified price stability, clarity in tax laws, fiscal consolidation, and revival of the manufacturing sector as the top-most priorities to attend to a sputtering economy. The burst of reforms initiatives that followed shortly thereafter — easing of foreign investment caps in retail and other sectors, the passage of the pension funds regulatory Bill, the Companies Act and capital market reforms among others — bear the stamp of the government’s intent to pull growth back to the 9%-plus trend line. To the UPA government and Mr Chidambaram’s credit, the economic and regulatory landscapes have altered considerably over the last 10 years. On Monday, the Union finance minister listed out some of these and also defined the broad contours of the future roadmap.

As a statement of intent, as also as a record-taking exercise, the minister’s interim budget speech can be seen through two prisms: as an honest attempt to lay bare the facts as these were; or as an attempt to economise on facts. Reforms do not honour the fiscal calendar. A majority of announcements did convert into actionable points over a 10-year period beginning 2004 helping the economy shed some of its most sharp rigidities. After all, many promises — subsidised grain for the poor, education for the marginalised and a rural job guarantee scheme — have winded its way through a legal labyrinth before these have started to deliver.

Of the many challenges confronting the government — regaining 9% GDP growth, making development inclusive, improving the public delivery mechanism and consolidating public finances — the minister sought to focus the attention of this speech on most of these goals. It was first imperative to nurse India’s ailing public finances back to health. Slippage on the fiscal deficit target was no more an option with the threat of a ‘downgrade’ by international credit rating agencies casting a shadow over the economy.

The burden of reform expectations on Mr Chidambaram may not have been too heavy this time around, what the economy needed more immediately was a firm hand on the fiscal. Runaway government borrowing was choking India’s growth prospects presenting him with a difficult task: to cut unproductive expenditure without stuttering the growth engine that is meandering at decade-low rates. After seeing the fiscal deficit slide to 4.9 % of GDP, the minister promised to cap it at 4.8% of GDP in 2013-14. On Monday, he showed that he has more than delivered on that pledge by containing it at 4.6% of GDP and forecast to keep it at 4.1% of GDP in 2014-15.

Slippage here, by the government’s admission, posed a significant risk to consolidation that anticipates the fiscal deficit will shrink to 3% of GDP by 2016-17. Subsidies are projected to stay at Rs 2.55 lakh crore next year, despite provisioning for a new food entitlement plan.

The tricky bit, however, was to revive activity in the thousands of factories to spin jobs and multiply income. For this Mr Chidambaram relied on a textbook method: give firms tax breaks; the reduced prices and the resultant rise in demand will prompt companies to add capacities and hire more. The massive four percentage point cut in indirect taxes for the automobile industry is to make cars drive out of showrooms faster than the pace seen in the last 12 months.

The risk with such a stimulus is that it may shave off precious revenues for the government in a slowdown year. The Centre’s total tax revenues are set to fall short by about 6.6% from its budgeted estimates. Despite this, the minister has pencilled in a 13% growth in tax revenues in 2014-15. The growth in earnings assumptions are vital to meet a host of other metrics that he has set out for the next year, including the all important fiscal deficit. In a year of slow recovery some of these may have to be altered by the next finance minister.