History of broken promises

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Populism and profligacy are becoming a habit with finance ministers. Sutanu Guru and Atul Bharadwaj analyse how P. Chidambaram has set a really dangerous and insidious precedent for the economy.

It is February 1985 and the then Finance Minister Vishwanath Pratap Singh (arguably the worst Prime Minister that modern India had to endure) presents a Union Budget that electrifies the nation. Rajiv Gandhi is the Prime Minister and India, wounded by Indira Gandhi’s assassination, Operation Bluestar, carnage in Assam and lack of economic opportunities, is desperate for redemption. Apart from loosening the grip of the state on entrepreneurship, V.P Singh unveils a Long Term Fiscal Policy (LTFP). The LTFP is a blue print that promises that the government will refrain from reckless spending and ensure that fiscal deficits reach acceptable levels within a well defined time frame.

We doubt if Mr ‘Mandal’ remembers his LTFP speech, but the fact is that by 1990-91, the government was bankrupt and India had to pledge gold to pay for oil imports in 1991. The reason: despite tall promises, successive finance ministers had behaved like profligates playing around with tax payers’ money. In fact, N.D. Tiwari as Finance Minister presented the notorious ‘pre-election’ budget in 1988 when excise duty exemptions on ‘bindis’ were the talk of pink papers!

The current Finance Minister P. Chidambaram is luckier and India is more fortunate. Buoyant tax revenues and bulging foreign exchange reserves have given Chidambaram the playing field that V.P. Singh, and for that matter Rajiv Gandhi, never enjoyed. The pink papers and pundits are marveling at how the Harvard educated lawyer (who incidentally represented Enron in India when he was not the Finance Minister) has managed to keep the revenue and fiscal deficits quite close to targets. And what are the targets for this fiscal year?

The targets were to reduce overall fiscal deficit to 3% of GDP by 2009, and reduce revenue deficit to 1% of GDP by 2009 and zero the next year. While presenting the latest abracadabra budget, Chidambaram boasts that he is successfully meeting the targets set by the Fiscal Responsibility and Budget Management Act of 2003. Chidambaram insists that he has been fiscally prudent and that his wild grandiose allocations on social welfare schemes and loan waivers will not lead to huge deficits since tax revenues are buoyant.


But look closer at the financial jugglery that is going on and you will realise that Chidambaram is being economical with the truth, and the reality. And the precedent set by Chidambaram will in all probability mean that no Finance Minister in the future can even hope to be fiscally prudent and genuinely meet the fiscal and revenue deficit targets set by the FRBM Act. Chidambaram has cleverly unleashed a genie. But he has been too clever by half. And India will pay dearly. “I see some risk number on account of the sluggish GDP growth, the impending sixth pay commission hikes, higher interest costs on sterilisation bonds, growing interest payments on oil subsidy bonds and the continuation of various subsidies,” shares Deepak Uppal, Principal Consultant, PricewaterhouseCoopers. However, Gaurav Dua, Head Research, Sharekhan Limited feels that, “Given the fact that it is an election year, the populist budget is line with the general expectations. Despite the increased spending on rural and social sectors, the finance minister has set the fiscal deficit target at 2.5% for 2008-09. Steps are also taken to contain inflation (through excise duty cuts) and boost domestic consumption (through increasing the annual income slabs for tax rebates).”

wer in 2004 much to the surprise of most thinking Indians, Chidambaram presented his first budget where he announced that the Fiscal Responsibility and Budget Management Act (FRBM) will be a ‘mantra’ that he will follow meticulously. This coming from a man who presented a ‘Dream Budget’ in 1997 promising fiscal responsibility to have the Fifth Pay Commission hikes ravaging government finances for a few years was a tough call for hacks who were not sold on his dreams, and his smug smiles. Now he has done the trick again…

If you go by his budget speech and the papers that you have to scour through, Chidambaram has done the impossible: he has given away thousands of crores in doles, waivers and sundry welfare schemes and yet assured voters and tax payers that his government has enough revenues to ensure that the fiscal deficit will remain at 3% of GDP. What he has forgotten (perhaps deliberately) to tell-with the connivance of pink papers-is that more than Rs.1,00,000 crores will be spent by the government the coming year without any idea of where that money will come from. Countering this point Sandesh Kirkire, CEO Kotak Mahindra MF argues that “It is worth commending that while the total expenditure for the present Budget has expanded by only 5% over the previous year, yet the non-plan expenditure for FY09 is projected to expand by only 1.2% over the previous year. This indicates the increasing emphasis on planned and monitored outlay as well as constraining non-planned expenditure. The tax revenue has also been projected at a rate lower than the current year to account for the drop in excise duty rates while the non-plan expenditure growth has been kept flat for the next year. Thus, this year’s Budget proposes to achieve revenue deficit of 1% and fiscal deficit of 2.5% of GDP.”

Let’s start with the mother of all loan waivers. When Chidambaram was giving his speech, the waiver package was set to cost Rs.60,000 crore. Now, even Congressmen and other insiders are saying the bill could go up to Rs.100,000 crores if UPA chairperson Sonia Gandhi and her son Rahul Gandhi insist that all loans must be waived before the next General Elections. Then there is the Sixth Pay Commission that is all set to recommend massive pay hikes for government ‘servants’ who have been slaving away. B&E estimates that the exchequer will take a hit of at least Rs.30,000 crores a year only to give hikes to babus who are central government employees. The horror story will happen again when state governments implement the Sixth Pay Commission There is more. By issuing so called oil bonds, Chidambaram has pledged another Rs.90,000 crore or so as government expenditure. Please do not be surprised if the fertiliser subsidy goes beyond Rs.75,000 crores in the next fiscal year. And be prepared to see India spending billions of dollars on wheat imports.

Conservatively, this will add at least 1% to fiscal deficit. Chidambaram may or may not remain the Finance Minister. But what he has ensured with this Budget is that the future finance ministers, from any party, will have to try very hard not to become a V.P. Singh or an N.D. Tiwari. Even Chidambaram doesn’t know if Rahul Gandhi, who may most probably be the next Congress leader, will be really up there when it matters the most.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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