The negative reactions to P Chidambaram's budget from the markets - bonds, stocks and commodities - tell us that, maybe, just maybe, we have been too tough on his predecessor.
The stock market is upset that the budget is not reformist enough even though Chidambaram has cut the securities transaction tax. The commodity markets are upset over the decision to bring non-food derivatives under a commodities transaction tax. The bond markets are spooked by his higher-than-expected borrowing targets for 2013-14.
While it is true that Chidambaram is perceived to be a better reformer than Pranab Mukherjee, we have to weigh this perception against facts on the ground. Budget 2013-14 does not bear this out.
Contrast the thumbs down received by Mukherjee's last budget and Chidambaram's.
Chidambaram has presented a more irresponsible budget than Mukherjee, but he is being given credit for not being populist in an electin year. Mukherjee's budget proposed a spending hike of 13.7 percent; Chidambaram has proposed 16.4 percent when things are much worse.
Mukherjee got a shellacking for raising the Mauritius issue and tax residency certificates. Chidambaram's finance ministry is having to fight the same battle, by having to issue clarifications that investments from Mauritius are safe. It is the other places, and not Mauritius, that will be impacted. What is clear is that both tried to plug tax loopholes, but it is only Mukherjee who got branded as retrograde. Chidambaram tried to slip in the same laws in the Finance Bill, but got caught. He attributed this to clumsy drafting. He has been forgiven, but not Mukherjee for the same sin.
Or take the retrospective amendment involving Vodafone. Mukherjee got roasted for it. Chidambaram has not changed the provisions at all, and has, in fact, said it would be amended only if Vodafone comes to some compromise. In an interview to ET Now, he said: "Once the Vodafone issue is resolved and that is put behind us, then we can always move the amendments necessary to reflect the Shome Committee recommendations." (The Parthasarathi Shome committee said if retrospective amendments are made, only the tax should be collected, not the penalty).
Mukherjee was pilloried for throwing up unbelievable numbers. Chidambaram faces the same criticism - whether it is subsidies or borrowings or projections of tax revenues. He wants to launch a Food Security Bill but provides only Rs 10,000 crore for it. And he does not budget for a rise in food procurement prices in 2013-14, an election year. But his critics are going easy on him.
As for government borrowing, after the sharp cut in development spending in 2012-13, the bond markets expected him to keep the gross figures flat. But Chidambaram announced an unexpectedly high figure of Rs 6.29 lakh crore.
This sent bond yields up, and prices down, and ministry bureaucrats tried dousing the fire by claiming that Rs 50,000 crore of this would be used to buy back loans falling due in 2014-15 and 2015-16 - that is, bonds that fall due during the tenure of the next government.
Now, one wonders who North Block is trying to fool. In a tough situation, why would Chidambaram be trying to help out the next government when the political need is to spend more this year before the elections?
The most obvious explanation would be this: Chidambaram has provisioned for extra borrowing precisely because he knows that once the budget is passed, he will have to start spending to woo the electorate. This may be the compromise he may have struck with Sonia to keep the market happy for now. The extra borrowing will give him leeway to spend just in case tax revenues don't show up on the ledger in time, or subsidies bloat out of shape.
In fact, the surprising thing about Chidambaram's budget is not the austerity, but its profligacy. Surjit Bhalla, writing in The Indian Express, expressed shock over the amount of spending Chidambaram had actually programmed in the name of austerity and fiscal consolidation.
He points out the gap between rhetoric and reality: "A significant part of the runaway fiscal deficit...has been caused by government expenditures getting out of hand. So what does UPA-2's final budget propose? An expenditure growth of 16.3 percent, and much, much higher than its estimate of nominal GDP growth of 13.4 percent! That is, far from enforcing a decline in the growth rate of expenditures, UPA-2 has actually significantly increased the expenditure-to-GDP ratio from 14 percent to 14.7 percent!"
One needs to rest the case here.
The short point is this: Chidambaram has not proven his reformist credentials any better than his predecessor, but he has still gotten away with higher marks than the latter.
In fact, looking back, one can charitably reassess Mukherjee's troublesome tenure at the finance ministry and say that Chidambaram was luckier than him. Mukherjee got zeroes for his reforms, while Chidambaram got more marks than warranted for doing little.
The reasons are these.
One, Chidambaram started with a perceptional advantage. He was accepted as the reformer, not Mukherjee. Just as Manmohan Singh has been living off his 1991 reputation, Chidambaram is living off his 1997 and 2004-08 performance, even though he did little in UPA-1 to enhance his reformist credentials.
Two, in his first stint (2004-08), Chidambaram got extremely lucky with his tax revenues and growth as a result of the global tide that lifted all boats. Mukherjee entered the picture when the tide was ebbing. He was up the creek without a paddle.
Three, let's remember that Chidambaram is believed to have been shifted out of the finance ministry in 2008 primarily because the PM wanted someone like Montek Singh or C Rangarajan as FM. But politics intervened, and he got Mukherjee instead. But Mukherjee and Manmohan Singh did not share a good equation. This is the prime reason why Mukherjee never got the backing of either the PM or Sonia Gandhi for his attempts at reform.
Four, Mukherjee has got no credit for the right things he did, but got all the blame for the things he could not do for coalition reasons. For example, Mukherjee corrected Chidambaram's penchant for hiding away subsidies in the form of oil bonds. Mukherjee brought the subsidies back onto the books and got blamed for the fiscal deterioration. Not only that, Mukherjee's attempts to raise diesel prices got canned due to electoral and coalition compulsions. Chidambaram got the political support needed that Mukherjee never did. Worse, the UPA was battling all kinds of corruption allegations that had little to do with Mukherjee's tenure and more with A Raja's, PM's and Chidambaram's sins of omission or commission in UPA-1.
Five, another attempt at reform by Mukherjee was last year's railway budget, where he (not the PM) got Dinesh Trivedi to raise passenger fares and freight. But when Mamata Banerjee went ballistic, neither PM nor Sonia backed him. Trivedi had to go. His successor rolled back the rail fare hikes. Mukherjee was also forced to roll back the FDI in retail proposal in December 2011 under political pressure. Again, the PM didn't stand by him.
Six, now contrast this with what Chidambaram got by way of support. For FDI in retail, the Congress party was willing to let Mamata leave the coalition. Ditto for raising diesel prices and direct cash transfers - something that Sonia Gandhi's National Advisory Council had been wary about.
The question is: why was the Congress willing to back Chidambaram on his reforms when it was not willing to do so for Pranabda?
The answer is in two parts: bad vibes and timing.
First, neither Sonia nor Manmohan trusted Pranab. Hence he got no political support despite all he did for the party. His only reward was an honourable exit from North Block to Rashtrapati Bhawan last July.
Second, timing. The reforms and austerity that Mukherjee had proposed in 2012 were too early for Sonia Gandhi - who did not want to risk the coalition two years ahead of the general election. This year, Sonia has been willing to take the risk.
Chidambaram may or may not be a better reformer than Mukherjee, but he has certainly been the luckier of the two.