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Union Budget 2013: Will the reformist Chidambaram stand up?

It used to be said about Atal Behari Vajpayee that he was the right man in the wrong party-a liberal Indian in the Right-wing, Hindu-leaning BJP.

The same can be said about Finance Minister P Chidambaram as he wrestles with shrinking options for Budget 2013. He is a reformer caught up in the wrong party. (The same cannot be said of Manmohan Singh, who bends with every passing political wind.) The Congress under the Dynasty is a feudal party that believes the only way to win elections is to keep throwing crumbs at the poor.

It is this writer's case that a good reformer has gone bad: Chidambaram's personal ambitions have stifled the reformer in him.

Budget 2013, due on 28 February, will tell us which Chidambaram has won, or whether Right and Wrong. AFP

Whatever his personal faults-arrogance, and a tendency to talk down to everybody, being only two of them- Chidambaram is one of India's most intelligent ministers. He is capable of doing the right thing when the going gets tough.

The fact that you are getting only muddled responses, and even wrong ideas, from him right now is proof that his reformist heart is not in sync with his politically calculative mind.

Chidambaram Right (the promoter of reformist policies) is at war with Chidambaram Wrong (who is willing to pander to vested interests in the name of the poor to secure his own political future).

Budget 2013, due tomorrow, will tell us which Chidambaram has won, or whether Right and Wrong combine to produce a messy compromise where neither has won, and the country heads for more economic uncertainty.

Recent moves by the finance ministry tell us that personal ambition is getting the better of the reformer in Chidambaram.

Consider what he has been saying and doing ever since he took over last September.

Start with taxes. For some time now, Chidambaram has been saying that the rich must pay more taxes. Some of the renowned economists in this government-C Rangarajan, M Govinda Rao, etc-have also been hinting at the idea of plucking more feathers from the plumage of the rich. In principle, getting the rich to fork out more is fine. But in practice, without a coercive state apparatus, you are not going to generate more revenues by merely raising tax rates.

Chidambaram Right knows this, and will not want to tinker with tax rates that have generated revenue buoyancy for so many years-a regime which he helped create. But Chidambaram Wrong knows that talk about soaking the rich goes down well with the jholawallas infesting the Congress party.

His most recent utterances have been on gold-he doesn't like gold imports because they increase the current account deficit (CAD). As someone who understands economics, Chidambaram has rightly concluded that a CAD of 5.4 percent in the second quarter of 2012-13 is simply unsustainable. But the politician in him has opted for the placebo solution. If he is half the reformer he claims to be, he should know that high gold imports are a symptom of declining faith in the value of paper currency. The remedy is to make the rupee valuable by reducing inflation.

Or take disinvestment. Chidambaram Right knows that selling more public sector shares is key to his budget deficit arithmetic. But Chidambaram Wrong has decided to allow LIC to buy a lot of his shares in case the market is unwilling to pay decent prices for his offerings. Selling shares to LIC is no disinvestment at all.

Take external debt. Chidambaram Right knows that the rupee will crash if he does not get more foreign investment. The only right way to get long-term investment is by creating stable policies for domestic investment - which will then draw in foreign investment. But Chidambaram Wrong is in a hurry. He has invited all the hot money in first - foreign investment in debt and stocks, which can vanish at the first sign of opportunities elsewhere. Or trouble here. As at the end of September 2012, India's external debt was at $365 billion, and our foreign exchange reserves are enough to cover only 80 percent of that debt. Chidambaram is increasing India's external vulnerability in the pursuit of short-term capital flows.

The FM's battles with the Reserve Bank over interest rates are too well know to bear repetition. Suffice it to say that when inflation is at 10 percent, lowering interest rates is sheer folly. It will neither bring in a rush of investment, nor lift sentiment for more than a few trading sessions. Here Chidambaram Wrong is whispering non-reformist ideas to Chidambaram Right and attempting to damage the independence of the central bank. A corollary: lower rates will dent even Chidambaram's own policy of inviting foreign dollars into Indian debt. Why should an FII invest in 8 percent government paper when inflation is just under 8 percent (WPI) and under 10 percent (CPI)?

Let's also talk subsidies. Chidambaram Right knows that the only way to cut subsidies is to raise the prices of energy - starting with diesel and cooking gas. But Chidambaram Wrong understands that this is a politically tough sell to Madam, and is thus entertaining suggestions for raising taxes on diesel cars. The point is: diesel cars are a response to the gross underpricing of diesel. The solution is to price diesel correctly, not tax diesel cars. Huge investments have gone into diesel engines and cars. The best way to sour the investment climate in automobiles is to make sure that diesel car demand is ruined by a tax hike.

In 2008, Chidambaram was almost forced to extend loan waivers to farmers by his political masters. He thus set India up for junking the Fiscal Responsibility and Budget Management Act in that year, and in the coming years. Pranab Mukherjee got all the blame for messing up the economy, but it was Chidambaram's 2008 follies that pushed us towards fiscal bankruptcy. The need to keep his job in an election year (2008) forced Chidambaram to do something he was not fully convinced of (loan waivers, etc).

Chidambaram's approach to Aadhaar-the Unique ID scheme-is another case of Chidambaram Right versus Chidambaram Wrong producing mixed results. As home minister in his previous avatar, Chidambaram played a dubious role in spiking the guns of Nandan Nilekani. Aadhaar will now be attempted only in half the country, while the National Citizen's Register (the home ministry's plan to issue ID cards in some infiltration-prone states) will take care of the rest.

But as finance minister, Chidambaram now says direct cash transfers will be mediated through the Aadhaar card.

Chidambaram's hasty embrace of direct cash transfers is evidence that he has once again managed to mix up his reformist credentials with the Congress party's populist leanings. Cash transfers are a good thing when implemented slowly and steadily after defining the objectives of the scheme, studying the results achieved, and then extending it in phases. But the decision to expand the scheme to the whole country based on the Congress party's electoral needs is irresponsible.

In the case of cash transfers, Chidambaram has made a mish-mash of three different aims-and one does not know which one will be achieved. It is not clear whether he wants benefits to the poor to be more efficiently delivered, or whether he expects the scheme to cut subsidies by eliminating bogus recipients, or whether he just wants to provide beneficiaries greater choice by allowing them to buy what they want with their money. It is, for example, possible to use Aadhaar cards even to stop leakages in the existing public distribution system and ration shops. This will ensure that grain goes only to the right people (saving the exchequer money) without having to dismantle the whole infrastructure by replacing grain with cash.

It is one thing to pay scholarships and pensions with cash-for that is their purpose-quite another to think of extending the scheme to food, fertiliser and fuel (though that is not on the cards right now). Doing only the former (going for minor schemes like scholarships) does not achieve any political purpose. Doing the later (giving cash for all kinds of subsidies) will achieve a short-term political purpose by putting cash in the hands of the poor before an election.

It is not at all clear what deal Chidambaram has struck with Sonia Gandhi in the cash transfers scheme-whether it is intended to achieve efficiency goals, or only political goals.

Clearly, Chidambaram the political ambitious FM may yet take us in the wrong direction. Budget 2013 will tell us whether Chidambaram Right, the reformer, wins or Chidambaram Wrong does, as he did in 2008. The difference is this: in 2008, he didn't know the Lehman crisis will ruin his budget arithmetic. This time he cannot claim ignorance if he does the wrong thing.

In nine years of UPA rule, we found out that Manmohan Singh is a fair-weather reformer at best. Budget 2013 will tell us if Chidambaram has buried his reformist instincts forever or what we saw in 2008 was merely an aberration.

His choices will determine whether the India story will revive or recede.