From scraping the bottom of the barrel when it came to assembling a reformist-minded economic team, suddenly the UPA government seems to be experiencing a problem of plenty. Finance Minister P Chidambaram is putting together a ‘dream team’ of bureaucrats and advisers and from all accounts, taking their economic worldviews collectively, the team screams “reforms” in spades.
Many of the ‘reformist-minded’ bureaucratic changes reflect the reshuffle of civil servants, but the star component is being provided by economists from outside the service who are lending the weight of their experience to what will prove a very difficult budget for Chidambaram, given the plight of the economy and the political compulsions of the UPA.
In December last year, for instance, taxation and public finances guru Parthasarathi Shome took over as adviser to Chidambaram. He brings star value to a team that already boasts of Raghuram Rajan, who was appointed chief economic adviser late last year.
On paper, there is also Montek Singh Ahluwalia, who is marking time in the Planning Commission. But any reformist credentials that Ahluwalia may have had from his time in the early 1990s have been lost in his masterly inactivity of recent years.
Of course, Chidambaram could do with all the dispassionate professional advice he can get, particularly since he will have to walk a tightrope between the compulsions of lowering the fiscal deficit in order to keep hawk-eyed rating agencies in good humour, and the political imperative of giving a populist edge to what likely to be UPA 2 government’s last budget.
But already, there is speculation that Chidambaram’s team perhaps has one star too many. In particular, the subject of whether Shome’s advent will mean an attenuated role for Raghuram Rajan, who serves as chief economic adviser, is the focus of media speculation. Writing in the Business Standard, AK Bhattacharya points out that in at least one instance in the past, when Shome served as Chidambaram’s adviser, the role of the then chief economic adviser Arvind Virmani was curtailed significantly.
When Shome served as Chidambaram’s adviser in 2004, he was widely believed to have formulated the fringe benefit tax (FBT) as well as the transaction tax on withdrawal of cash from bank accounts. Both those provisions, one intended to tax perks that were escaping the tax net and the other to bring cash transactions, which fed corruption, on the radar of the taxman, met with much criticism, and were subsequently abandoned.
More recently, Shome has been involved in plugging tax loopholes on other fronts, and served as the head of the committee on General Anti-Avoidance Rules (GAAR), which former Finance Minister Pranab Mukherjee announced with much fanfare, only to hold back on its implementation, again after much criticism that it affected investor sentiment and was opaque.
If Shome is into policy minutiae, Raghuram Rajan may take on a role in economic policymaking that dwells on the macro picture. In years past, that found expression in, for instance, former chief economic adviser Kaushik Basu articulating the government’s economic philosophy in the pre-Budget Economic Survey.
However, in Basu’s case, the experience must have proved less than gratifying because the Budget document itself was unfaithful to the economic philosophy that the Economic Survey outlined. Reading the Survey, one may have anticipated a reformist-oriented budget, but Pranab-da disappointed massively. He failed to address any of the big issues such as subsidy reform, postponed the implementation of the GST, and his retrospective taxation proposal, in particular, which targeted Vodafone and held the threat that it would be invoked against others too, single-handedly ruined investor sentiment.
This year’s budget will be all the more challenging, and Chidambaram has in the past proved himself adept at the smoke-and-mirrors show of presenting Budgets that bamboozle. The economy itself appears to have bottomed out, but the macro picture is far from cheery, and Chidambaram will probably need the counsel of his all-star team if he is to walk the tightrope and put the economy on the growth path without blowing up the deficit.