In an interview with Financial Times, Finance Minister P Chidambaram has admitted to possible mistakes (of course “with the benefit of hindsight”) in dealing with the global financial crisis.
According to him, there is a view that the third stimulus from the government “was perhaps entirely avoidable”.
His statement assumes significance as the third stimulus package, in the form of a 2 percentage point cut in excise duty and service tax, was announced by his predecessor in the ministry, Pranab Mukherjee, in the interim budget.
At the time of announcing the cut, the revenue loss for the government was estimated at about Rs 30,000 crore.
Mukherjee had also extended a 4 percent across-the-board excise duty cut, announced as part of the first stimulus package, to beyond 31 March 2009. The 2 percentage point cut was over and above this.
Is Chidambaram blaming Mukherjee for the present economic ills?
This is what he said in the interview:
“We had three stimulus packages. Now, there is an opinion today that the third stimulus package was perhaps entirely avoidable. Now, that’s a view. It’s difficult to say whether, when the package was announced, was it considered superfluous or was it considered necessary. But there is a view that perhaps a third stimulus package could have been avoided."
In another indirect reference to Pranab's policy initiatives, he also has mentioned the GAAR and retrospective tax guidelines. “There is also a view that the guidelines could have been written in a different way. Again, that is the benefit of hindsight. I’m not saying there were mistakes, all I am pointing out there is a perception that we may have made some mistakes.”
So, he is definitely not placing blame squarely on Mukherjee but some finger-pointing is clear.
The first stimulus announced on 7 December 2008 was a Rs 20, 000 crore package, which included tax cuts to boost demand.
This stimulus came after the Reserve Bank of India (RBI) affected deep 100 basis point cuts in repo and reverse repo rates to 6.5 percent and 5.0 percent, respectively.
Prime Minister Manmohan Singh had the additional charge of the finance ministry when the first stimulus was planned and announced.
But Chidambaram, who handled the portfolio until 1 December 2008 when he assumed the home minister’s office after Shivraj Patil was unceremoniously removed as a fallout of the Mumbai terror attacks, had taken an active part in devising the package.
The second post-crisis stimulus package was announced on 2 January 2009. The package included easing of external commercial borrowing rules for firms in the infrastructure and real estate sectors, and increasing the foreign investment limit in corporate bonds.
The government also announced a Rs 20,000 crore recapitalisation plan for public sector banks.
The third stimulus, which Chidambaram mentioned in the interview, came as part of the Budget for 2009-10 announced by Mukherjee on 26 February 2009.
While the stimulus was important, its roll-back is also key to the financial health of the economy. One of the reasons for the government’s present financial strain is the incomplete roll-back of the stimulus.
In July 2009, the Planning Commission had suggested the government should roll back the stimulus steps as emergency measures cannot be allowed to continue endlessly.
“These (three fiscal stimulus packages) were emergency measures that we had taken... The lower excise rate duty that has been given in the fiscal stimulus package of December and January and after the interim Budget, should be rolled back... may be from September," Planning Commission Member Saumitra Chaudhuri had told PTI in an interview.
But Mukherjee did not heed to the advice and reiterated that the government’s stimulus package will continue until the global economy recovers.
There is no arguing whether there has been a negative impact from the stimulus. It is for Chidambaram to take a course correction. And he has said that in as many words. "And if that is the perception, it is my duty to correct that perception," he says in the interview.
We would know how he plans to do this in a few weeks’ time.