If may be a trifle unfair to give the thumbs down to a finance minister who has just taken over. But if the remarks made by P Chidambaram on Monday are any guide to his thinking, they need to be shown up for what they are: mostly directional statements, and not a clear plan to lift our spirits.
The most uplifting thing he said was the hint about reviewing the retrospective taxation legislation – which largely impacts Vodafone for now. He didn’t say the proposal will be reversed, but that he was seeking a “fair solution”, indicating a compromise. If this happens, it will improve foreign investor sentiment. The finance minister has also done a good job on spectrum pricing. The cabinet adopted the pricing suggested by Chidambaram’s Empowered Group of Ministers.
However, many of the other things he said are extremely worrisome.
The FM said high interest rates were a burden on consumers. If by this he meant the Reserve Bank must cut rates, he should know that the high rates are the result of overborrowing by the government. So it is the government that is a burden on the people. But Chidambaram talked of taking calibrated risks to bring down rates to help consumers. This makes no sense till he moves to cut his own deficits – on which he promised nothing.
Next, he is supposed to have said that monetary and fiscal policies must move in tandem. If by this he meant the fiscal side must now do its share of inflation-fighting, he is bang on. More power to his elbow. But if he meant that the RBI must cut rates and not wait for Chidambaram to start reining in his fiscal deficit (which he said nothing about containing), he is merely following in the footsteps of his predecessor, Pranab Mukherjee. He is setting up the economy for greater failure.
The only interpretation one can put to this statement is that as FM he is going to force the RBI to cut rates, impacting both the central bank’s independence, with negative consequences for the economy. Duvvuri Subbarao is going to be under tremendous pressure from North Block to cut rates.
The FM also announced another panel on fiscal consolidation. This is absolutely unnecessary – and another way of kicking the can down the road. Do we need one more panel to read the writing on the wall –: that subsidies must be cut, government borrowing reined in, and pork-barrel populist schemes kept in abeyance till the economy can afford them? Surely, Mr FM, you should know better. The solutions are obvious and you don’t need another panel to camouflage what you know must be done.
His statement asking states to share in the fiscal consolidation is not going to work, for many of his allies — in Uttar Pradesh and West Bengal — are asking for special packages. Moreover, it is the centre’s fiscal situation that is completely out of whack —the states have been far less profligate than the centre.
The rest of the statements made by Chidambaram were neither here nor there. He said inflation can be tamed in the medium term, but this won’t happen unless he acts now to rein in the deficits and kickstarts reforms to bring in foreign direct investment.
He talked about removing supply-side constraints – presumably to boost agriculture and tame food inflation – but in this area he can’t do anything more than offer fiscal props. Mukherjee has already offered incentives for improving agricultural output, dairying and poultry production.
The real supply-side problem relates to lack of reform in land ownership, opening up agriculture to corporate investments, barriers to inter-state agri-produce movement, boosting horticulture, etc. Reforms in these areas relate to other ministries, not finance.
Chidambaram may not be the cause of the current fiscal mess, but it is difficult to see how he was not a part of the problem in UPA-1, when the problem started getting out of hand. Unlike Pranab Mukherjee, Chidambaram in fact made the oil subsidies opaque by issuing bonds to oil companies in lieu of losses. This kept the fiscal deficit hidden.
However, it was Mukherjee who changed this fiction by bringing subsidies back to the budget – an exercise in transparency that made him look worse than Chidambaram.
In fact, Chidambaram, in his first media briefing on Monday, gave himself a pat by claiming that the current problems of the economy looked challenging “because of our own record” during 2004-08.
This is, of course, is not the whole truth. The economic turnaround started in 2003-04, one year before Chidambaram took over. And the economy’s fall can partially be traced back to Chidambaram’s own follies – the Rs 70,000 crore farm loan writeoff, the huge increase in oil subsidies, etc – which worsened the fiscal situation when the Lehman crisis surfaced.
Of the oil subsidies of Rs 400,000 crore-and-odd paid out between 2004 and now by ONGC and the government, nearly half relates to Chidambaram’s term till the end of 2008. The current unmanageable fiscal deficit is partly Chidambaram’s creation.
It didn’t look so bad during Chidambaram’s previous term because tax revenues were buoyant, and everybody was happy to blame the Left for these problems. In UPA-2, the Left was gone, and these issues were clearly shown to be homegrown within the Congress. But since the blame could not be laid at Sonia Gandhi’s door, it was attributed to Mukherjee.
Chidambaram is capable of pulling this government out of the mess, but for a start it would help if he did not pretend that all the problems were created by his predecessor.