Has ambition got the better of Reformer Chidambaram?

By Shanmuganathan Nagasundaram

Of all the economists and advisors in government today, I considered Chidambaram the savviest and most reformist. Even when he made forgettable references to “The death of inflation” or Joseph Stiglitz’s “We care” statements or to the ridiculous concept of “potential GDP growth rate”, I tended to give him the benefit of doubt.

That these references were made for political consumption and not with the intent of conveying the economic impressions associated with them was understandable. But in most of his previous actions and budgets, there was an instinctive reformist undertone that was visible; that is missing today.

Much water has flowed between presentation of the budget yesterday and now. That the GDP projections are too optimistic, that accounting tricks have been used to convey a lower deficit than is really the case, etc., have been well documented and I will not add much to that.[caption id=“attachment_645409” align=“alignleft” width=“380”] Finance Minister P Chidambaram. Image courtesy PIB[/caption]

But before I set forth my criticisms, let me also set the context right - any other person, be it Pranab Mukherjee or Montek Singh Ahluwalia or even Manmohan Singh presenting such a budget would not have been so disappointing. But Chidambaram was the most free market-oriented amongst the team, and that he indulged in really petulant measures such as the super-rich tax, women’s bank, public private partnerships, mandatory CSR and, even worse, micromanaging CSR, etc, was quite out of character.

For sure, these measures are not going to be either major revenue earners or disappointments for the concerned people, but they send the wrong signals about India: a society that doesn’t respect capitalism, success and economic freedom.

The Super-rich tax: The proposal for a 10 percent surcharge on taxable incomes above Rs 1 crore is a typical “broken window” fallacy. All that we see is the money collected. But what about the unseen consequences? By definition, these are the people most likely to invest and grow their businesses. So in taxing successful people, we are diverting resources from a source that is likely to use the same productively to government departments that couldn’t care less once its share of the booty is garnered.

By no means am I suggesting that Chidambaram doesn’t understand the above. The fact that he choose to project an image of being anti-rich (and, by implication, pro-poor) at the expense of destroying capital, jobs and production is really sad.

Women’s Bank: Many bewildering schemes have been proposed in the name of gender rights, but this one has to take the cake. I really wonder if any “free-thinking” or entrepreneurial woman would want to be part of such a setup. In a society, where women have shown excellent spirit in competing with their male counterparts and occupying some of the highest positions in the banking setup, this is really a retrograde step (even if they weren’t, this would be an equally retrograde step - their success just makes this much more obvious).

I am sure this mal-investment isn’t going to stop with the Rs 1,000 crore and will probably go the Air-India way. There will be countless capital infusions and bailouts to prop up a failed institution that should never have existed in the first place. If Chidambaram is keen on women’s empowerment, he might as well study why the private sector throws up outstanding leaders in the banking industry, while the public sector has failed to produce even one in their much longer history of existence.

In the interests of real gender rights and the poor holders of the Indian currency, I hope Naina Lal Kidwai, Chanda Kochhar, and Kalpana Morparia stand up and prevent such ideas from taking off. Once it does, there’s no market check on this institution to effect a closure for a long time to come.

Increased allocation to agriculture: Over the last several years, we have seen massive year-on-year hikes for agriculture and all that we have to show against the same is anaemic growth rates. It seems so obvious, even without understanding a bit of economics, that this increased allocation and regulation that comes along with it, is the reason for stagnant productivity. As Doug Casey would say, “not only is the government doing the wrong thing, they are doing the exact opposite of the right thing”.

If the government deregulates and withdraws from this sector, then capital (land, labour and equipment) would get allocated to the most efficient producers and they would grow the production. With the government directing resource allocations in the form of subsidies, all that we will have to show against the same is more social entrepreneurs like Nitin Gadkari and more companies like Purti.

Having dealt with some of the “populist/philosophical issues” let me turn towards the core issue.

The fiscal deficit /Growth focus: Almost all commentaries as a reaction to the budget invariably state that government reducing its expenditure would reduce the GDP growth rate. That is the “Seen” result.

What is the Unseen? The economic truism is that we operate with a fixed capital base and that the private entrepreneur with his profit motive would use it far more productively than the government using it. So when the government cuts back on its expenditure, equivalent resources are instantaneously made available to the private sector to grow the economy.

So to cut the fiscal deficit and grow the economy at the same time, all that Chidambaram has to do, as Jim Rogers would put it, is to cut government expenses with a chain-saw and not with a scalpel. Balance the budget and deregulate the economy-and we will return to double-digit growth rates. Add a sound currency to the reforms list-and we will have double digit growth rates and zero inflation.

The disadvantaged community would be the political class that invariably gets to spend government resources on their whims and fancies, enriching themselves at the expense of the citizens.

The final scorecard: Since it has become customary to rate every budget on a 10-point scale, let me do that here. With a difference though. I am going to do so in the context of the person delivering this same budget.

Of course, starting with the “right” people. We don’t have a Ron Paul or a Gary Johnson - but if somebody with their background and intellectual leanings had presented this budget, I would have rated it 0/10. If Manmohan had presented this budget, I would rated it 7/10 - for a Pranab_da_ or a Montek, not to overestimate, I would have given 11/10. For Chidambaram, with all of his core beliefs in free markets and economic freedom, to present this budget, it has to be 4/10.

I am purely speculating on this last issue. Perhaps it is a sacrifice of economic ideology for a move to 7, Race Course Road after the next election.

Shanmuganathan “Shan” Nagasundaramis the founding director of Benchmark Advisory Services - an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted at shanmuganathan.sundaram@gmail.com