The 9 deadly sins (and counting) of P Chidambaram
Contrary to what he would like us to believe, P Chidambaram has not quite been the reformer we presume he is. He has done real damage to the economy by his sins of omission and commission
It's good that economic performance is now top of the agenda, even though the slugfest between former Finance Minister Yashwant Sinha and outgoing incumbent P Chidambaram degenerated into some degree of personal attacks.
Leaving that aside, it is worth looking more closely at Chidambaram's claims of superior economic performance under UPA, and especially under his watch. However, it is not really worth comparing the UPA's decade with the NDA's six years in power, for that would be like comparing apples with oranges. The reason: the India of the late 1990s was not the same the one Chidambaram inherited in 2004. So what one has to scrutinise is Chidambaram's performance in the much more favourable economic circumstances of UPA-1, and the legacy he leaves behind for the next government at the end of UPA-2.
Two areas in which the UPA clearly outperformed the NDA are growth and poverty reduction. Whether you take the whole 10 years or even just the decelerating years of UPA-2, growth has been significantly better, and poverty reduction significant.
So, take two bows, Mr Chidambaram.
But, here's come the brickbats. This growth came without jobs. And the poverty reduction came partly from growth and substantially from doles. The two issues are connected: when jobs don't happen due to the UPA's reluctance to reform, jobs will not grow. And when jobs do not grow, you have to invent boondoggles like NREGA and giveaways like food security to compensate.
Mindless social spending thus leave behind a legacy of high inflation, slowing growth, a weakened fisc, and new social legislation (food security, land acquisition law) will make things worse. This is the real legacy Chidambaram leaves for his successor. He had inherited rising growth, a current account surplus, and falling inflation in 2004.
So, Mr C, we hope you are sufficiently mortified by these failures.
However, quite apart from these factors, Chidambaram needs to be assessed for his own sins of omission and commission as finance minister. And here he has a lot to answer for.
First, no finance minister has as cooked his books as assiduously as Chidambaram has. At yesterday's (31 March) press conference, Chidambaram claimed his biggest achievement over the last 20 months he has been FM is the reduction in the fiscal deficit. It is ironic that even as he was claiming this, the Controller General of Accounts unveiled numbers showing the deficit at 114.3 percent of the revised estimate for 2013-14. At nearly Rs 600,000 crore, Chidambaram needs a miracle in March 2014 to keep his deficit at 4.6 percent of GDP. It is now closer to 5.3 percent.
But the real story is much, much worse. The 4.6 percent he promised, even if achieved, will have been achieved by doctoring the books - shifting costs to the next year and bringing forward revenues due next year to this year (Read here). Chidambaram massaged the numbers to fit into the box he created for it.
Second, Chidambaram's fast footwork has diverted attention from the real problem he leaves behind. The fiscal deficit is a number. It represents the gap between expenditures and revenues that have to be bridged by borrowings. But borrowings are not bad if used for investment. The real issue is the revenue deficit - the gap between the government's revenues and its consumption expenditure (excluding productive capital outlays). This has never improved in all of UPA-2, and even now the revised estimate pegs this deficit at 3.3 percent of GDP.
This continuing slippage can be traced to Chidambaram. Under the Fiscal Responsibility and Budget Management Act legislated by the NDA, the revenue deficit was to be eliminated by 2007-08.
But the first thing Chidambaram did on taking over in 2004 was push this deadline further. He said in his first budget speech: "Under the FRBM Act, I am obliged to wipe out the revenue deficit by 2007-08. However, the NCMP (National Common Minimum Programme) has proposed that we do so by 2008-09. In my view, 2008-09 is a more credible terminal year; it will also coincide with the term of this government. Hence, I propose to move an amendment to this effect through the Finance Bill. I am committed to implementing the FRBM Act. The elimination of revenue deficit will open up fiscal space up to 3 percent of GDP for enhanced public investment without undermining fiscal prudence."
But did he keep his promise? In 2008, he pushed the deadline back again. He said in his 2008 budget speech: "In the case of revenue deficit, I will meet the target of annual reduction of 0.5 percent. However, because of the conscious shift in expenditure in favour of health, education and the social sector, we may need one more year to eliminate the revenue deficit. In my view, this is an entirely acceptable deferment."
In 2013-14, the revenue deficit is still at 3.3 percent, and possibly heading higher. Chidambaram has comprehensively failed to keep his fiscal promises.
Third, Chidambaram presided over the biggest corporate governance failure in the public sector. Under his watch, and partially under that of his successor, the central government transferred over Rs 2,75,000 crore of profits from listed oil companies to consumers through subsidies to the marketing companies. This is over and above direct subsidies of another Rs 500,000 crore paid directly from the budget. Transfer of profits from one listed company to another - from, say, ONGC to Indian Oil - is a gross breach of basic corporate governance norms in listed companies. It amounts to cheating investors of the oil producing companies. But Chidambaram was party to that decision all through.
Fourth, Chidambaram was an expert in hiding the red stains under the carpet. Throughout UPA-1, when revenues were so buoyant, he failed to account for oil and fertiliser subsidies properly. He issues bonds instead of paying out cash to oil and fertiliser companies, thus showing a lower fiscal deficit than was warranted. Towards the end of his initial tenure, he acknowledged as much. In his 2008-09 budget speech, he said: "I acknowledge that significant liabilities of the government on account of oil, food and fertiliser bonds are currently below the line. This accounting arrangement is consistent with past practice. Nevertheless, our fiscal and revenue deficits are understated to that extent." In short, he was party to fudging the deficit total.
Fifth, his policies benefited rich promoters more than ordinary investors. At his Monday presser, Chidambaram accused Narendra Modi of benefitting crony capitalists, but Chidambaram is the original author of the dividend distribution tax - a tax that allows companies to pay the tax from their coffers while leaving dividends untaxed in the hands of recipients. This tax is iniquitous, for it taxes the rich promoter at a lower rate than their actual tax bracket while individuals who may be below the tax bracket end up paying tax. All promoters are Chidambaram's unintended cronies.
Sixth, his disinvestment revenues were partly fiction - like that of his predecessor. For over three years now, the UPA government has not been able to meet its disinvestment targets. And whatever it earned, came in as transfer from one public sector pocket to the finance ministry's own pocket. In recent share sales, the Life Insurance Corporation was often the main buyer - and this has been the case with bank recapitalisation too. LIC has recapitalised many banks even though it is the finance minister that owns them. This has increased the financial sector's vulnerability since a huge chunk of bank and financial sector ownership remains with the government - through LIC. (Read here).
Seventh, Chidambaram leaves behind a recognisably weaker banking system that is starved of capital.The rot began in 2008, when Chidambaram announced a huge farm loan waiver that cost the government Rs 72,000 crore and ruined the repayment regime for banks. But the real problem is that banks have lent copious amounts to crony capitalists, and the resultant bad loans will now burn everybody.
Uday Kotak of Kotak Mahindra Bank believes that Rs 10 lakh crore out of total advances of four times that level could be stressed, and banks may have to write off upto Rs 3,50,000-4,00,000 crore of this over the next few years. One public sector bank, United Bank of India (UBI), is already on the brink, with gross bad loans at over 10.8 percent of advances, and the Reserve Bank placing curbs on the bank's ability to lend more without serious collateral. But Chidambaram has proposed only Rs 11,200 crore for recapitalising public sector banks in his 2014-15 interim budget.
Eighth, Chidambaram has legislated more pointless taxes than any other finance minister. Apart from the dividend distribution tax (DDT), he invented the securities transaction tax (STT), the banking cash transaction tax (BCTT) and the fringe benefits tax (FBT), among other taxes. Of these, only the STT is likely to survive. FBT is gone, and so in BCTT. The DDT will probably be abolished by the next government given its iniquitous nature.
Ninth, he has announced policies that were not followed up by real change. In his second UPA budget (2005-06), he claimed that he was not obsessed only with making huge outlays, but about real outcomes. In short, he will get bigger bang for the government's buck. He said: "I must caution that outlays do not necessarily mean outcomes.The people of the country are concerned with outcomes.The Prime Minister has repeatedly emphasised the need to improve the quality of implementation and enhance the efficiency and accountability of the delivery mechanism.During the course of the year, together with the Planning Commission, we shall put in place a mechanism to measure the development outcomes of all major programmes. We shall also ensure that programmes and schemes are not allowed to continue indefinitely from one Plan period to the next without an independent and in-depth evaluation."
But huge increases in food, fuel and fertiliser subsidies have continued for 10 years without reform. Outlays have continued to be made without examining outcomes. Even as the basic question of leakages in food subsidy remains unaddressed, the UPA has announced an enormously expensive Food Security Bill that will make the leakages worse.
As we noted before, the Planning Commission's Independent Evaluation Office has calculated that it takes Rs 3.65 to reach Re 1 worth of grain, and even in this Re 1, some 57 percent does not reach the right beneficiary - that is, the poor. This means out of the total Rs 3.65 spent, only 43 paise gets to the poor - about 12 percent of the original quantity. That's a Rs 1,01,200 crore waste in next year's food subsidy outlay.
Despite his claims to being a reformer, Chidambaram's two tenures in North Block have not been scrupulously reformist. In fact, in many areas his touch was distinctly anti-reform.
For this he deserves at least one boo.
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