Sixteen years ago, P. Chidambaram presented what in urban legend has come to be called the dream budget. Not without reason. It had exhibited out-of-the-box thinking that rationalised and reduced rates of income tax into three slabs (10%, 20% and 30%). Having created the context for compliance, it had also offered an amnesty scheme that additionally served the purpose of raking in some much-needed resources. The budget came in against the run of play and the finance minister was hailed a hero.
Once again, going by his recent utterances in the course of very heavily publicised international road shows for foreign investors, Chidambaram has implicitly promised similar magic to pull the country and his own government out of the economic and political mess in what is the penultimate year of its second consecutive tenure at the helm. But, as they say, watch what you wish for.
Expectations, especially among foreign investors, have been stoked. So the consequences of not being able to meet the self-imposed gold standard can be severe. Similarly, Indian industry, always on the lookout for a government crutch and buoyed after the Reserve Bank of India (RBI) obliged and cut its policy rate, has similar expectations.
In the time since the finance minister presented his seminal budget and now, there has been a sea change in the economy, politics and the global landscape. Central to this change is the influence of market forces in the economy, making it less responsive to policy changes alone, as opposed to the command control regime that worked in an economy when the government was the dominant force. Chidambaram’s predecessor suffered, and of course with disastrous consequences for the economy, precisely because of his 1970s mindset. (Several Mint columnists have flagged this point.)
When Chidambaram presented the budget for 1997-98, he was not part of the Congress. He was, as he described himself, part of an “avowed regional party, albeit with a national outlook.” Sixteen years later, he is now a key part of the Congress party (and some believe a potential prime ministerial candidate) and of the union cabinet. As a result, he can more than pull his weight in getting the cabinet’s backing on politically sticky decisions.
The Congress-led United Progressive Alliance (UPA) has already shown considerable political savvy by effecting all the uncomfortable decisions—increasing railway fares and successive rounds of increase in prices of diesel and petrol—ahead of the onset of budget season. In this way, it has ensured the budget is not held hostage to any political stunts by the opposition.
While this may be the case, the basics of the Indian economy have radically altered since 1997. According to the World Development Indicators, India’s gross domestic product rose from around $350 billion in 1997 to nearly $1.9 trillion in 2012—growing almost five fold.
Similarly, the country’s integration into the global economy has come about at a tremendous pace. In 1997, India’s merchandise trade as a percentage of its gross domestic product was under 20%; by 2012, it was over 40%. Its external debt stock, which was under $100 billion in 1997, is now a little under $400 billion. In other words, if you include foreign institutional investors, India is no longer insulated from global developments
Now throw in the structural constraints—rickety infrastructure, shortage of skilled workers, rising inequality—and you have a mix that requires both a short-term strategy and a long-term vision. While immediately, the finance minister’s task is to ensure that sentiments don’t flag, he also has the challenge of laying out a clear path to revive investments and, thereby, revive the growth momentum—and unlike in the recent past, one that is employment-friendly. All this, with near-empty coffers and sagging revenues.
Clearly, the constraints outweigh the options. But expectations are sky high. The only way out then is a dream budget. We will know by Thursday.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics.