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'Jaswant will continue with tax breaks'
P Chidambaram |
February 06, 2003
Palaniappan Chidambaram, the suave, Harvard educated lawyer and former finance minister of India [1996-98], has long been known to call a spade a spade.
Blessed with the rare combination of incisive analytical ability and splendid articulation, he makes even complex matters seem really simple. Like the Budget, for example.
At an invitation from the All India Association of Industries and the Young Entrepreneurs Society, P Chidambaram, visited Mumbai on Wednesday to present his pre-Budget thoughts.
Dressed in a cream coloured shirt and a dhoti worn in South Indian style, he addressed an elite gathering comprising noted bankers like Hemendra Kothari of DSP Merrill Lynch, industry chieftains like A K Doda, managing director, IDBI and Minoo Shroff, vice-chairman, Raymonds Ltd, amongst others.
The former finance minister, in his eloquent and confident style, laid out his thoughts on what the Budget this year would look like. He also pointed out some major issues that Finance Minister Jaswant Singh needs to address.
Starting off on a humorous note, Chidambaram suggested that the best way to minimise pre-Budget speculation and post-Budget dissection would be to have the Budget presented once in five years.
Excerpts from his speech:
An effective solution [to minimise pre-Budget speculation and post-Budget dissection] is to have a Budget once in five years in which case the yo-yo over various tax provisions will happen only once in five years.
Unfortunately, we are limited in our wishes so we will be presented a Budget once every year, or worse like it used to happen prior to 1975, twice a year.
From 1975-80 the most obnoxious provisions of the Budget were issued in an addition called the supplementary budget. So it escaped the notice of most people till the time they realised that such new obnoxious provisions had be added.
'Budget a media event'
In the last few years the build up to the Budget has become bigger and bigger every year, largely because of the media coverage.
The Budget has now become a media event.
In all, the Bharatiya Janata Party has been in office for five years, if you include their short stints earlier. But it has not ever delivered more than 6.5 per cent growth rate.
'FM will settle for low growth rate'
In 1988-89, when it was in power, it delivered the highest growth rate of 6.5 per cent. Since then growth rate has been between 4-5.7 per cent and it has never crossed 6 per cent in the last few years.
So, the big question is, what will the finance minister aim for 2003-04? Indications are already there that he will settle for a lower growth rate. It is a truism that investment will spur growth, though the direct mathematical relationship between investment and growth has never been proved.
While the Planning Commission has asked for a Budget allocation of Rs 134,000 crore (Rs 1,340 billion), the finance minister has said that he will settle to give Rs 100,000 crore (Rs 1,000 billion).
While the prime minister has made announcements that the government will push for 8 per cent growth, the finance minister has indicated that he will aim for 6 per cent.
So, already it is a Budget with modest aims for a 6 per cent growth.
'Taxation is the sexy part of the Budget'
Regarding the tax rates, the question should not arise year after year.
Yes, taxation is the sexy part of the Budget, but it should be visited once only in 10 years. It should not be subject to frequent revision, especially year after year.
I believe our previous finance minister has made great mistakes. He was rather poorly advised. I can't say that he had an A team with him, because that team soon became B, C and D grade.
There should have been a degree of stability in tax rates. The direction was correct but the rates were unnecessarily tampered with. A number of useless surcharges were added. Even in indirect taxes, a number of surcharges like semi-VAT, et cetera made their appearance.
I urge the present finance minister to introduce stability in the tax rates and make a declaration that if the BJP remains in power no one will tamper with the tax rates for the next 5-10 years. He cannot speak for the other parties, but at least he can give this assurance on behalf of the BJP.
All indications are there that Finance Minister Jaswant Singh shares the concern for stability in tax rates. I feel that he will bring down peak customs duties, further reduce distortion in excise duty, keep income tax at 10, 20, 30 per cent and get rid of surcharges.
If he wants to score a big hit he will bring down the corporate tax to 30 per cent.
'Govt has failed to promote investment'
Now what about investment?
The one area in which the present government has failed miserably is in promoting investment. Eight out of ten industrialists I meet tell me that they have no plans to make new investments.
There is no new investment in power, ports and many other sectors. Barring telecom and national highways not one sector in the country has seen investment pouring in.
'Capital markets are almost dead'
Even the capital market is almost dead. In the last one year only Rs 1,821 crore (Rs 18.21 billion) has been raised through 6 issues in the equity market.
How can India, with its population of one billion people of which 30 per cent live below the poverty line, pull itself by its bootstraps if the risk capital in this country is only Rs 1,000-odd crore (Rs 10 billion) in a year?
No one is rushing to raise ADRs or GDRs [American depositary receipts or global depositary receipts]. No one has the appetite for raising money abroad now.
Where are we going to find the money then? Who has the drive to raise it or who has the money to make the investments?
Over the next 12-18 months I can't see private investment increasing sharply. So public investment has to lead the way. This is where the conflict between the Planning Commission and the finance minister over budgetary allocations comes into the fore.
The growth rate this year maybe 5 per cent. Estimates range from 3.8 per cent to 5.5 per cent, but I think it will settle down at 5 per cent.
'FM needs to take risks to increase investment'
To increase it to 8 per cent the finance minister should take risks and go for increase in public investment. And one area of public investment can be power.
In Tamil Nadu, Uttar Pradesh, Madhya Pradesh, West Bengal, Karnataka, Maharashtra, the power sector is in total disarray. What we need to add is several hundred thousand mega watts over the next 5-10 years.
Just like the prime minister launched the national highway program, the finance minister should have major investment in power sector.
Once the government makes a heavy investment in the power sector, then it is possible to invite many of the companies who have left India.
'Great opportunity for govt in power sector'
Today, every state electricity board is broke; most power plants are in bad condition with poor plant load factor. There is a great opportunity here where the issues and problems can be converted into a chance for the government to do better.
It is also a chance to kill many birds with one stone.
By announcing a major power plan the government can touch upon all sectors of the economy as it will not only help the power situation but also increase public spending and thereby the growth rate.
I pick the power sector with reluctance but I think grave policy distortions have happened in this sector before and this could be the time for the government to step in and make them right.
'This Budget may be populist'
Now we come to the politics of Budget-making.
There are eight elections coming up; naturally, there will be some political impact on the Budget.
This could also possibly be the first and the last Budget of the present finance minister. If the stars smile on the National Democratic Alliance, then this could be the last Budget before the next parliamentary elections, which are due in late 2004.
So you cannot avoid the strong dose of populism in this Budget. It is possible that Jaswant Singh will give some breaks to the middle class.
'Jaswant Singh will continue with tax breaks'
Today, the biggest concern of the people is unemployment and increasing prices. I think these concerns will affect the public mood, so it is important that the Budget sends a signal that government is not going to touch the pockets of the people; rather it is going to leave money in their pockets.
So Dr Vijay Kelkar's proposals notwithstanding, the finance minister will continue with tax breaks to the middle class.
Actually these breaks shouldn't be considered a special thing. In a country with no social security system except Provident Fund for the organised workforce [plus a lot of people who depend on fixed incomes earned through savings, bank deposits, fixed deposits, et cetera] and no health insurance [in which case if people fall sick they have to dip into their savings], tax breaks are important because they increase savings.
Tax sops are necessary for people to build homes, fund higher education and increase their savings.
Household savings are very important in India. If it weren't for them we couldn't have hoped for even a 4 per cent growth rate.
They are the reason why we can sustain 5 and even 6 per cent growth rate today.
The government is a notorious spender, the private sector saves modestly at around 3 per cent, and the public sector shows negative saving. The households in India are the ones who save at 17-18 per cent, compared to the 10-12 per cent in developed countries.
But just imagine what would have happened to this country if the households didn't save. They are the ones who contribute to the large chunk of capital today.
There is always a temptation to use the Budget as a launching pad for grandiose plans. That is the time when every minister fosters his grand projects on to the Budget.
In fact, the Budget and August 15 have become two days to dread, because of the launch of these kind of programmes.
But Jaswant Singh is a conservative and cautious man. I don't think he will encourage either the prime minister or other ministers to launch any grand programmes through the Budget.
'Free trade, freeing controls on forex work well'
India is not a unique country. The laws of economics that have worked elsewhere will work in this country too. It has been shown that an open economy works better than a closed one. Freer trade, deregulated industrial policy works well, freeing controls on foreign exchange and current and capital account convertibility works well.
'The control regime is back'
We must persevere and keep faith in these policies and processes that we had started in 1991. What I find though, in the last two years, is creeping socialism. We have had a coal control order and a tea marketing control order passed in the last two years.
That is dangerous. The tea control order specifies how much tea can be bought, how much can be sold, what is the limit at the auction, et cetera.
The whole control regime is back. These are regulations that took a long time to get rid on and now I find them happening again over the last two years. It is a dangerous sign and once it starts it will take over all sectors of the economy again.
I would urge the finance minister to announce that he will review all the orders that have crept in clandestinely in the last few years and scrap those that are a throwback to the control regime.
'Budget will be a cautious one'
I see this Budget to be a cautious, conservative one aiming at a growth of modest 6 per cent. I see it leaving most of the tax breaks for home-owners intact.
There could be rationalisation in indirect taxes and elimination of aberrance in direct taxes. This Budget is not going to set the Yamuna on fire but then that is also not Jaswant Singh's style. Instead, it will be a carefully crafted, well-written speech.
I will be greatly disappointed if the government does not aim high. It ought to aim higher. If it aims at 8 per cent then it has to do something dramatically different.
I don't see that happening because doing that requires daring and vision, which I don't see in this government.
So get ready for a modest effort about which we won't have much to shout and complain at least.