P Chidambaram’s tenure as finance minister in the last 54 months saw the Indian economy register 9 per cent plus growth in three consecutive years that resulted in buoyant tax collections. But record-high crude oil prices and populist schemes announced by the Congress-led coalition government eroded many gains achieved in the first four years.

Chidambaram’s initiatives on the tax policy front resulted in revenue collections posting a compounded annual growth rate (CAGR) of 22 per cent. He made tax administration more efficient and introduced new taxes like the fringe benefit tax, the cash withdrawal tax and the securities transaction tax. He also widened the service tax net to cover many more services.

Buoyant tax revenues helped him rein in fiscal and revenue deficits under the Fiscal Responsibility and Budget Management Act, till March 2008. From a fiscal deficit of 4.5 per cent in 2003-04, the aim was to bring it down to 3 per cent in the current fiscal ending March 2009. But the implementation of the Sixth Pay Commission recommendations, the populist farmers’ debt waiver scheme and an economic slowdown will make the finance minister’s task difficult.
 

Initial estimates show that the Centre is likely to run a fiscal deficit of 4.49 per cent of GDP in the current fiscal. This deficit will be much higher if off-budget liabilities on account of subsidies granted through bonds for the oil, food and fertiliser sectors are also included.
 

On the expenditure front, Chidambaram had enforced a tight leash with revenue expenditure growing by only 12.69 per cent year-on-year. But capital expenditure, which is required to create productive assets, actually registered a negative CAGR of 3.2 per cent during his tenure.
 

The last three years also saw a rush of capital into the country as portfolio investors pumped in record money into the stock market and private equity players too contributed to this growth. This created a piquant problem for the government and also for the Reserve Bank of India.
 

Record flow of capital meant increase in money supply that put upward pressure on inflation. India’s central bank responded by tightening its monetary policy by increasing key rates like repo rate (the rate at which the central bank lends money to the banks) from 6 per cent to a peak of 9 per cent. RBI also increased the cash-reserve ratio from 4.5 per cent to a peak level of 9 per cent to suck money out of the system. These rates, however, were brought down in the last few months as the economy faced a liquidity squeeze in the wake of the global financial turmoil.

Headline inflation remained under control for most of his tenure but the increase in crude oil prices resulted in inflation hitting a 16-year high of 12.9 per cent this year. When Chidambaram took over as finance minister, the Wholesale Price Index-based inflation was 5.02 per cent. As crude oil prices have declined in the last few weeks, the annual inflation rate too has come down to less than 9 per cent.

Many capital market reforms like corporatisation and demutualisation of stock exchanges, and permitting foreign investors to pick up equity in local exchanges, were initiated during his tenure.

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