The Father Of All Budgets

I do not know if the last budget was the greatest ever, but I cannot recall a more meteoric rise in public estimation than Chidambarams. Before the budget he had been written off by all; after the budget he could not be praised enough. This does not simply reflect fickleness of public taste; there was a vast difference between his two budgets. How did the man who made the July budget a bare seven months later make another so different? He said he had had more time to work on the second, and had been learning in the meantime. He is right. But even with someone as self-willed as Chidambaram, a budget is a collective exercise; there is more to it than his re-education.

Chidambaram came to the finance ministry full of confidence and ambition. The first budget was a lark. Jairam Ramesh, who has close connections with industry, came up every day with customs duty concessions; the revenue department relayed more.They all sounded sensible. But when they were added up, the revenue loss was considerable. So Chidambaram decided to drop the idea of reducing the maximum tariff to 40 per cent. Still the figures did not match. M R Sivaraman came up with the 2 per cent minimum import duty. I earlier thought the idea of MAT also came from him. Although he is reported to have taken credit for it, I am no longer sure he was the source. I think it was in a paper sent by Indira Rajaraman of the National Institute of Public Finance and Planning to Shankar Acharya. It is such a damfool idea that it could only have come from an economist.

All these ideas seemed brilliant when discussed in Chidambarams sprawling office. So he could not understand why the public and the press did not think so. The department of economic affairs (DEA) told him that the industrialists were just cribbing: that in fact they were doing very well, and deserved MAT. This was the line he repeated, and thereby courted deep unpopularity.

Apart from this public reaction, there was another thing he did not anticipate: the glare of publicity and the pressures. The finance minister gets as much publicity as the rest of the ministers combined barring the prime minister. The media reward handsomely those who know how to handle them, but punish their errors equally mercilessly. They create the image they convey. It is no use telling them what image you want conveyed, no use arguing with them, not much use rewarding them for a favourable image and punishing them for an unfavourable one. The job they do is shaped in the case of each pressperson by his or her generally limited understanding of the subject, and in the case of the industry by the competition within it. Images are rapidly transmitted within the media. If someone comes up with a novel interpretation, others will pick it up fast. If someone gets a reputation for inside knowledge or good judgment, reporters in London or New York will ring him up before writing on Chidambaram. The best one can do with the media is to stop bothering about particular media events and follow a consistent strategy of conveying a certain type of image affable, reasonable, transparent, responsible, modest. Chidambaram was too sensitive to the particular interview, newspaper or channel, and lost sight of the wood for the trees. In individual encounters he came across as combative, dismissive and overconfident. Apart from adverse publicity, he received less publicity than a brilliant new finance minister like him would have got. The media wrote him off and shaped the publics image of him.

The finance minister faces considerable political pressures. He is visited by hundreds of people, all with some request, proper or improper. His colleagues regard him as a treasurer they both kowtow to him, and bitch about him behind his back. It is all rather sordid, and Chidambaram did not have the forgiving, philosophical bent of mind to take it in his stride. He soured. This mood was reflected in his treatment of his senior bureaucrats: he was often short and rude. It was revealed in meetings with outsiders: he would fidget or snap, and his attention would wander. Thus the chattering classes experience of him was similar to that of the media.

His irascibility ensured that he got much less response from his bureaucrats in making the second than the first budget. Everyone watched him like mice, and waited for him to come up with ideas. On the expenditure side this was all right. Early on he had called together the financial advisors and told them to cut down on moribund and infructuous projects; this paid excellent dividends. The expenditure side has compulsions of its own, based on the past and on the lobbies behind the ruling parties. So the expenditure budget emerged without the need for much initiative. It was the revenue side that presented problems and opportunities.

The DEA stuck to the view it had taken in July, that there was nothing seriously wrong and that industry was complaining without reason. Over the years, Montek Singh Ahluwalia had created a DEA to his taste; there was no one left who would provide or consider alternative views of the economy. Dissent had been eliminated. So the DEA took the view given in the last Economic Survey that everything was in spanking good shape.

If it was, then there would have been no call for an industry-friendly, tax-cutting budget. But here a number of things helped to defeat the DEAs ideology. From October onwards, the prime minister got seriously worried about industrys sullenness, and took special pains to court it. He soon sensed industrys dislike of the budget and of Chidambaram. So he told Chidambaram that whatever the economics of it, it was in the interest of the government and Chidambaram to cheer up industry. Chidambaram refused to do so immediately, but promised to do something in the budget.

At this point Chidambaram started thinking of deep tax cuts. Normally, he would have been resisted by the revenue departments, which hate to lose revenue; but to his surprise he got a warm response from N K Singh, the revenue secretary. N K Singh produced figures of tax rates in other Asian countries, and proposed that we should match them. Doing so was risky, and quite inconsistent with the DEAs reading of the economic situation; but luckily, neither the prime minister, nor the finance minister, nor the revenue secretary was an economist. They could not care less about consistency. So Chidambaram went ahead and reduced direct taxes regardless.

This is why the budget has attracted criticism from economists, especially those close to Ahluwalia and the DEA. But not from me, because I draw different conclusions from the same facts. The reason is evident in the graph, which shows industrial and manufacturing growth since 1995 (12-month moving average). As it shows, manufacturing growth has been slowing down since February 1996. The average industrial growth for 1996-97 does not matter: what matters is, how long the deceleration in manufacturing production will last, and how far it will go. In my view, deceleration was the basic problem, and the budget has addressed it correctly because Chidambaram flouted the counsel of his economists, and listened instead to that buccaneer N K Singh.