Companies have no reason to look forward to budgets "" particularly when the government is running a large fiscal deficit. Those in the media who routinely anticipate concessions" and tax relief mistake the nature of populist politics. Even the most economically enlightened finance minister has great difficulty in persuading his political colleagues that it is unwise to tax corporations. In the eyes of the general public, (whose aspirations and prejudices, a democratic political system will reflect) its corporations are personified by wealthy fat cats who move from air-conditioned homes to air-conditioned offices in air-conditioned cars. It would seem monstrous to the poor housewife for any relief to be given to these organisations.
It is somewhat difficult in this environment to put forward the argument that a tax on company profits is nothing but a tax on collective savings. In economic terms, taxing companies is almost as foolish as taxing government revenues. Modern companies are organised so as to increase savings and use these resources for investments. Of course, all too often resources are diverted by the fat cats for personal consumption but the misdeeds of a few is no base for devising a tax policy.
It is to the credit of the finance minister, therefore, that he has applied long-term considerations in formulating his Budget. He was probably harassed by the mounting fiscal deficit which he has sensibly ignored. The finance minister claims that he has been able to control the fiscal deficit. But we will have to wait for the fine print to see what he has actually achieved. Not that it really matters.
The fiscal deficit is not likely to be cured by conventional means. There are no expenditure cuts readily available to the authorities, and all this talk of raising revenue is as unreal as it is stale. What the government needs is a dose of realism, and by that I mean a realistic appreciation of their capacity "" not just the present governments capacity "" but any future Indian governments capacity to reduce the fiscal deficit by cutting expenditure of raising taxes.
To unfortunate and benighted people like this author, there seems no prospect that any Indian polity in the foreseeable future is going to be able to resolve fiscal deficits by anything other than inflation. It is, therefore, good that the finance minister has abandoned fiscal rectitude by refusing to punish the economy through taxation. We have over the last year seen the grave damage done by high interest rates and a liquidity squeeze. The authorities may pretend that growth rates have been not too bad, but it is industry and the corporate sector that knows where the government shoe has pinched.
The finance minister has chosen in every direction to be bolder and take risks that years of Indian economic advisers have advised against. He has chosen his timing well, for if you are to take a risk on inflation it is obviously better to do it now when the economy is recovering from the throes of a self-imposed recession. All the changes he has proposed for capital markets will do much to revive activity.
Is there anything he has missed ? In a panel discussion held at the Nehru Centre in London, I proposed that the single Gordian knot that would free and transform the Indian economy is full capital convertibility. The finance minister has gone some way towards it, by hoping to move from Fera to Fema, but nothing like enough. There should be no apprehension now, indeed there should never have been any anxiety on the external account. India has a gold stock, in private hands of over 10,000 tonnes worth over $100 billion and this will underpin the value of the rupee.
But it is not just the external value of the rupee. The finance minister has done much in keeping the process of liberalisation on track, yet there is still too much that depends on the goodwill and discretion of bureaucrats. He needs to give it one final push to bring the Indian economy into the global system. Nothing could do that better than capital convertibility. I shall not presume to foretell which way the value of the rupee will go on introducing convertibility; in any event the point is not of the slightest importance.
What matters in the Indian context is that our liquid resources are exchanged for investments. This requires two conditions; first a mechanism to ensure a healthy capital market. The initial reaction to his Budget is that he has done that. We now need a mechanism for transferring resources into investment. The resources are there; opportunities for investment are readily available. The way to put them together is total convertibility "" and Mr Chidambaram may as well make this route credible by winding up the enforcement directorate.
