Chidambaram quoted Saint Tiruvalluvar to describe his guiding principle: ?What clearly eye discerns as right, with steadfast will, And mind unslumbering, That should man fulfil.? Chastised by the threat of a credit downgrade, Chidambaram’s eye is clearly focused on the fiscal deficit, and he has succeeded in containing it at 5.2%, below 5.3% he had committed to and 5.9% that his predecessor allowed it to drift.
With general election likely next year, Chidambaram has done nothing that would be seen to hurt any segment of the people, and has sought to win votes from the larger section through distributive expenditure with increase of 46% for rural development, 22% for agriculture, 17% for human resources ministry and 11.7% for integrated child development scheme, which is definitely a good politics and given the growing inequality in the country a good economics, too.
Allowing a larger amount of R50,000 crore for infrastructure tax-free bonds, providing a mechanism of credit enhancement for infrastructure debt, creating a regulatory authority for roads and announcing start of 3,000-km roads, increasing the corpus of the rural infrastructure development fund, almost doubling the spending on urban renewal, and earmarking `5,000 crore through Nabard for rural warehousing are good steps.
However, though the plan expenditure is increased by 29.4%, it constitutes less than 5% of nominal GDP ? little to make any direct impact on growth rate of the economy. There were only pious statements on the industrial corridors. Chidambaram has pulled out from the attic the concept of investment allowance; given its limited two-year window, it can really be of help only to ongoing projects and cannot precipitate new projects. There are indications of reforms in the oil and gas sector, in recognition of the threat from the current account deficit where the culprits are coal, gold and oil; gold import duties were increased before the Budget, coal imports are inevitable as Chidambaram points out and so the country will eagerly wait for the new policies on shale gas exploration, natural gas pricing, revenue sharing instead of profit sharing in upstream activities, and for measures to energize the stalled projects.
The Budget has a very little to actively create growth, but by broadly maintaining stability of customs, excise and service taxes, and seeking to facilitate FII and FDI flows by streamlining administrative matters, it seeks to continue with the growth momentum and add to it marginally by improving investment sentiment among foreigners through the administrative measures.
It does not contribute to improving market sentiment and share prices; however, continuing with stability of indirect tax rates and only marginally increasing the incidence of direct taxes will be a relief for the market.
The finance minister spoke of addressing inflation in food prices through supply-side initiatives, but provided fewer details, perhaps the details being reserved for the Reserve Bank of India. A few months ago, Chidambaram gave up on the Reserve Bank of India and declared that the Centre would have to go alone in the task of reviving growth. One now hopes fervently that, with the fiscal restraint shown by the Centre and the reduction in the headline inflation rates, the Reserve Bank will reduce interest rates aggressively to support growth.
The author was the founder managing director of Crisil and runs IndAsia, a corporate finance advisory company
