Had he lived in Europe during the time, Finance
Minister P. Chidambaram would have been one of
Napoleon’s favourite generals. He has all the skills
for his job; more importantly, though, he has
enjoyed all the luck and more in his second innings.
Thanks to a compounded annual growth rate upward of
8.6 per cent over the last four years, Mr.
Chidambaram has had an enviable situation of an
Particularly amazing has been the growth in direct
tax revenues. Between April 2007 and mid-January
2008, net direct tax revenues to the centre grew
increased by 42 per cent to Rs.217,149 crore, which
was over four-fifth of the budget estimate for
2007-08. Given the hiccups in industrial growth
during the second half of 2007-08 and the
strengthening of the rupee, excise and customs
collections may not be so buoyant. But it is a safe
bet that the revised estimate of net tax revenue for
2007-08 will exceed the budget targets. No recent
finance minister has achieved such results. Mr.
Chidambaram will have done it thrice in a row.
Such bountiful revenue will give the FM considerable
room for manoeuvre. The question is: how much of a
long rope will he give to expenditure? As I write
this, the budget has been prepared for all intents
and purposes; and by the time you read this,
everything will have been cast in stone. But when
things were fluid, what might have been the factors
that the FM had to take into account?
To my mind, there would have been four. The first
factor is political. The government is in its final
lap and this budget will be structured with an eye
to impending elections. That implies an expansionist
budget targeted at rural India, the social sector,
employment generation and micro and small
enterprises. I, therefore, expect significant
percentage increases in outlay on the various planks
of the Bharat Nirman programme, such as drinking
water and sanitation, rural roads, rural
electrification and rural housing. I also expect
more on Sarva Shikhsya Abhiyan, the mid-day meal
scheme and the National Rural Health Mission. Most
likely, the largest absolute increase in expenditure
will be on the National Rural Employment Guarantee
These and other social sector heads will comprise a
large part of the budget speech. But even with a
sizeable increase in outlays, in the aggregate these
will not amount to much in the backdrop of stellar
revenue buoyancy. Certainly not of a magnitude where
anyone can accuse the FM of being a fiscal
The second factor the distinct possibility of an
economic slowdown. Mr. Chidambaram is a realist who
understands numbers, especially early warning signs.
Given the present state of electricity, roads,
highways and ports, it is very unlikely that
industry can expect to continue growing at
double-digits. Growth of the Index of Industrial
Production has fallen from 11.2 per cent in
April-December 2006 to 9 per cent for April-December
2007, and is trending down. Our estimate is that
India will be looking at a GDP growth of somewhere
between 7.5 per cent and 8 per cent in 2008-09.
Lower growth may require some expansionary sops. And
I believe that the FM will offer a few, without too
much pressure on the fisc.
The third factor is a guillotine called the Seventh
Pay Commission. Mr. Chidambaram had the misfortune
of being at North Block when the Sixth Pay
Commission was implemented. It seriously hurt the
exchequer and scarred him as well. He knows of the
pressures for substantial increases in civil service
pay; and he knows how it can rock the exchequer. The
FM will need to stash away a sizeable chunk of
revenues to make these payments. And to go easy on
major expenditure outlays, knowing that a big
splurge is around the bend.
The fourth factor is fiscal rectitude, and the
Fiscal Responsibility and Budget Management Act.
Will Mr. Chidambaram meet the FRBM targets for
2007-08 and 2008-09? And leave a much stronger
exchequer for his successor? I believe he would want
to; but he may not be able to given the possibility
of a slowdown, additional civil service pay and
election year sops.
On balance, what should we see? Lots of stuff on
social sector expenditure; some sops to industry; a
hold on reducing customs duties; talk on the
additional resource needs for meeting the Seventh
Pay Commission; some talk too on the need for a
strong exchequer; and, of course, couplets from
Thiruvalluvar and other poets. High on politics; but
basically safe. Or so I hope.
Published: Business Standard, February 2008