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Chidambaram faces ‘please all’ paradox

Will the 2013 Budget be populist or reformist? Mr P Chidambaram is in a dilemma like no other finance minister. With just 15 months to go for the Lok Sabha elections, this will be the last effective Budget of the UPA II.

And Chidambaram will be under pressure, especially from his Congress party, to present a ‘please-all’ Budget to woo all sections of society ahead of the elections. For the middle class, a significant chunk of the voters, the finance minister may be persuaded to raise the annual tax-free salary limit from the present Rs 2 lakh to somewhere closer to the range of Rs 3 lakh as recommended by a Parliamentary panel.

For the poor, he may be asked to raise allocations for anti-poverty programmes. And for the corporates and the super rich, a strong case may be made not to tax them any further than the current 30 per cent tax.

But Chidambaram has promises to keep - the promises he has made to himself and foreign investors. And the main promise is of fiscal consolidation, of keeping the fiscal deficit within limits.

He calls this the red line - to keep the fiscal deficit for the current year at 5.3 per cent of the GDP and for 2013-14 at 4.8 per cent. The other promise is to aim at a higher growth rate of 6-7 per cent for the next year.

If he does not keep these promises or give assurances, the global rating agencies will be forced to reduce India’s sovereign credit rating to junk status and the foreign investors will run away never to return again, and it will be difficult to achieve the desired growth rate. But keeping these promises is a daunting task for any finance minister in a pre-election Budget.

To hold the fiscal deficit within manageable limits, the government can either raise revenue or curtail expenditure.  But cutting expenditure substantially in a pre-election year means taking some unpleasant political decisions such as slashing non-food subsidies on diesel and kerosene.

Chidambaram has already clarified that he cannot cut subsidies on kerosene as it will make the fuel unaffordable to the rural poor. As for food subsidies, the Congress-led government can hardly abandon them as it would want to tom-tom its Food Security Bill ahead of the election.

The other option left for the FM to meet the fiscal deficit targets would be to raise revenue, which would mean taxing the people more severely- raising the upper tax limit to 40 per cent or better still a surcharge on the current 30 per cent maximum limit..

But then the chorus from the allies and from within the party would be present a populist Budget. This would leave Chidamabaram in a Catch-22 situation.

How to raise revenue to meet fiscal targets? Whether to present a populist Budget or a reformist? The FM has hinted at introducing inheritance tax, which is likely to be less contentious than a hike in income tax rate.

But will it be able to fetch the government enough revenue.

The only option is this case will be to raise tax compliance - a tough proposition in any circumstance.

Everybody will be looking at a populist Budget - from party colleagues, to the allies to the general public.

But the finance minister is staking his reputation and that of his country on a 4.8 per cent fiscal deficit target.

What will he do? Chidambaram is a responsible finance minister and we can all expect a responsible Budget from him. (IFS)
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