Millennium Post

Economy, still in bad shape

Having had the unique privilege of presenting several general budgets of the country as the finance minister first way back in 1996-1998 and twice during the decade-long dispensation of the UPA coalition for as many as eight times, the Harvard-educated Palaniappan Chidambaram will before long be out of this arduous assignment with the nation going to the poll to constitute the 16th Lok Sabha. For a politically correct Parliamentarian it is a desirable break from active politics as he has chosen not to contest this time around, leaving his pocket borough to his son Karti Chidambaram. But the record of Chidambaram in managing the economy as the ace man holding the crucial finance portfolio had seldom been so unglamorous as it is today with the economy showing no salubrious sign but only a mere hope to get out of the rut of slowdown that had set in since 2011-2012.
The Interim Budget he had presented to Parliament on 17 February 2014 may be his swan song though he recently rejected the claim in certain sections of the media that the hope of a stable government after elections is bringing in investments and driving up capital markets and the rupee, arguing justifiably so that it is not ‘hope’ but the ‘fact’ of a stable government provided by the UPA and the numerous measures  in the last one and a half years that had lent stability and strength to the Indian economy.  But oddly, he also indulged only in ‘hope’ that the new government will follow the 10-point agenda that he had laid out while presenting the interim budget for the next fiscal. The valid point to ponder is that if Chidambaram had the courage of conviction, he would have convinced his own party leaders as also the leading opposition parties to devote attention to the immediate and compulsive tasks on hand to give a shove to the pending reform legislations, instead of letting the situation drift and ultimately get out of hand. Even at the height of the global financial meltdown the country was cruising on a high growth trajectory till 2009-2010, while the eruption of corruption charges against UPA coalition in the allotment of natural resources – be it coal, land or spectrum marred the governance record of his government for almost the latter half of the five year tenure of the UPA-II (2009-2014).

On the one hand, the populist policies of freebies and doles including waiver of agricultural credit and rights-based entitlement programmes including absence of any serious bid to stem the triple subsidies on food, fuel and fertilisers save a few spasmodic bid to align fuel price to market rates to stem the financial hemorrhage to oil market companies drained the exchequer of making do with extant resources to undertake capital expenditure programme to generate growth and revenue. On the other hand, there was no serious effort to raise non-tax revenue with budgeted disinvestment programmes languishing way off the target for three years in a row. Even on mopping up tax revenue, while direct tax receipts were invariably on course, the persistent decline in manufacturing activity year after year for the last three years failed to enlarge the kitty of indirect taxes. To boot, the steep decline in imports during the current fiscal was partly made good by high customs duty on gold imports, with the latter having put paid to the country’s high export proceeds from gem and jewellery, besides boosting smuggling activities on the yellow metal.

The UPA’s contribution to foreign investors’ irreclaimable diffidence also stems from retrospective tax amendment to wrest tax on income and profits from the jurisdictions in which they are earned because of ‘base erosion and profit splitting’ by the activities of multinational companies.  Besides Vodafone which was promised arbitration to solve the disputed tax arrears stemming from capital gains on its reported sale of its domestic outfit overseas, there is also the case of the tax notice slapped on Nokia, the Finnish hand-set company. It is fighting an Rs 20,000 crore tax evasion notice with the tax authorities for allegedly withholding tax norms since 2006 while making royalty payments to the parent firm in Finland. The tax altercation with the department has come in the way of Nokia’s Chennai Plant at Sriperumbudur from making over the company to software giant Microsoft, with the latter’s acquisition all set to close by the end of this month. To add to its cup of woes, the Tamil Nadu State government’s revenue authorities slapped an Rs 2,400 crore tax notice on the company recently, claiming that the devices made at Nokia’s Chennai complex were sold domestically instead of being exported! The company has filed a writ in the Madras High Court, contesting the claim to be without merit and contrary to domestic tax laws. If the Income Tax statutes provisions could be interpreted by the Centre and the States in their own way, what objective lesson investors, especially foreign investors, would learn before they put their wealth through the legitimately allowed and sought foreign direct investment (FDI) route.

It is one thing to go the whole hog for FDI in areas where we need technology, best managerial practices and the capital to leverage other factor endowments to benefit by but it is altogether a diametrically different ball game to tease and traumatise the investors by as many pinpricks and problems as we could ingeniously invent.

In fine, as Chidambaram, hailed once for presenting a dream budget in the short-lived United Front
government in 1997-1998, goes with a record of novel fiscal engineering, expenditure outrun primarily because of his party’s penchant for doles to keep vote bank politics and three years of persistent high consumer price inflation that contributed to his party’s electoral debacle in the Assembly elections of 2013.

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