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Reading Chidambaram’s mind

Finance minister P Chidambaram will be presenting the last full-fledged budget of the United Progressive Alliance (UPA) government next week. Whether next Lok Sabha elections are held on time in May 2014 or not, the budget is going to be the election budget, because the government will prefer to introduce vote on account next year, if elections take place on time.

Chidambaram presented the budget back in 2008. He had presented a feel good budget, which was one of the main reasons for the UPA to stage a come back in the government, winning the election with a considerable margin.

The most significant provision of that budget was writing off the farmers loan amounting to around 60,000 crores. During the same year, the government had implemented the recommendations of the Fifth Pay Commission. In the same budget, the finance minister announced to cover the whole country under MNREGA. In this way, almost all sections of society were granted something or the other. Reeling under the world recession, the government has given special package to industries and financial system as well. Excise duties on many items had been reduced. Small cars and two wheelers were made cheaper.

Now the question arises, will Chidambaram repeat what he had done in 2008? The answer is  that he would like to but his hands seem tied at the moment since this is the crucial year of elections. Elections are being held in some states while in some they will take place in the coming months.

In November, elections will be held in states of Rajasthan, Madhya Pradesh, Chhattisgarh and Delhi. Before that Karnataka will also witness Assembly Elections. Reeling under the Telengana movement, Andhra Pradesh may also go for early elections.

The stakes are very high for the ruling Congress in all these states. In at least five states, the Congress has to face the Bharatiya Janata Party (BJP), the main opposition party of India during the elections. The party has to save its government of Delhi and Rajasthan by defeating the BJP and it has to wrest the governments of Karnataka, Madhya Pradesh and Chhattisgarh from its main political rival. The political scene of Jharkhand also seems fluid.

Apart from Assembly elections of these states, the Lok Sabha elections, too, will be held within 15 months. That is why, Chidambaram must be under pressure to present a populist or feel good budget for the country.

It is all the more important because for the last six months, the government has taken a number of measures, which have hurt people, who are reeling under high inflation for many years. Petrol was decontrolled and it’s price has increased substantially after the decontrol. Diesel price has also been decontrolled and it is rising month after month. The subsidy on LPG has also been reduced and people will get only nine subsidised cylinders. Electricity, water, rail fares and many public utility facilities have been made costlier and people are naturally turning against the ruling parties at the centre.

The government, therefore, has to take correcting measures. The problem for the finance minister is that public finance is not in a very good shape. Fiscal deficit is the indicator of public’s health. It has grown during the last two years. Rising fiscal deficit makes it very difficult for the government to take fiscal measures of its choice. The declining rate of economic growth is further making the task of the government difficult.

Growing economy can absorb the high rate of inflation giving high revenue to the government, which in turns helps in containing the fiscal deficit. But the rate of growth is declining. Our Deputy Chairman of Planning Commission hopes a growth rate of 5.5 per cent during the current finance year, but it seems to be an optimistic figure, when we take into account the growth in our industry and manufactures. The growth in agriculture is revenue neutral, so as far as the government revenues are concerned, agriculture has emerged as the major component of growth apart from services. It means the decline in growth rate coupled with reduction of industrial growth is restraining the revenue collection of the government.

This strain of revenue has led the government to take strong measures over subsidy components of expenditure. The finance minister will be facing the same problem, while preparing his budget for the next year, which is the year of Assembly Elections and may turn out the year of Lok Sabha elections as well. With limited resources the government has to try to appease the people, who will decide the fate of political parties during elections.

The question is: will Chidambaram be able to balance politics with his economics? His economic acumen must not be underestimated. During the last 17 years, he has presented budgets during Deve Gowda, Gujral and Manmohan Singh regimes. He knows the skill to does miracles while preparing the country’s budget.

This year, it is expected that he can go in for a populist budget and may give a lot of tax benefits to the middle class. Under the fiscal strains, he may go for imposing higher taxes for the upper class of the country. Direct Tax Code (DTC) and Goods and Services Tax (GST) may also help the government to raise its revenue. (IPA)
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