How the "dream budget" turned into a nightmare
By Sudeep Chakravarti, Senior Editor, India Today

Palaniappan Chidambaram should have known better. Being voted the best Finance Minister in Asia by Euromoney magazine is not the same thing as being a successful one in India. The magazine, and much of India’s industry, voted for Chidambaram for what he set out to do. But even before the BJP government assumed office in March, he was being criticised not because of what he set out to do, but because here was another finance minister who went so much for the feel-good factor that he ignored at his and the exchequer’s peril, very real hindrances of his government in general, and India’s economic climate in particular.

A discussion on what happened to the Union Budget for the year-ended March 1998 is not an academic exercise. What sank Chidambaram could very well happen to his successor in the finance ministry, Yashwant Sinha.

Chidambaram’s entire exercise was based on cutting costs, generating revenue and--unfortunately--proving a point.

The first assumption of the Budget, helped along by much of the media, was flawed. It assumed that simply because it suggested cuts in personal and commercial taxes and unveiled a scheme to attract undeclared income, other equally strong suggestions would find sanction from the coalition United Front government. First, it was the "dream budget", mainly on account of a wow-he’s-pulled-it-off feeling as suggestions like tax cuts and aggressively divesting equity in public sector corporations were seen as pulling off the impossible in a government pressured by leftist allies.

What happened was that despite the general ease of doing business, the nuts and bolts of the operations that take a Budget and give it shape fell apart. Though direct tax revenues came in, in the absence of strong industrial growth which brings in both excise and customs revenue--which Chidambaram had bargained for--revenues were lower by almost Rs 15,000 crore ($ 3.65 billion). The so-called Voluntary Disclosure of Income Scheme ended up as the most successful scheme of its kind ever. However, because Chidambaram had planned for more than it had brought in, it didn't help matters.

This over-commitment flowed in other areas. Bank credit was cheaper last year, but in the absence of cheaper capital from a comatose capital markets, the usual route, utilization of bank funds was low, leading to lower investment. Low demand from households and the industrial sectors meant industrial growth dropping to 7 per cent a year from the earlier 11-12 per cent rate of growth. With the agricultural sector growing at sub 4 per cent a year, the consumer push that this sector can give in good years was absent.

The last nail in the dream budget was driven in by Chidambaram’s colleagues in Cabinet and outside, from pressure groups like the Communist Party of India (Marxist). The government decided to pay out far more in salaries and bonuses than what the Fifth Pay Commission had recommended--nothing but a sop. Former Prime Minister I.K. Gujral, never terribly vocal about his government’s economic policies, was quicker still when it came it came to writing off loans and subsidizing state governments.

Divestment was slow, expected with so many left-leaning allies, but Chidambaram inexplicably hiked his estimates of revenue from this source to Rs 7,000 crore from an initial estimate of Rs 4,000 crore (the fact that as such the policy was flawed, with receipts going to fill budget deficits than build assets, is another story). The net inflow was a tenth of that. But by then, Chidambaram had already committed the cardinal error of combining political naiveté with fiscal overestimation.

By the time it became clear that India would have to go in for mid-term elections last November, the plans had already crumbled. The year ended with the economy having grown by about 5 per cent in 1997-98. The fiscal deficit had grown to over 6 per cent of GDP. Subsidies had been added, no major infrastructure project except telecommunications took off -- and even in this basic telephony aspect was delayed.

It would be incorrect to write off last year’s Union budget as all bad. It wasn’t bad; it was more reckless and foolish than bad. It assumed a coalition was stable when it obviously wasn’t -- the Congress wasn’t ever going to prop it up; and there was a lesson in the way Gujral’s predecessor H.D. Deve Gowda was ejected. It assumed support for laws that were drafted and tabled but not passed--in insurance, corporate governance, foreign exchange regulation and labour. It assumed a miraculous speeding up of the economy. 5 per cent a year isn’t bad growth, but it’s terrible when the arithmetic has been done with 7 per cent growth in mind.