Commentary/Yazad Darasha

The 12 Labours of Chidambaram, Part I

... with apologies to Hercules

Second guessing a finance minister is a favourite hobby with commentators. And finance ministers love to prove the pundits wrong. Will it happen again in February? There's only one way to find out. So here goes...

Finance Minister P Chidambaram seems to have an uphill task before him. One and a half months down the line, when he presents his second Budget for the United Front government, Chidambaram will have to walk a thin line.

On the one hand, he will need to take solid measures to rejuvenate economic growth. On the other, he will have to see that none of these measures irritate or anger any of the 13 partners of the coalition government. More importantly, Big Brother Congress will be perched on his shoulder with a hawk-eye open for any stumbles of which it can take political advantage.

Chidambaram is like Hercules, who was set 12 tasks to prove his worth. The finance minister is luckier, in that he may have four whole years (one hopes... if only in the name of political stability) his 12 tasks to perform. Let's look at the interweaving dynamics of these tasks.

Jumpstart the Economy: The most important item on Chidambaram's agenda will have to be the slowdown in economic growth. The Index of Industrial Production recorded a 6.4 per cent growth in August 1996, the last month for which figures are available. This is the lowest growth ever.

Coming from the liquidity crunch of the last calendar year, industrial output has been plummeting, as a result of lower consumer offtake. This has had its vicious effect on the bottom lines of most companies (an extra tax burden too has not helped), resulting in even less funds to deploy for further growth.

Exports too have slumped, as have imports. Exports grew at the rate of 9.9 per cent in the period April to October 1996, as against the almost 25 per cent growth they logged in the same period of the previous year.

At this rate, Chidambaram, however confident he may sound, is going to find it extremely tough to meet his target of 6.6 per cent growth in the economy.

Control the Deficit: Despite the lip service paid to austerity by successive finance ministers at the Centre, government expenditure continues to be a black hole into which most of the available cash is relentlessly sucked.

Chidambaram has set his government the target of controlling the fiscal deficit to 5 per cent of GDP. With tax revenues actually falling, and the government continuing to spend merrily on non-revenue-generating avenues, this target seems unlikely to be met. The problem is, if the fiscal deficit goes beyond 5 per cent, Chidambaram, like Manmohan Singh before him, will resort to selling public sector undertakings's equity to raise cash.

This would be tantamount to throwing good money after bad, as the funds raised from disinvestment should ideally be used to generate more capital in the economy, and not be allowed to be sucked away into the black hole once again.

Thus controlling the deficit also needs a parallel thrust on revenue generation, in several ways. Tax revenue can be increased not by levying more taxes but by promoting better compliance. Revenue from PSUs can be generated by making all profitable PSUs pay a base dividend to the government.

Most PSUs do that, but the amount can be increased, but in such a way so that it comes not from reserves but from a particular year's income. The income needs to be increased via higher productivity levels and lower staffing levels. A part of this process has already been into effect, and it needs to be strengthened.

At the same time, the proposal to scrap PSU projects that have incurred time overruns -- when less than 5 per cent of the project cost has been incurred -- should be stringently applied.

Another great way to reduce the drain on the central exchequer and to increase the resources available for utilisation in capital creating mechanisms is to make a detailed study of the subsidies and hidden subsidies being offered by the central government. Wherever the subsidies (i) have ceased to make sense in the current context; or (ii) are not reaching and/or benefiting the sections of society for which they were meant; or (iii) are simply promoting a lethargy and indifference to growth, they should be reduced or scrapped.

Clean up the Petroleum Sector: One of the most senseless subsidies in India is the one on petroleum products. In order to provide kerosene and liquefied petroleum gas at subsidised rates, petrol and diesel -- which are the fuels for the engine of growth -- are charged at some of the highest rates in the world.

It is interesting to see how this subsidy promotes sloth. To start with, kerosene is the poor man's cooking fuel, while LPG is the cooking fuel of the middle classes. Because the sector has been controlled for such a long time, both fuels are available only in controlled quantities, and never meet the demand.

At the same time, because of the control, the Oil and Natural Gas Corporation has never taken its job of prospecting for and producing crude seriously, leading to perennial shortages of both crude and the derivatives. This has led to a higher import bill, which in turn ensures that the prices of the non-subsidised items remains unnaturally high, but still does not make for a steady supply of either LPG or kerosene.

So whom is the subsidy benefiting? ONGC, and its slothful ways? Industry, which has to shell out more for transport costs on its goods? The common man, who has to pay more for the goods he buys in order to pay less for his kerosene (he ends up paying more on the black market anyway, because the supply is so erratic)? Where is the sense?

Chidambaram needs to make at least a dent in this sector, so that future industrial growth is not hampered, while keeping in mind the legitimate needs of the poorest sections of society.

Hike Agricultural Output: An agro-driven economy like India cannot afford a drop in agricultural output. And yet, in spite of nine consecutive good monsoons, agro output has fallen in 1995-96. Hence the current rush to import two million tonnes of wheat.

What is the reason for the drop in agricultural production? Why aren't the farmers producing more in spite of the subsidised rates they receive for their crop? Are the subsidies not going to the right places? Or are they, once again, promoting sloth?

It is also interesting to see how one arm of a government with 13 arms can be so out of synch with the other 12 arms. Agriculture Minister Chaturanan Mishra thinks there are no takers for PSU equity, and so wants the government to direct the state-owned financial institutions to sell of the considerable private sector equity they own. Why? So that the money realised would stop the government from reducing the subsidies on farm produce and inputs.

Not only is Mishra totally out of sync with the rest of his government's policies in this regard, he is also out of sync with the ground realities of the capital market and the taxation laws. But that is besides the point. This only serves to indicate the pressures and pulls Chidambaram has to work under.

Next week, more labours for Chidambaram. Stay tuned.