Commentary/Yazad Darasha

Two steps forward - one fiscal, the other political

Give Palaniappan Chidambaram his due. He has done what no finance minister has been able to do in the history of Independent India.

Every single step he has taken in the Budget for 1997-98 can be counted as two steps forward - one for the people, and one for himself and his government. Such adroitness is seldom witnessed in an Indian politician, for an Indian politician has only one thing on his mind - personal survival and gain.

In that respect, let us spend a moment in silence - in awe, actually - because Chidambaram has taken the art of politics to new heights.

Please... there is no cynicism implied here. The times they are a changin', and they demand more of a politician than the old times. Soon there will dawn an age when a politician will have to perform or perish - give the people what they want or slide gently into oblivion.

Chidambaram has done his bit to move us painlessly into such an age.

In the process, anyone who went to him with a begging bowl - be it a corporate czar or the common citizen - has had a few substantial paise thrown into the bowl. Let's take a few of his budget proposals and see how he has adroitly managed to benefit both the people and himself.

Let's start with all the things designed to pull the stock market out of its morosity:

• The double tax on dividend has been withdrawn. Dividend is paid out of the money remaining to a corporate after taxes have been paid on the company's income. The dividend received by the shareholder is also taxed in his hands. The stock market has been screaming itself hoarse that this amounts to double taxation, and should be done away with. Chidambaram has obliged.

  Dividend income is no longer taxed in the shareholder's hands. So it makes more sense to stop working! Take voluntary retirement from your place of work, invest the huge severance package in high dividend paying companies and stop paying tax on your huge income.

  Grasshoppers of the world can now legitimately thumb their noses at the poor hard-working ants who have to pay tax on their hard-earned money!

• Chidambaram has caved in to the industry's demand and allowed companies to buy back their own shares. This is a great defence against a hostile takeover attempt, and the cash-rich companies who would have been natural takeover targets, can now present their raiders with a bitter pill by increasing the promoter's holding via market operations. The stock market loved that one too.
• The dalals are in heaven. They can corporatise their business to attract higher net worth individuals and companies as clients, and not pay the attendant capital gains tax.
• Corporate bottom lines are expected to improve, with a lower tax outlay, and the Minimum Alternate Tax being transmogrified into a Minimum Alternate Advance Tax. The money will continue to flow into the exchequer as a credit, and the market will have had one of its strongest demands met. In style.
  

All these measures - combined with the direct tax proposals that make India virtually a tax haven - have found an enthusiastic, echoing boom in the stock market indices. Isn't that what all the pundits were begging for?

Weren't we all clamouring for steps to boost the supine markets so that we could get out of our long positions on which we had taken such a beating?

Well, we got it. And the beauty of the deal is, the government too benefits! Because in a booming stock market, it can now seriously consider disinvestment of the equity of public sector undertakings at prices that reflect the PSUs' true worth rather than at distress prices meant simply to get some money into the exchequer.

So not only has Chidambaram made the people happy, he has also ensured that a lot of money will come in via the disinvestment route - enough to fill the holes he has made in the revenue account by largesse all around!

Clever, isn't he?

Perhaps not quite. It is a major gamble he has taken, but more on the gamble next week. Here, let us continue singing the paeans for a while more. The man has earned it.

Now to the taxation front - the one segment in which everybody, but anybody, is happy. Chidambaram has, as I said earlier, almost turned India into a tax haven. The highest rate of tax in the US is some 37 per cent. In the UK it goes up to 40 per cent. In India, we now have a top tax rate for individuals at 30 per cent! Happy, did I say? Make that ecstatic!

History shows that a low tax rate and rationalised tax procedures make for higher compliance. So by making us happy - sorry, ecstatic - Chidambaram has also ensured that there is a wider base of people paying tax, which means more inflow into the exchequer.

Look at it from another viewpoint. For the United Front government, this was make or break time. It needed to ensure that it continues in power at least for another year.

And what with the Congress growling in the background and former finance minister Manmohan Singh gracelessly giving the budget a C, Chidambaram had no choice but to get the people (read voters) on his government's side.

With such a give-away budget under its belt, the United Front can happily go to the voters and demand a second term, if the need arises. Clever, isn't it? But we've already said that.

At the same time, Chidambaram has not cut - he has in fact increased - agricultural subsidy, and refused to tax the rich farmer. The heartland's vote banks are thus secured. But the gamble (again the gamble, of which more next week) is there.

Which brings us to the crux. By giving everybody and his uncle whatever was demanded, Chidambaram has...

• Given the people exactly what they wanted.

• Increased the chances of the United Front government going its full term (after all, aren't we all waiting with bated breath to see what it will pull out of its hat at budget time next year?).

• Increased his own employment potential (the Tamil Maanila Congress is unlikely to form a government on its own steam; Chidambaram is probably looking at a merger with a strong party, which is made easier by the public image he has created for himself with this budget. The bottom line being: any party with Chidambaram in it is likely to do well at the hustings).

• What a consummate politician! Can Manmohan - for all his carping - claim such political dexterity - or even fiscal courage in giving up so much revenue? Can any finance minister in the last 50 years? I would love to know...

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