Thursday, February 28, 2013

Chidambaram delivers good economics, great politics!

Most commentators on TV and in press are praising Chidambaram for the good economics he has practiced in his budget. There are no populist schemes, no enhanced spending plans and no grandiose announcements. There are big investment revival strategies prompting corporate India to give him a thumbs up. While I agree that the budget is indeed shorn of the usual pre-election-year rhetoric, and I compliment Chidambaram for it, I think most people have not deciphered the political intent behind the budget. I am convinced this is a budget driven largely by the compulsions of looming elections.

Before I go on to what I mean by that, let me say a word about the usual critics. The BJP has been totally silenced. The only lame duck argument the party could provide (read Yashwant Sinha in Indian Express today) is that Chidambaram first cut spendings in FY13, and then raised allocations for the next year to merely make it all look optically nice. His contention is that this is a form of “trickery”. I call it smartness. This is what private companies do. They never look at last year’s budgets to set next year’s numbers. They look at “actuals” of last year for that. Chidambaram has brought the best of private sector governance standards to the government. The BJP can crib! Chidambaram even silenced the loudest critic of the UPA – the number 1 TV news anchor! The poor soul was forced to agree meekly with his panelists that Chidambaram had indeed delivered! The Left could not decide whether they should agree with the taxing of the “super rich” (something they would be naturally prone to do) or disagree (considering it was inspired by the US President)! The JD(U) made some really good overtures, stoking speculation that a political re-alignment is in the offing! So all in all, the usual suspects were firmly silenced!

Now let me prove that this is an election-eve budget.

1)    In the first 5 minutes, Chidambaram made the most important statement of his entire speech. I reproduce verbatim “As Joseph Stiglitz, Nobel prize winning economist said “There is a compelling moral case for equity; but it is also necessary if there is to be sustained growth. A country’s most most important resource is its people”. We have examples of states growing at a fast rate, but leaving behind women, the SCs, STs, minorities and some ackward classes. The UPA does not accept that model. The UPA Government believes in inclusive development, with emphasis on improving human development indicators. I hope this budget will be yet another testimony to that commitment”. Who do you think Chidambaram hit with that statement? BJP’s poster boy Narendra Modi of course!
2)    The Congress’s core electoral constituency is the rural poor, the farmers, the SCs, STs and in some states, the OBCs. Just look at the spending increases Chidambaram has promised for these constituencies:
a.    Rural development: budget of Rs 80,000 odd crores, an increase of 46% over last year’s actual. This is huge. Of this, NREGA and the PMGSY are big schemes, both of which have seen enormously enhanced budgets. Clearly, the rural constituency won’t be starved of funds!
b.    Ministry of drinking water and sanitation (targeting the above identified electoral constituencies) has a 17% higher allocation
c.     Ministry of education also has a 17% higher allocation. A large chunk of this is in the form of scholarships for SCs/STs/OBCs/Minorities/Girls and that has grown by 16%. The Mid-day meal scheme has also grown a lot.
d.    The Ministry of Health budgets have increased significantly to Rs 37000 crores. Of this, the National Health Mission has seen a 24% increase to Rs 21000 crores.
e.    Ministry of Minority affairs has seen a 60% over last year’s actuals.
f.      Agricultural credit target has been increased to Rs 7 lac crores from Rs 5.75 lac actuals of last year, an increase of 22%. This is the credit target. The Ministry of Agriculture has been allotted 22% higher at Rs 27000 crores.
g.    There is a small provision of Rs 10000 crores for the food security bill related expenses. I guess, the larger part of this burden will come in next year’s budget.
3)    The symbolism of making the rich pay more in a tough year – the surcharge on the “super rich”, the higher surcharge on corporates, the higher excise duty on SUVs and big cars, the higher customs duties on costly cars and even mobile phones – are all meant to make the core election constituency feel privileged.
4)    The symbolism of being concerned about women is obvious. The special “Nirbhaya” fund for women’s safety, the all-women’s bank are all part of this; clearly aimed at growing the election constituency to include women.

The above should show that Chidambaram’s spending focus is squarely on his party’s core consituencies. Where has he cut? He has given a very small increase to defence, though to take care of any attacks from the BJP on grounds of national security, he has said he will provide as much as required, if required. This is a good way of keeping it “off-balance sheet”!

Of course, there are many good ideas in the budget as well. The strong emphasis on reviving investments, the cut-backs on fuel subsidies (though not adequate in my view), the plans to increase savings (inflation indexed bonds), the focus on infrastructure (tax free bonds up to Rs 55000 crores etc), the incentives for local manufacturing (industrial corridors, investment allowance etc)….are all very good proposals. No wonder the near unanimous opinion that the budget makes for good economics. What most people have not realized is how savvily Chidambaram has also presented a great political budget!

The real truth is that this is a clear pre-election budget. It is focused on ensuring that the Congress wins the next elections. Spends are targeted at key election constituencies; painful tax provision are aimed at making these constituencies feel special. This is Chidambaram at his best. Good on economics, great on politics!

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