The Hindu Business Line : Challenges before the Finance Minister

The Finance Minister, Mr P. Chidambaram's success as a Budget-maker will be tested by his resoluteness in resisting the temptation to offer too many goodies. There is no escaping the fact that the exchequer has to pay for every concession, every subsidy the Budget offers. Mr Chidambaram has a difficult task on his hands, given the demands of infrastructure and the compulsions of coalition politics, in framing a Budget that will please most, if not all, and help take the nation forward on a path of sustained economic growth with stability, says S. Venkitaramanan.

COME February 28, the Finance Minister, Mr P. Chidambaram, will unveil his Budget for 2006-07. He must be in the throes of the complex exercise that precedes the framing of the Budget. The Finance Minister has already given the nation an idea of the problems he faces in budgetary balance through his mid-year presentation of the trend in expenditure and receipts. He had, however, pressed the pause button on the targets for achieving elimination of the revenue deficit as prescribed in the FRBM Act.

The Budget is more than a statement of receipts and expenditure, as estimated. It is traditionally looked up to for hints and decisions on various policy issues. First and foremost, the nation looks up to the Budget as an indication of the Government's tax policy for the year ahead.

Second, policies on various expenditure items also come under the scanner. The Finance Minister will, no doubt, be expected to spell out details of his divestment proposals, or at least such of them as remain after the gruelling negotiations with the Left.

It is an undeniable fact that both the Khan Market and the stock market look to the Budget eagerly — contrary to Finance Minister's earlier declaration that the former mattered but not the latter. The stock market is at least as important as the Khan Market, with its implications for FII flows and corporate investments. He has to take care to see that he does not hurt the impetus for growth, both in terms of corporate profitability and attractiveness for further private investments. Hopefully, his advisers' instinct for innovation for innovation's sake will be held in check to prevent further proliferation into more such nuisance taxes, like the FBT and the cash transaction tax.

Turning to the size of the deficit, the Finance Minister is constrained by the fact that many of the expenditure commitments flow out of the National Common Minimum Programme. For instance, the provision needed for the Employment Guarantee Scheme has to come within the revenue account.

It is quite likely that given the Finance Minister problems, the size of the programme will be determined by the provision that he will be able to make rather than the reverse. Perhaps, that is all to the good, given the uncharted territory that the Employment Guarantee Programme involves and the risks of faulty or flawed implementation of a large-sized effort. The Finance Minister will also have to provide for the expansion of the Health Insurance Scheme that has been announced. While the size of the commitment is estimated to be only a few thousand crore, the implementation may raise questions of sustainability, especially inasmuch as the beneficiaries are not bearing any part of the cost directly.

Adverse selection is likely to be the result. The National Insurance Scheme may end up encouraging many more people to declare themselves sick than they would in the absence of the Scheme. The Finance Minister had initiated steps to contain subsidies by attempting to adjust the price of foodgrains in PDS. But this proposal has met with resistance from an important member of the coalition. The prospect of Mr Chidambaram sticking to his target of reduction of subsidies in this as well as other areas, such as fertilisers, is doubtful, given his political compulsions.

There is no easy way, however, to manage the expenditure compression, except by refraining to take on more new subsidy obligations. Unfortunately, the writ of the NCMP runs large and a fractious Coalition dominates the prospects of Finance Minister doing the difficult Budget balancing act.

Particularly depressing is the scenario on petroleum prices, with his own ministerial colleague sticking to his stand that the rise in international prices should not be passed on to the public. This has serious repercussions in form of lower dividend payments by oil companies and thus affects the revenue deficit directly.

00Indirectly, it is the surest recipe for encouraging consumption of petroleum products by offering them at a lower price. The subsidy on petro-products thus harms both the exchequer and the balance of payments. One only hopes the country will not have to endure another full-blown fiscal and BoP crisis to realise the dangers of excessive subsidisation of imported petro-products, however attractive it may look in the short run politically.

The task before the Finance Minister during a Budget lies in encouraging investments in the economy while managing the fiscal deficit without excessive taxation or unnecessary compression of essential expenditure. To find resources for investment, especially in infrastructure, the Finance Minister will inevitably have to approach the banks or financial institutions for resources. The Special Purpose Vehicle he has proposed has still to take shape. The idea of drawing on RBI's huge forex reserves seems to have apparently been given a hasty burial. In the circumstances, there is no alternative but to open the door for foreign direct investment or to make liberal changes in infrastructural pricing and regulations as to attract private domestic funds. What is clear is that all attractive options deserve to be pursued.

The IDFC, one of Mr Chidambaram's earlier creations, already contributes to infrastructure investments. Hopefully, the Budget will indicate concrete measures taken by him to reactivate this institution as well as new SPV he has proposed. Much has been said about public-private partnerships in infrastructure. The Finance Minister has himself spoken about it. The success of public-private partnership depends on the way in which concession agreements are drafted and worked out, the user charges are levied and collected and the operators allowed to function in accordance with the original agreements.

The history of public-private partnerships all over the world is replete with instances of Governments reneging on concession agreements after the project comes into operation on the alleged ground that the charges levied are too high or that there is popular unrest.

We have to tread carefully to ensure that public-private partnerships are not framed too ambitiously in respect of the responsibilities they cast on the private parties or the Governments. Political realities must be taken into account in formulating the concession agreements. All stakeholders should participate actively in the formulation of the concession agreements.

One hard nut for the Finance Minister to crack is the issue of divestment. While some progress has been made in getting the concurrence of Left partners in regard to profit-making navaratnas, there is still a great deal of obfuscation. Perhaps, this is part of the process of political bargaining.

The Finance Minister needs to convey to his coalition partners the lessons of the Chinese experience with the divestment of stakes in Chinese State-owned banks in recent months. Massive divestment has taken place in China through the giant-sized initial public offerings in respect of that nation's State-owned banks.

The process involved in initial strategic sale of a small percentage to a foreign entity, like the Royal Bank of Scotland or Temasek and riding on the back of the increased creditworthiness signified by such partnerships, go ahead with an IPO on the Hong Kong Stock Exchange. The net result has been that the Chinese have netted in large resources in the form of foreign contributions through the IPOs and simultaneously strengthened their own admittedly weak banking structure.

The experience of China in this regard is an eye-opener on how India can proceed, especially with reference to its public sector banks. Unfortunately, the Left does not seem to grasp the lesson that China's successful divestment offers. Hopefully, the Finance Minister will try to convince his partners about the benefits of following the Chinese way, which they endorse in their political ideology.

The most baffling of all challenges before the Finance Minister is likely to be political. With the prospects of Assembly elections in a few States, the coalition parties are likely to be politically sensitive to do anything that smacks of a tough budgetary stance. Taxation is bound to be unpopular, so too cutting subsidies. In fact, the danger is that in the euphoria of a pre-poll honeymoon, the UPA may itself spawn more populist schemes, which Finance Minister will have to incorporate in the Budget.

Mr Chidambaram's success as a Budget-maker will be tested by his resoluteness in resisting the temptation to offer too many goodies in his Budget. An unsustainable Budget is no good, however many sops it offers. There is no escape from the economic lesson that the exchequer has to pay for every concession, every subsidy that the Budget offers. The Finance Minister has a difficult task on his hands, given the demands of infrastructure and the compulsions of coalition politics. Here is hoping Mr Chidambaram will, as usual, manage to present a fair and reasonable Budget that will please most, if not all, and help take the nation forward on a path of sustained economic growth with stability and social justice.