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FM's Picture Courtesy PIB
 
Interim budget serves as a pedestal for the outgoing Finance Minister to pontificate. The urge to lay down the agenda for the future is more when the incumbent knows that the ruling party would not return to the power after the elections. 
 Mr. P. Chidambaram has thus rolled out a 10-point ‘A Vision for the Future’ in his 2014-15 budget speech.  He perhaps aped Dr. Manmohan Singh, who had also unveiled his 10-point vision in the Interim Budget speech for 1996-97.  Dr. Singh had labeled his vision as ‘medium term objectives for accelerated economic and social development’ over the next five years. After the elections, Dr. Singh had to sit on the opposition benches in Rajya Sabha.   
Some of the objectives identified by both of them in their respective speeches have been articulated by their predecessors as well. This is because certain objectives remain eternally elusive due to the politicians’ short-sightedness and obsession to shower favours on different constituents of the electorate.   
Take the case of price stability and growth that figures as the third task in Mr. Chidambaram’s vision. Dr. Singh had listed it as the first among his medium-term objectives by pitching for 7-8% annual growth in a ‘framework of reasonable price stability.’ 
The issue of growth with price stability has been articulated by outgoing as well as incoming finance ministers (FMs) for the last several decades. To be precise, this issue has been a fixation right from the first budget speech after the Independence. 
In the Interim budget speech for 1967-68, late Morarji R. Desai, for instance, stated: “Our aspirations and hopes for economic well-being and a higher standard of living for millions of our people lie in accelerating the tempo of development. But this has to be done without generating further inflationary pressures, and on the basis of a realistic assessment of the resources that can be mobilized in a non-inflationary manner.”
Rephrasing of unfulfilled objectives has thus become a ritual for successive FMs. The incumbent minister in the present case has, however, no moral authority to preach what he himself has breached.  Moreover, laying objectives without showing how to achieve them is ridiculous. 
It would have been great if Mr. Chidambaram had applied the skills that he acquired at Harvard to roll out a strategy to break the vicious circle of hike in food grain prices & government wages, increase in subsidies including dole-outs under public private partnership projects and the consequent increase in borrowings and inflation rate.
He should have enlightened the public about the combined effect of inflation, subsidies and government borrowings on fiscal health & rupee depreciation, which itself fuels inflation.
Mr. Chidambaram and the UPA have in fact sown seeds of inflation, fiscal decay and depreciation of rupee whose impact would be felt over the next 5 to 10 years!
The triggers for future inflation in the interim budget are gross under-provisioning of major subsidies without concomitant reforms, reduction in excise duty without disclosing its impact on tax receipts and without factoring in the impact of the yet-to-be proposed award of the seventh Pay Commission (SPC). 
Take first the under-provisioning of subsidies. The fertilizer subsidy for current fiscal has been under-estimated by over Rs 35,000 crore to manage the fiscal deficit. In December 2013, Fertiliser Association of India (FAI) had urged the Government to provide an additional Rs.41,000 crore allocation for fertilizer subsidy in 2013-14 to meet the realistic requirements. 
The under-estimation of fertilizer subsidy for the next fiscal is much more as it does not factor in the impact of doubling of domestic gas price on urea subsidy. 
Mr. Chidambaram has paid only lip-service to urea subsidy reforms including increase in urea price without taking any concrete initiative. It is no wonder then that the urea industry is being governed through Stage III of the new pricing scheme, which should have been replaced by a new one in April 2010. 
Credit agency ICRA thus foresees a “spillover of around Rs. 370 billion in terms of fertiliser subsidy to 2014-15 based on the actual requirement and the revised allocation for 2013-14.”
It says: “In the absence of urea farm gate price revision, the subsidy requirement for domestic urea manufacturing is expected to rise by ~Rs. 130 billion, if the proposed gas price revision is implemented from April 1, 2014, as gas price hikes are passed through to GoI. Consequently, the budgeted subsidy for 2014-15 of Rs. 680 billion is likely to prove inadequate, even if GoI announces a ~10-15% reduction in subsidy for phosphorus and potassium nutrients for 2014-15 (as expected in light of the recent fall in global DAP & MOP prices), and is likely to lead to a further spillover to 2015-16.”
Another Credit rating agency CRISIL has voiced similar concern on subsidy under-estimates. It says: “CRISIL, “Domestic gas prices are expected to double to ~$8 per mmbtu in 2014-15. This will increase the government’s fertiliser subsidy burden to an estimated Rs 775 billion in 2014-15 from the Rs 680 billion budgeted. Besides, there will be a subsidy spillover of Rs 330 billion from 2013-14 to 2014-15. Thus, the total increase in the subsidy rollover to 2015-16 is likely to be Rs 410-425 billion.”
Factor in the roll-over of Rs 35,000 crore of subsidy payable to public sector oil market companies to 2014-15. Reckon the undisclosed subsidy arrears payable to Food Corporation of India. And then assess how unrealistic is fiscal deficit for current fiscal and the target for the next one.  
The adverse impact of the National Food Security Act on the subsidy bill and the statutory compulsion to increase food prices to increase farm yields would be known only after the full-scale implementation of the Act. It would surely fuel both the inflation and the fiscal deficit year after year. 
Add to this impact of the award of the SPC, implementable from January 2016, first on the Union Exchequer and later on the States’ finances. The States either implement the Pay Commission’s recommendations for their respective staff or appoint their own panels to rework the wage structure for their employees.
The Pay Commission’s award has a cascading effect on not only the States’ finances but also on the wages in all other sectors of the economy. The Pay Commission award’s inflationary impact on the economy invariably gets phased out over five or more years.  
With an eye on five State assembly polls where Congress later licked dust, Mr. Chidambaram had announced the decision to set up SPC in September 2013 even though there was hardly any demand for SPC from the employees’ unions. 
In any case, there is no constitutional or legal obligation to set up a pay commission. Moreover, dearness allowance takes care of inflation.
It would have been far better and credible if Mr. Chidambaram had issued an action taken report on the previous pay commission’s recommendations including the ones relating to governance reforms and personnel management. If a pay commission is required, it should be set up for the exploited contract and outsourced employees that both the Centre and the States hire without any qualms. 
Mr. Chidambaram should have prodded the Cabinet into implementing the recommendations of the 13th report of the Administrative Reforms Commission (ARC), which mooted restructuring of ministries to align their functioning and coordination. Such an initiative would have reduced the number of ministries to 20-25 and facilitated huge saving in non-plan expenditure.
It would have been great if Mr. Chidambaram had spared time to study the impact of previous pay commission reports on inflation, fiscal health of the centre and the States incorporated in diverse documents.
It is here apt to quote a CRISIL study captioned ‘'Pay Commission may reverse states’ fiscal improvement -Primary deficit levels could reach 3.1 per cent of GSDP, thrice the current target'  released in September 2006.
It stated: “Salaries and pensions constitute the largest component of state governments’ expenses: they make up between 30 and 45 per cent of individual states’ revenue expenditure. In the late 1990s, states’ deficit indicators worsened dramatically due to the implementation of the Fifth Pay Commission’s recommendations.”
CRISIL study added: “Keeping this fiscal shock in mind, the Eleventh and Twelfth Finance Commissions recommended that there was no need to appoint a pay commission every ten years.”
Mr. Chidambaram presented the interim budget on 17th February. On the same date in 1960, a member in Rajya Sabha said what could turn out to be a key to breaking the wages-cum-food price hikes sustained inflation-fiscal rot cycle.
Participating in a discussion on the report of the third pay commission, Mr. Biswanath Das stated in Rajya Sabha ,  “there is a limit to this and that limit—the capacity of the nation to bear the financial burdens— must not be crossed…. No wage scale could be acceptable to the nation, much less to the House, unless and until it conforms to the financial capacity and capability of the nation itself, of the tax payers themselves.”
Nobody in UPA would pay heed to such gems of wisdom as it is currently busy orchestrating its achievements in the mass media. An advertisement, for instance, has this catchy headline –“Minimum support price to farmers more than doubled in last 10 years.” 
Had the UPA moderated such hikes and slashed wasteful expenditure, Mr. Chidambaram would not have to state the first task in his ‘Vision for the Future’ as: “We must achieve the target of fiscal deficit of 3 percent of GDP by 2016-17, and remain below that level always.”
There is nothing great about this vision or blurred vision as this goal was set in 1993 when Dr. Singh was the Finance Minister! A document captioned ‘Economic Reforms – Two Years after and the Task Ahead’ released in 1993 envisaged reduction in fiscal deficit to 3%. 
Let us now revert to subsidies, which figures as the 7th task in Mr. Chidambaram’s vision. It states: “Given the limited resources, and the many claims on the resources, we must choose the subsidies that are absolutely necessary and give them only to the absolutely deserving.”
Instead of making this grandiose statement, he should have disclosed the increase in the number and the diversity of subsidies and in the total subsidy bill right from his maiden budget speech in July 1996. At that time, he proposed a discussion paper on subsidies as a prelude to comprehensive subsidy reforms. 
Though there are several more issues in the Interim Budget that ought to be put under the lens, the existing analysis is sufficient to drive home the fact that Mr. Chidambaram has failed to practice what he has envisioned for his successor.  
(Published by taxindiaonline.com on 23 February 2014)
http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=19835  
 
                                                        
 
You are here: Home Budget Mr. Chidambaram, please look at the preach-practice deficit too!