Rule of averages

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As we near the next financial cycle, it remains difficult to bury the ghost of past one year. Here is a lowdown of chances missed and few positives from P Chidambaram and his predecessor

Rule of averages
When finance minister Palaniappan Chidambaram presents the budget for 2013-14 next Thursday, he will also have to present the government’s report card for year gone by. And that may not look rosy at all.

Come what may, the Harvard-educated lawyer, will have to bear the ignominy of defending the government’s yearlong policy paralysis.

So what does the report card look like from a distance?

Chidambaram, aka PC, carries a mixed bag of modest achievements and failed opportunities, with a huge number of unkept promises from the last budget presented by his predecessor Pranab Mukherjee.

So, his job of presenting an economic performance report becomes that much more daunting, as Chidambaram will have to defend his predecessor’s budget proposals.

To be fair to PC, much of his burden is not of his own making. But then, Pranab too cannot be entirely blamed for the way the year, and the economy, panned out.

When measured on the performance barometer, the contrast in the working styles of veteran Congress leader Mukherjee and market-savvy Chidambaram would come to fore in a big way.

Coming to the brass tacks, the UPA government will be found wanting on most policy issues and performance related targets, though, beginning September, some effort seems to have been made in right earnest to lift the sagging economy.

Financial Chronicle’s an­a­lyses puts the government performance at below 50 per cent of what was pro­mised in the budget by the then finance minister Muk­herjee on March 16, 2012. FC’s illustrative presentation on the cover of this issue, more or less sums up the government’s performance on the economic and policy fronts.

The government lost over half the year in policy paralysis, before Chidam­baram stepped in as Manmohan Singh’s lucky mascot, to bring a sense of urgency to North Block.

PC’s biggest challenge was to tackle the perception that the India growth story was on the wane, especially when foreign investors dithered from putting their cash in the domestic market.

Earlier this year, Chidambaram waded through Hong Kong, Singapore, Frankfurt and London to hardsell the long-term India story, hoping to stem the rot in India’s image in top financial markets.

Singapore-based DBS Ba­nk India chief executive Sajiv Bhasin told Financial Chronicle, “Execution with efficiency of both policy and projects should be the key focus.”

While the conservative Mukherjee presented the image of an elderly statesman and a stern politician, Chidambaram demonstrated flexibility in ironing out policy issues.

No wonder, Bhasin rates his performance in the past few months close to the top in a scale of one to 10. “It’s difficult to rate his performance, but it would be close to double digit,” Bhasin told Financial Chronicle.

Soon after he took control, PC faced the onerous task of pacifying foreign companies, markets and Indian businessmen who were particularly up in arms against ‘retrospective reopening of tax assessments’ under the general anti-avoidance rule (GAAR). GAAR was brought in to counter aggressive tax dodging by both foreign companies and investors.

Mukherjee had proposed reopening of (tax) assessments up to 16 years with respect to assets held abroad, having tax implications for a host of buyouts made by companies such as Vodafone.

Mukherjee repeatedly argued in Parliament and outside that India was “not a banana republic” that foreign companies would do business with by not paying taxes either here or in their country of origin. In doing so, Mukherjee directly targeted Vodafone for not paying taxes in buying the Indian telecom assets of Hutchison Whampoa of Hong Kong in 2007. In the process, he kicked up a huge row between the company and the government, resulting in litigation. If GAAR were implemented in its original form, Indian tax authorities could also open up another half-a-dozen such deals against foreign companies.

The move also led to a huge cacophony in the form of trial by media and social networking sites, raising questions about policy stability. It was finally left to Chidambaram to beat a ‘temporary retreat’ on GAAR for three years and he did that with grace backing up his move with the recommendations in the Sho­me committee report.

Policy paralysis & aftermath

Having got over the GAAR row, Chidambaram backed by prime minister Singh got to work on the stalled reforms programme. While his predecessor had done a lot of homework in his inevitable style without going to press every other day, Chidambaram front-ended this concerted campaign to retrieve the ‘lost growth story’.

Apart from companies and market participants who willingly allied with him, evolving political consensus on major reform issues like insurance, pension and banking laws posed a big challenge. He worked over weeks with political parties within the government and outside to blunt opposition to some of the reform measures, with limited success.

For instance, the government managed to get the banking laws amendment bill adopted by both houses of Parliament. It empowers the boards of state-run banks to manage their undertakings with the professionalism and independence they had been demanding for over a decade. It also allows foreign investors voting rights in proportion to their equity holding in private Indian banks.

And even as this issue was going to bed, RBI announced new guidelines for private sector entry into banking (read report on page 3 of this issue for detailed guidelines).

However, two other legislations on pension and insurance reforms remain stuck for lack of ‘working understanding’ between Chidambaram and his bête noire, former finance minister Yashwant Sinha, who is also chairman of parliamentary standing committee on finance. Unless there is agreement on keeping FDI at 26 per cent in both insurance and pension sectors, with a proviso for subsequent hikes only with parliamentary approval, these two bills seem to be moving nowhere.

Foreign direct investment (FDI) in multibrand retail too faced hurdles, with scanty groundwork and lack of political consensus. But, the government bulldozed its way through Lok Sabha, though getting Rajya Sabha to agree to the provisions may still be quite an achievement. The government also opened up the aviation sector, allowing foreign airlines to pick up to 49 per cent stake in Indian ventures. Malaysian airline, AirAsia’s foray into India along with the Tatas is a pointer to the outcome of a liberal aviation roadmap.

Jeff Immelt, chairman of the $150 billion, General Electric who was in the capital on Friday, gave a thumbs up to Chidambaram’s FDI policy, describing the changes by Indian government as “positive steps”.

In the case of goods and service tax (GST) — a single impost on goods and services — the government is yet to get a handle on the issue seven years after it was first proposed. Lack of unanimity amongst states on this tax-reform measure has added to the problem. Last month’s meeting of state finance ministers convened by Chidambaram signalled that GST may not become operative till April 1, 2015, given the unfinished task and procedures involved. Sushil Kumar Modi, chairman of empowered group of state finance ministers, told FC that GST couldn’t become operative immediately as “half the state legislatures will have to adopt the legislation after it is adopted by both houses of Parliament”.

Another direct tax reform measure, DTC, modelled on the lines of laws in the US and the UK seem to be stuck for one reason or another. After he took over in July, Chidambaram had said, “It (DTC) needs a fresh look,” and was not sure whether it could be implemented even in the diluted form beginning next financial year. After those initial remarks, not much has been heard on this front, though several finance ministry officials believe that it could be the centrepiece of Chidam­baram’s budget for the coming year.



Subsidies & cash transfers


There has been a huge debate on whether the elected government is within its right to disburse cash subsidy in lieu of the several services and facilities it provides to vulnerable sections.

Amidst this debate, the government made progress in disbursal of cash subsidies as promised by Pranab Mukherjee in his budget. For instance, cash support in the form of scholarships, old age pension, student stipends have begun to be disbursed directly to beneficiaries in 20 districts beginning January 1, amidst fanfare, with Congress president Sonia Gandhi and prime minister Singh in the lead.

Even this limited success on the subsidies front has been overshadowed by lack of performance in other areas. Also, Pranab babu’s promise to provide subsi­dised cooking gas, ker­osene, food grains and other facilities via cash transfers into bank accounts through Aadhar platform is yet to happen. In fact, this may take some time, as the government has ordered a review of the Aadhar scheme given its duplication with national population register that is being put together.

In his presidential address at the start of the Budget session of Parliament, however, Mukherjee said the government would ring in cash subsidies in wages, cooking gas and other services shortly.

Disinvestment & markets

Full marks to Chidambaram for mobilising over Rs 21,500 crore during this financial year, as on date, through sale of equity in companies such as NTPC and Oil India. A couple of more floats for MMTC, SAIL, RCF and Nalco seem to be in progress. If one were to go by disinvestments secretary Ravi Mathur’s assertions, the government should mobilise close to Rs 27,500 crore during this financial year against the targeted Rs 30,000 crore. This is in contrast with Rs 14,000 crore raised in 2011-12 against the targeted Rs 40,000 crore, with Mukherjee as finance minister. In a pre-budget note, Icra, an independent rating agency has projected that the government may target mobilising another Rs 30,000 crore even in the next financial year from disinvestments in state-owned companies. But, HDFC Bank has projected Rs 40,000 crore as possible target for 2013-14.

It’s not only about mopping up cash from disinvestments, the government has also notified a scheme to allow small investors to enter the stock markets, while enjoying tax exemptions on investments up to Rs 50,000. This scheme was conceptualised by Mukherjee, but is being implemented by Chidambaram to widen participation in capital markets. The scheme was launched recently, and its impact would only be known after some time.

Fixing the Fisc

The single biggest failure on part of the government in the past year was the drastic fall in growth rate and the double digit rise in food prices.

Mukherjee had proposed an optimistic 7.6 per cent GDP growth, plus or minus 0.25 per cent, this financial year. But, when Chidambaram presents his macro-performance report card on Thursday, he would, in all probability, put the growth figure at 5 per cent, plus or minus, 0.25 per cent. Chidambaram may have to explain the continued sluggishness in the absence of policy intervention.

Even RBI governor Du­vvuri Subbarao has thrown enough hints on the government’s inaction as a serious constraining factor to pep up growth and rein in inflation. Unabated double-digit inflation, especially in food items, may continue to haunt the finance minister, inviting catcalls from opposition benches, when he presents the inflation numbers to Lok Sabha. In the lower house of Parliament, former finance minister Yashwant Sinha has cha­rged the Manmohan Singh-Chidambaram-Montek Singh Ahluwalia troika with “gross mismanagement”, leading to a faltering economy, flagging growth and unabated price rise.

On the positive side, Chidambaram should be a happy man when he reports to Lok Sabha how he brought the economy back on the path of fiscal consolidation by reining in fiscal deficit at 5-5.3 per cent. As reported in this newspaper earlier, he appears to have worked his magic on budget maths to present a rosy picture of government finances that reflects lower borrowings and curb on wasteful expenses. HDFC Bank chief economist Abheek Barua puts the revised fiscal deficit at a revised 5.3 per cent.

Social development

Though, the UPA government has done modestly well on development issues through its flagship projects, such as the rural job guarantee, health and education schemes, progress has been tardy owing to overwhelming perception of policy paralysis. Mukherjee’s presidential address on Thursday revealed that 11 crore children in 12 lakh schools benefit from the mid-day meal scheme. The number of technical training institutes has grown to 10,344 as on December 31, against 5,114 in 2006-07.

Also, health infrastructure has expanded in a big way, with more than 43,500 new constructions underway and 70,000 additional hospital beds added to health institutions.

But then, the government has been unable to roll out the food security sch­eme as promised in the 2009 Congress manifesto and also outlined in Mu­kherjee’s budget last year. The food security bill continues to be stuck in parliament, leading to inordinate delays in providing food security, as in the case of job guarantees in rural areas.

All said and done, despite his valiant effort to lift the economy out of the morass and reinvigorate sentiments, Chidmanbar­am still has some tough explaining to do on the government’s tardy performance in the year going by, when he formally presents his budget next week.

badarinath@mydigitalfc.com

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