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Chidambaram gets an average rating on Dalal Street; Sensex returns 18.63% during his tenure though he operated in a tough macro-economic environment

Finance minister P Chidambaram assumed office when inflation was soaring, the policy setup was in a state of paralysis and stocks were in the bear grip. The rupee was under severe stress due to exit of foreign investors and ballooning fiscal deficit from the huge burden of a stimulus package doled out by the then finance minister Pranab Mukherjee.

Foreign investors were jittery after Mukherjee as finance minister announced the general anti-avoidance rule (GAAR) on a retrospective basis in 2011-12.

Chidambaram took over in July 2012 after Mukherjee had been elected president, and he took immediate steps to soothe the nerves of investors, by setting up a panel under Parthasarathi Shome to suggest amendments to the GAAR and retrospective tax issues, leading to the postponement of their implementation till April 2016. He also unveiled a raft of reforms, including opening up of aviation, pension and power trading sectors to foreign direct investment (FDI).

Foreign investors cheered this and pumped in more money into India’s capital markets. FIIs poured Rs 1,63,350.10 crore into equities in 2012 and another Rs 62,288.20 crore in 2013.

“The finance minister has operated in a particularly tough macro-economic environment since he took over. Global economic and financial market environment has been challenging for emerging markets, like India. Chidambaram has managed to avoid a sovereign downgrade by ensuring adherence to fiscal deficit targets by curbing fuel subsidies and cutting spends, reducing uncertainty around taxation issues (particularly GAAR implementation), pushing stalled large investment projects and increasing tax compliance,” said Brijesh Mehra, country head for international banking at Royal Bank of Scotland.

Chidambaram also worked with RBI to curb current account deficit and inflation, even at the cost of growth in the short term. “His efforts have not necessarily pushed up growth or kickstarted investments, but have gradually corrected the macro-economic imbalances in the form of twin deficits and high inflation. He has done a reasonable job of improving the business sentiment and investment climate,” Mehra said.

Deven Choksey, MD of KR Choksey Securities, believes that Chidambaram had fared much better as a finance minister than what he had done at the home ministry, where he spent three-and-a-half years. “Immediately after taking charge at the North Block, he took quick decisions, helping the government to rein in CAD, which threatened to go out of control,” Choksey said.

IV Subramaniam, CIO of Quantum Mutual Fund, had a different view. “I think Chidambaram did not fare very well. Containing inflation should have been the main focus of the government. The government could have been more aggressive in tackling fiscal deficit,” he said. “We can live with spending cuts, but inflation control should be ideally the prime focus.”

Mid last year, Indian stocks and currency markets were in turmoil, along with other emerging markets like Brazil and Indonesia, when the US Federal Reserve muttered the word ‘taper’, indicating a slow withdrawal of its quantitative easing programme.

Since Chidambaram took over as finance minister, the market has risen 18.63 per cent (from 17,236.18 to 20,448). Since the last Union budget, the Sensex is up 8.41 per cent, notwithstanding the Fed tapering that began this January. The Nifty has gained nearly 16 per cent since Chidambaram assumed office on July 31, 2012 and 6.50 per cent since his last budget.

Yet, the finance minister could do little to end the slowdown in growth. “It would have been a feather in his cap had he been able to bring economic growth too,” Choksey said. “He arrested the rise in fiscal deficit and took steps to control the CAD, which have yielded good results.”

R Sivakumar, head of fixed income at Axis Mutual Fund, credited the finance minister and other policy makers for the relatively stronger performance of the rupee when Latin American and other Asia currencies are in turmoil following the Fed taper. “Let’s give him the credit where it is due. The finance minister has stuck to his fiscal deficit target. The final number may be better than his budget target,” Sivakumar reckoned.

From the market’s point of view, Pranab Mukherjee’s tenure as finance minister was a dream run in terms of numbers, though he gave investors many tense moments with the retrospective tax or GAAR. From 8,674.35 points, Sensex rose to 16,906.58 (95 per cent) between January 23, 2009 and June 26, 2012 when Mukherjee was at the helm at finance ministry, Capitaline data showed. Nifty returned 91.18 per cent through his term in two successive governments.

Mukherjee was lucky, because the market was at rock bottom when he took over — the index touched the upper ceiling of 20 per cent the day the UPA returned to power without Left support — and he was out by the time market sentiments had begun to sour due to the so-called policy paralysis and various macro-economic ills.

Next week’s vote on account will be Chidambaram’s last chance to prove a point under this dispensation, but economy watchers do not think he will go for any populist measures. “Anything he announces now cannot be implemented in such a short notice, hence I don’t expect any big step in the interim budget,” Sivakumar said.

Given that it is a vote-on-account and not a full budget, there is a limit to what Chidambaram can do, said RBS’ Mehra. “As long as the interim budget reiterates a commitment to fiscal consolidation through control of subsidies, it would serve the purpose,” he said.

The rise in food inflation was also partly due to the successive hike in minimum support prices for various agricultural produce. “The government can control inflation. It is not correct to say it is helpless in controlling inflation,” Sivakumar said.

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