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When Luck Runs Out

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The NDA government’s performance on the fiscal front was quite poor. The centre’s fiscal deficit rose from 4.8 per cent of GDP in 1997-98 — Chidambaram’s second year as the finance minister in his first stint — to 6.2 per cent in 2001-02, when the combined deficit of thecentre and states was over 9.6 per cent.
The NDA, however, was lucky on the inflation front. Between 1998 and 2004, average WPI inflation was 4.8 per cent, with fairly long periods when it ruled below 4 per cent. In fact, between January and June 2002, inflation was under 2 per cent. Chidambaram’s inheritance, therefore, was average growth, benign inflation and poor fiscal management. There was one more legacy. Itwas the groundswell of an entrepreneurial spirit across India which, nurtured by the pro-investment climate of the NDA government,matured to adulthood with the growth in domestic demand from 2004.
So, how did Chidambaram do? Let’s start with the clear positive — his excellent management of the nation’s exchequer up to 2007-08. By controlling inessential expenditure and with serious efforts at tax collection, the present government has raised the direct tax to GDP ratioto a far more respectable level than ever before and, in the process, has created a more sustainable environment for public finance. To be sure, it has been helped by phenomenal growth in corporate and personal incomes, especially from 2005-06 right up to the present.



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Equally, there have been some strange taxes imposed by Chidambaram, such as the banking transaction tax (now thankfully withdrawn) and the fringe benefit tax. Even so, there is no doubt that until the current year, the government has done an excellent job in raising tax revenues and reducing both the fiscal and revenue deficits.
The finance minister likes to take credit for the growth that has averaged 8.8 per cent over the four years of the UPA’s reign. This is the highest growth rate in post-1991 India —something that few could dream of when reforms began 17 years ago. It is entirely due to Indianentrepreneurship and business across manufacturing and service sectors throughout India. Lack of needless government interference in business, soft interest rates right up to last year and easy availability of funding have helped. I would say that the government has enjoyed this growth; not necessarily created it.
Where this government has failed is in physical infrastructure. Despite sufficient funds, the National Highway Development Programme is way behind schedule, embarrassingly so. Village road programmes are also lagging badly. Bharat Nirman is more of a slogan than a reality.
At 16.6 per cent, the peak power deficit in 2007-08 is much worse than the 11.2 per cent shortfall in 2003-04, the last year of NDA’s rule. The actual power generation achieved each year has been much lower than the plan targets. Large tracts of India live in darkness. Poor infrastructure implementation has been a blot on UPA’s economic governance.
Contrary to popular opinion, however, neither Chidambaram nor the government has failed on the price front. Yes, we are looking at 12 per cent WPI inflation. But that is not the government’s fault. Never in the history of the 20th century, or in this one has four major commodity classes — hydrocarbons, minerals, metals and food — risen the way these have and in sync. Nobody can blame the finance minister for crude at over $140 per barrel. It is just his real bad luck — especially for it to have come in an election year. And there is precious little that anyone can do. You cannot control inflation through administrative diktats.
So let’s commiserate with Chidambaram. He had the luck of the devil in his first four years. Now the devil’s taken over. And since the only certainty about luck is it will change, times will get better. But maybe not under this FM’s rule.

The author is chairman of CERG Advisory. omkar.goswami@cergindia.com
(Businessworld 15-21 July)


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