The Indian Budget 1996-97 The Indian Economy Overview

INDIAN BUDGET 96: Analysis


Chidambaram's first budget aims to be all things to all people

The Indian Finance Minister Palianappan Chidambaram finds himself in a strange predicament-he is now no longer in the Congress party where he, along with the previous finance minister, unleashed major reforms in the Indian economy. But his convictions bear a close resemblance to his former party and he is ill at ease with his new found colleagues and partners, especially the hardcore leftists who for years sharply criticized everything he did.

Those contradictions found an echo in the first ever budget presented by him in the Indian parliament on Monday. There was little that could seriously annoy his leftist partners-in fact he seems to have paid heed to their warnings about opening the door to foreigners too much-and there is a bit which would please the middle class and big business. In short, Chidambaram has tried to be all things to all people.

Let us take the corporate sector. A long standing demand of big business has been to abolish a 15 percent surcharge on the tax paid by a company; Chidambaram has reduced it to 7.5 percent. But at the same time, he has introduced a minimum tax of roughly 12 percent on the so-called "zero tax" companies which till now used to take advantage of provisions to pay no tax by investing continously.

Mr.Chidambaram showed great interest in the Indian Economy Overview
This will allow him to please the corporate sector while avoiding the charge that he is pro-big business. Similarly, he has allowed foreign institutional investors to raise their stakes in Indian companies to 10 percent from the present five, but has not altered the ceiling on the total amount of foreign investment in a company, which remains at 24 percent.

Though he is personally committed to bringing private players, both foreign and domestic, into the state owned insurance sector, Chidambaram has not been able to take any decision on it in the budget. That is clearly so as to not annoy the trade unions who have powerful backers in the government.

As far as the middle-class is concerned, the finance minister has not raised the minimum taxable limit, but lowered the rate of tax on lower end salary earners. There are other tax breaks and savings instruments for the salaried classes, and the sop of not raising taxes on several items of middle class consumption, because the consumerist middle classes are increasingly becoming an important constituency.

But clearly the most important lobby that the finance minister had to please was the farmers. The new Indian prime minister H D Deve Gowda is a farmer himself and has made no secret of the fact that he intends to give them whatever he can by way of subsidies and financial assistance. The government is committed to setting up rural banks and agricultural financial institutions as well as keeping down prices of essential fertilizers. Naturally the finance minister has tried to keep his boss happy.

Infrastructure is a critical problem for India and the finance minister has announced the setting up of a new funding institution which will exclusively finance capital intensive projects. In addition, there are tax breaks for companies investing in infrastructure areas like roads, power and telecom. But investors want more-guarantees, protection against change in government and many more tax holidays and Chidambaram has not been able to promise them that.

Indeed, it looks like his oft-quoted commitment to bring in 10 billion dollars of foreign investment into India appears a pipe dream considering that at the moment the country gets barely one-fifth of that amount. Foreign investors want far more than assurances-they want less red tape and more tax incentives-merely offering them India's vast consumer market is not enough.

Though reactions to his budget have been generally favourable, most people have also understood that the finance minister's hands were tied by political compulsions. But that is no consolation to either the middle-classes or to big business, either to foreign investors or even to trade unions. Enthusiasm for his proposals is bound to be muted, more so since it is clear that this government's longevity is dubious.

Chidambaram has promised to come out with more reforms in his next budget-the question is, will he be around at all?

Sidharth Bhatia is a senior Indian journalist who runs a well known television program on Indian business and current affairs. A former newspaper editor and foreign correspondent, Bhatia has written for several publications in India and abroad.

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