P. Chidambaram took office as Union Finance Minister for the third time in his long political career on 1 August. He faces the tough task of reviving India’s economy, by raising growth rates and putting a stop to high inflation. Chidambaram has left his mark in his previous two stints as Finance Minister, in UPA and in the United Front Governments of H.D. Deve Gowda and Inder Kumar Gujral. In his stint between 1996 and 1998, Chidambaram became famous for his ‘Dream Budget’ of 1997 which promised more than it delivered. It became notorious for its Voluntary Disclosure of Income Scheme (VDIS) which offered an amnesty to tax evaders if they disclosed their hidden incomes and paid a nominal tax. It was largely seen as a measure to help the rich, not the poor.
Chidambaram’s second stint in the Finance Ministry between 2004 and 2008 was more successful. He was helped by a global boom which pushed India’s growth rates to 9 per cent per year without the need for much policy action by the Government. As Finance Minister, he announced the Government’s much heralded National Rural Employment Guarantee Scheme. And then he announced a huge waiver of farm loans in 2008 just before the General Election. The Congress party widely held those two schemes responsible for their victory in 2009.
Now, as he moves back into the Finance Minister’s office, Chidamabram will have to figure out a way to find the resources for Sonia Gandhi’s pet _ the Food Security Bill, which guarantees cheap rice and wheat to the poorest two-thirds of India’s population. The Bill, if implemented, will need additional resources of almost Rs 40,000 crore a year, almost equivalent to the annual bill for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) . With the fiscal deficit running at almost 6 percent of GDP, Chidambaram will find it hard to find the money to fund the programme without putting more pressure on the fiscal deficit and consequently on inflation.
There are serious question marks on why Chidambaram as finance minister and guardian of the treasury did nothing to prevent A. Raja from pulling off the biggest scam in independent India. The BJP and other opposition parties may make life difficult for him in Parliament.
Fiscal reform has to be at the top of the new Finance Minister’s agenda. It is politically difficult to cut subsidies on food, fertiliser and fuels which constitute almost one-third of the fiscal deficit. Chidambaram will have to take a call on decontrolling the price of diesel which is subsidised by Rs. 13 per litre at the moment. Most economists believe that a subsidy of that level is unsustainable. It is also perverse because many beneficiaries are the rich, not poor, take the example of drivers of diesel guzzling SUVs for starters. He could strike a bargain with his party and allies to cut some of the subsidy and allocate the money freed up to fund the food security bill.
The Finance Minister may find it difficult to press ahead with the economic reform agenda that depends on legislation. The UPA does not have a comfortable enough majority in the Lok Sabha to push the contentious bill on raising foreign investment limits in insurance, banking and even retail. On retail, both Mulayam Singh Yadav and Mamata Banerjee have already announced their opposition to any move to open up FDI.
Chidambaram will also find it impossible to get tax reform done, particularly the implementation of the long awaited goods and services tax which would lower overall rates and improve tax compliance. The BJP-ruled states have bitterly opposed the tax. To be implemented, a majority of states have to get their legislatures to endorse the Goods and Services tax (GST). The states which are opposed to the GST are unlikely to change their stance for Chidambaram who has been the target of Opposition ire for the last year. He has been particularly unpopular with Chief Ministers with his attempt to force through the National Counter Terrorism Centre (NCTC) as Union Home Minister, a move rightly viewed by states as infringing on their constitutional right to enforce law and order.
Chidambaram will also have to deal with the taint of the 2G scam. Although acquitted by a trial court for criminal conspiracy with A. Raja earlier this year, there are serious question marks on why Chidambaram as Finance Minister and guardian of the treasury did nothing to prevent A. Raja from pulling off the biggest scam in independent India. The BJP and other Opposition parties may make life difficult for him in Parliament. Last year, they had boycotted Chidambaram for several months alleging his involvement in the 2G scam.
To make a success of his third stint at the Finance Ministry, Chidambaram will have to summon all the powers of his famed competence. He will also have to be politically deft to drum up support for some of the tough measures he needs to take. The future of India’s growth story is in his hands for the next year and a half. The prospects for the Congress and UPA’s reelection in 2014 are also dependent on whether he can rescue a failing economy.