Chidambaram isn’t walking the talk

The February cover story of FinanceAsia magazine featured P Chidambaram, India’s finance minister, and his pledge to get the country’s budget in shape to return the country to 8% GDP growth by 2015.

The interview came on the back of the minister’s visit to Hong Kong and other cities, where he met with investors. The timing to win back investor favour was good: Chidambaram, upon taking over as finance minister (his third such stint), pushed through reforms in civil aviation and the retail sector. He was also believed to be supportive of tax reform, notably GST, a plan to create a consistent, national tax regime for goods and services.

The budget unveiled last week may not be terrible. It may not even be bad. But it isn’t good, notably in its failure to address subsidies for diesel and other products. Such subsidies are not only undermining the country’s fiscal position: they also lead to corruption and other economic distortions, and relatively few among India’s poor really benefit from them.

Instead the government is going to soak the rich, with luxury taxes and incomes on the ultra-wealthy. Such measures are almost sure to fail, because the rich can so easily get around them. Imposing these politically expedient taxes while failing to back the GST — which would have done far more to create sustainable, consistent tax revenues — is hardly a move toward fiscal probity.

It is, however, a budget designed to play to the political gallery. Chidambaram’s name often appears in news stories speculating about future prime ministers. His career echoes that of the current prime minister, Manmohan Singh, who also enjoyed several stints as finance minister, most notably under the prime minister Narasimha Rao, who helped push through dramatic changes to the licence raj in 1991, thereby opening India to capitalism.

However, India is more dependent on foreign investment today than it was 30 years ago. Fund managers wooed by the finance minister earlier this year and his pledge to “walk the talk”, as he had put it to FinanceAsia, are likely to be unimpressed by this particular sashay.