The Art Of Illusion

Corporate chieftains and economists across the globe are even now poring overthe small print to figure out the potential twitches various bottom lines willsuffer. They can be using their time better.

For, the Finance (No 2) Bill 1996 is a pure and simple political act, not aneconomic one. It says all the nice things, it tries to please all sections ofthe economy. It gives with one hand and then quickly takes it back with theother.? It maintains the status quo, while deftly giving theimpression that Chidambaram is for you, whoever you are: FII or retiredgovernment clerk. "The Budget has no specific focus," says Ramesh Daga,chairman and managing director, GEC Alsthom. "Most of the sops are at bestmarginal." "Most major announcements have been deferred," pointsout Yogendra K. Modi, chairman of YKM Holdings. Chidambaram's first Budget is arguably the most "politicallycorrect" one ever presented in independent India.

It may also be part of a shrewdgame plan to usher in real reforms, the sortthe country needs.

Even his worst detractors admit that behind the finance minister'sremarkably boyish looks—it's the sort of face that appears in BrilliantTutorials ads after the IIT entrance results are out—ticks a brilliant mind.Recalls a former subordinate at his law firm: "He has an amazing ability tolook at a problem in its entirety and cut to the core. His mind works like thatof a pure mathematician, and he is absolutely dispassionate."?

SoChidambaram may have already firmed up his strategy by the time he walked intoNorth Block to take charge. He had inherited an economy where much-neededreforms and many tough decisions—for example, a petro product price hike and aloosening up of the money supply, which would lead to higher inflation—hadbeen kept in abeyance for two years. He had to contend with the Left Front andthe powerful trade union lobby, which had made it clear that it would not takeanything remotely construable as hurting even the very-short-term interests oflabour. So he tested the waters with the announcement about freezing governmentwages. The expected outcry followed. He retreated tactically, but his purposehad been achieved. He had sent a message to industry that he had the rightproblems in his sights, he had gauged the intensity of the opposition he would facewithin the coalition, and he had identified his allies. Some days later he and Prime Minister Deve Gowda let loose the dogs of war with the petroproduct price hike, again retreating tactically a couple of days later, but going back only a short distance, not all the way. And Chidambaram had got his Budget strategy worked out. Which was:

Do nothing that would raise the coalition partners' hackles.To be precise, skirt around issues like subsidies, government spending and opening up the insurance sector. The Budget, after all, is to be voted on and passed inParliament. Chidambaram was aware that if he made any significant announcementson these issues, his fragile coalition will be put under tremendous pressure,for it would be a direct challenge to the Left to vote against the Budget. ?

Maintain the impression that he is going ahead with reforms,or at least that real reforms will happen in the next budget, just seven monthsaway. Consider the issue ofautonomy for the Reserve Bank of India (RBI), something clearly needed to cutreckless Government spend. Today when the Government decides to blow up somemoney, it just gets the RBI to print some more notes. "I shall presentconcrete proposals...at the time of next year's budget so the RBI can havegreater autonomy in formulating and implementing monetary policy," hepromised in his Budget speech. He has also proposed Rs 50 crore for the corpusof the India Brand Equity Fund, which is supposed to popularise the "madein India" label across the world. It's totally another matter, however,that even if exporters contribute another Rs 50 crore, a sum of Rs 100 crore isfar short of what's needed for a worldwide advertising campaign.

Put whatever he does in the context of the Common MinimumProgramme (CMP). Right at theoutset in his Budget speech, the minister reminded everyone that he was one themain authors of the CMP. "Therefore, my commitment to the CMP goes beyondthe office I hold," he said. "Hon'ble Members will have manyopportunities this afternoon to test my commitment and they will find that theCMP has provided the foundation and set the agenda for this Budget."Needless to say, Chidambaram knows that the CMP is a very broad-based agendaopen to flexible interpretations.

At all costs, maintain a pro-poorstance. Given the UnitedFront Government's constituency, Chidambaram had to up social sector spending.He went to some length in his Budget speech to point out his increased outlayshere, but remained silent about the core of the problem: that the amount spenton uplift of the impoverished is not the issue, efficient corruption-freedelivery of that money is. "I don't believe the 'trickledown' effectcan work for the real poor in India," he explains bluntly. "It canwork for you or me, maybe even the urban poor, but it cannot reach Kalahandi.These people need direct aid." But if one looks at the figures closely, youdiscover that Chidambaram actually intends to spend less on the social sector asa percentage of the GDP than Man-mohan Singh spent in the last three years! Thisis audacious real-politiking, trying to please everyone without breaking into asweat.

And balance thatwith the $10 billion magic figure. "Thenation needs and has the capacity to absorb at least $10 billion a year asforeign direct investment," says the CMP. Even before the Budget, theGovernment took its first step towards that figure by giving the ForeignInvestment Promotion Board (FIPB)—the main agency for foreign investmentapproval—a new character and a new address. The high-profile body which wastill now the PMO's baby, was shifted to the Industry Ministry. The FIPB'spower to clear proposals has also been doubled to Rs 600 crore and the timelimit for clearances reduced from the earlier three months to six weeks. Theobjective: to snip some of the red tape and make way for fast-track clearancesof foreign investment proposals.

The target,however, remains daunting. In the last two years, the total foreign investmentinflows (foreign direct investment or FDI, FII money and Euroissuesubscriptions) were $4.9 billion ('94-95) and $4.7 billion ('95-96) only.

And a meretransformation of the FIPB is hardly enough. "The guidelines for approvalshould be more transparent and flexible," says economist D.H. PaiPanandiker. "What frightens the foreign investor is the ground reality thatdespite liberalisation, Indian rules remain pretty complicated. What's neededis a quickening of the entire process of approvals and a streamlining ofprocedures," points out economist Dr Subhashis Gangopadhyay. Also needed isan efficient institutional mechanism to resolve disputes quickly. And someanalysts also question whether just letting FDI flow into whatever sector itwants to helps the economy. Says economist Arun Ghosh: "One has to seewhere the money is coming in and whether it would benefit the economy. If themoney is coming in for consumer durables, where the entire profits and returnsgo back to the foreign investor, what's the use of having such investment inIndia?"?

With the Budget out of the way, Chidambaram and reformer ally,Industries Minister Murasoli Maran, can be expected to take a flurry of policydecisions to get foreign money in. "While the $10 billion annual FDI targetis optimistic, we believe $3-4 billion in fiscal '97 is achievable. We alsoexpect strong FII inflows to continue," says Alok Vajpeyi, director,BZWAsia. "The Budget is more encouraging towards foreign investment,"admits Mark Mobius, president, Templeton Emerging Markets Fund.

Carry out all theimportant reforms, take all the tough decisions outside the Budget. Imaginewhat would have happened if petro-product prices were raised in the Budget. Alarge number of United Front and Left Front MPs would have voted against theproposal, causing untold embarrassment to—and possibly the demise of—the UFGovernment. In the event, the Government got away with some acrimony manageablewith a partial retreat. The Budget has been followed by a flurry of policydecisions, like delicensing several more industries, raising the maximum limitof foreign holdings in small-scale industries, and the announcement thatissuance of foreign exchange derivatives will be freed in the near future."Keep watching," says a top Finance Ministry source. "We'llopen up insurance too, gently."

Leave hisdetractors no choice but to toe his line. Chidambaramis setting up a high-level Expenditure Management and Reforms Commission tostudy government spending and make recommendations. He will make sure there areseveral Left MPs on these committees, and he is hoping that, faced with hardfacts and burdened with the onus of finding a solution rather than carp from thesidelines, they will be forced to recommend austerity measures. As far assubsidies go, he will place before the House a discussion paper listing allsubsidies, visible and hidden "so that there can be an informed debate anda consensus on the overall level of subsidies as a percentage of GDP and theirappropriate targeting". Same strategy with the same objective in mind.

This is a craftygameplan, and if Chidambaram can pull it through, he will emphatically provethat he is no longer the politically naive technocrat he has often been accusedof being. And he will earn his place in history alongside—perhaps even aheadof—

Dr ManmohanSingh. For surely, Chidambaram has a tougher job on his hands than Singh had.Singh inherited an economy that everyone agreed was in extremely poor health,and the medicine the patient's conditions demanded was clearly of a particulartype. Singh did not have a basket of strategies to choose from. He had a toughjob, sure, but of linear simplicity in its structure.

Chidambaram,however, has inherited a halfway-house economy that could suffer a relapsepretty easily. He has to keep it healthy and give it vigour while balancing themyriad interest groups in his vibgyor coalition. Not only does he, for instance,have to get the fiscal deficit down, infrastructure up and foreign investmentin, he also has to take care of trade unions, rich farmers, the forces offederalism, and politicians with no vision beyond district or state-levelpolitics. Singh was an unknown commodity about whom no one had any preconceivednotions when he stood up to read his first Union Budget.

Chidambaram bears theonus of optimism, having been a reform-minded commerce minister, and moreimportantly, possibly the only face in this Cabinet which Indian industry looksat with hope: in that group photo of regional politicians, he's the one manindustry thinks it knows. So when the stockmarket indices crashed the day afterthe Budget, it was as much a reaction to some of the Budget proposals likeMinimum Alternate Tax (MAT) and import duty cuts, as a sense of betrayal.Industry had expected a lot from this man, possibly over-expected, and felt letdown. "Customs duties should have been reduced further, especially ofelectronic items so as to keep it in line with the Raja Chelliah Committeerecommendation," says V.N. Dhoot, CEO, Videocon group.

THIS is the other balancing actthe country's new architect of reforms has to perform. While making his firstBudget a totally political act, he has paid scant attention to Indian business."Traditionally, the minister meets people from a wide range of industriesand listens to their industry-specific suggestions and demands beforeformulating the Budget. This time, Chidambaram met few people and unilaterallytook steps that will dramatically change the way we do business, without everhearing what our problems were," says the chief executive of a ballbearings manufacturing company. Within two days of the Budget, he says, he haddecided to stop manufacturing ball bearings and had his vice-president on theplane to China to place large orders for components, which the company will nowonly assemble in India and sell.

Similarly, the MAT (see 'TheMAT-Trick'), business believes, is illogical and unfair and ends up penalisingfirms for managing their planning and finance functions efficiently. Exportersare up in arms since theman they had trusted and backed for the last five years has suddenly turned coatand slapped higher taxes on them. "The capital markets are disappointedthat he has not given any incentives for investors, especially in mutual funds.Since the market is getting more and more institution-alised, such an incentiveat this stage would have helped mutual funds in mopping up household savings anddiverting them to the capital markets," says Hemendra Kothari, chairman,DSP Financial Consultants.

Will he get awaywith it? He has already shown enough evidence that he is wilier than anyone gavecredit for. Says Kothari: "He has adroitly managed to balance variouspolitical interests while maintaining the stimulus for continued growth."And the Budget has many proposals that show an innovative mind at work. Inscience and technology, instead of directing more money into obscure research ofdoubtful applicational value, he has proposed that the Government will matchevery commercial rupee that the Council of Scientific and Industrial Researchand the Indian Council of Agricultural Research earn. New private sector localarea banks will be promoted with jurisdiction over two or three contiguousdistricts.?

The banks will mobilise rural savings and make them available forinvestment in the local areas. "Our deposit-credit flows are highlyskewed," he explains. "Banks mop up funds in Bihar and Madhya Pradeshand lend it out in Gujarat and Maharashtra. My proposal will offset that. And I have made them private sector banks, so they will be far less amenable to pressure from local politicians to lend badly and write off loans." But such creative proposals which neatly kill two birds with one stand are exceptions rather than the rule in this political manoeuvre masquerading as a Budget. A day or two before the Budget, Chidambaram met Manmohan Singh and, without giving any figures, broadly told him? what his main proposals were. Singh reportedly disagreedstrongly on two points: the MAT and lowering of some import duties. Chidambaramwent ahead anyway.

But the lawyerfrom Madras knows he has to curb his natural impatience and build an unhasty,crafty innings. With the Budget, he has seen off the fast bowlers at their peak.Now he will open up his stance and speed up the run rate. He must. His audienceis getting edgy.?