Budget Day: Chidambaram faces moment of truth

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Finance Minister P. Chidambaram will present one of the most highly anticipated budgets of recent years. (Reuters) Finance Minister P. Chidambaram will present one of the most highly anticipated budgets of recent years. (Reuters)
SummaryFinance Minister P. Chidambaram will present one of the most highly anticipated budgets of recent years.

and 4.8 percent in 2013/14. A no-nonsense, Harvard-educated, lawyer who commands both respect and fear in government, he has squelched opposition from cabinet colleagues worried that spending cuts could ignite a backlash among voters.

Some ministries are bracing for funding cuts of up to 20-24 percent from their original 2012/13 targets.

Defence Ministry officials fear the cuts could force a delay in weapons purchases by a country that has become the world's largest arms importer in recent years.

"My sense is that (at) this point the critical action we have to take is to try and re-accelerate growth, which is difficult in a situation ... where we are also trying to constrain spending," said Raghuram Rajan, Chidambaram's chief economic adviser, speaking at a news conference on Wednesday.

"But if we constrain spending cleverly, we can actually do both."

Chidambaram has focused on winning back foreign investors who were unnerved by proposals of his predecessor, Pranab Mukherjee, to tax merger and acquisition deals retrospectively and clamp down on tax evasion. He has implemented a spate of investor-friendly reforms, including opening up the retail sector to foreign supermarkets, since last September.

But Thursday's budget, his eighth, will be the biggest test of his reformist credentials.

His last budget, in 2008/09, was widely credited with ensuring the re-election of the Congress-led ruling alliance. Flushed with funds, thanks to near-double-digit economic growth, Chidambaram increased government spending in rural areas, the Congress party's traditional "vote bank".

This year, however, the economic slowdown has left him with little room for big-bang populist measures. The government estimates economic growth for fiscal 2012/13 will be 5 percent, nearly half of what it was in 2007/08.

In its annual economic survey released on the eve of the budget, the finance ministry said the economic slowdown was a "wake-up call for increasing the pace of actions and reforms". It projected growth in the coming year of 6.1-6.7 percent.

Nomura said the credibility of Chidambaram's budget would depend on the government's underlying assumptions on growth, asset sales and subsidies.

Some government economic estimates in the past have proven wildly over-optimistic. In the 2012/13 budget for example, the government predicted the economy would grow at 7.6 percent, sharply higher than the 5 percent that is now forecast.

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