It is hard to be all things to all people, all the time. But Mr Chidambaram certainly tried. He left the finance ministry earlier this month with his image of the financial miracle-worker?the maker of ?dream budgets??a little dented. Events of 2008 have proved that, after all, he is only human, and that too a politician. Nonetheless, his latest tenure at the North Block deserves high praise.
The first four years of the UPA rule were close to a dream run for the Indian economy. Inflation came down to 4-5% while the growth rate spurted above 9%. The stock market witnessed one of the greatest boom in recorded history of major economies and India joined China to become one of the global economic spectacles. Sure the ?India Shining? story, regardless of its electoral debacle, was already in full swing before the UPA came in. Nevertheless, the NDA?s ouster and Left support for the UPA had caused some of the largest FII outflows and stock market declines as the UPA government was being formed. The return of foreign investment, with decidedly greater gusto, and the continuation and escalation of the growth momentum speak volumes of the UPA government?s ability to convince both India Inc. and the world at large that the India growth story was here to stay and become bigger. Chidambaram?s role in this confidence building has, without a doubt, been pivotal.
However, given the irregular lag between economic policy and its effects, and the co-involvement of several quasi-independent regulatory agencies in policymaking, fiscal management is a better yardstick to judge a finance minister.
Tax revenue collections rose at a 20 plus % during the first four years. Indeed growth was the major driver but at least in part this also owed to the introduction of taxes like the fringe benefit tax, the cash withdrawal tax and the securities transaction tax and the widening of the service tax net. The successful expansion of the value added tax by state governments, with the Centre?s support was another major accomplishment. On the expenditure side, revenue expenditure was laudably kept in check in spite of the social initiatives, but the slight decline in capital expenditure has worrisome growth implications. The proportion of social sector expenditure, particularly education, showed a much-needed growth though one can always ask for more here. Riding on higher collection, the fiscal deficit fell from 4.5% in 2003-04 to almost 3% in 2007-08.
Then the tide turned in 2008. The politician in Mr Chidambaram triumphed, pre-election, in doling out the record farm loan waiver, smacking of Devi Lal-esque populism. The ?head room? in FRBM that the finance minister relied on was under threat from the Sixth Pay Commission recommendations, not to speak of the global crisis that followed later. Inflation, that had begun to creep up since 2007, turned into a major embarrassment for the UPA government. Surely, much of it was imported through oil and commodity prices, but the finance ministry has to take its share of blame.
It would have been unfair, judging by the performance of Chidambaram?s global peers, to expect him to have predicted the crisis in all its severity. But having landed in it, the government?s crisis management efforts deserve, and have received, considerable praise. North Block, RBI and SEBI went quickly into crisis management mode in a concerted manner and took, and continue to take, a series of steps to ensure liquidity without reversing the level of globalisation. Some in industry have blamed Chidambaram for underestimating the crisis, but part of it could well be that he was deliberately trying to ?talk down? the crisis to maintain confidence.
Broadly speaking, Mr Chidambaram?s major challenges during his tenure?both missions impossible, ?lay in raising social outlay without straining fiscal responsibility and in pushing financial reforms without losing support from the Left parties. The first he seemed to pull off quite well, but his success in the second area was admittedly less marked despite a few capital market developments. Overall, Chidambaram has earned public confidence that he has taken with him to the home ministry.
The author teaches finance at the Indian School of Business, Hyderabad