It may not be politically correct to point this out, but every finance minister must have a healthy streak of the gambler in his make-up. There are so many things that can go wrong with the process of making budgets. P. Chidambaram is a bigger gambler than most and is adept at taking calculated risks.
So, let's start with all the things that could possibly go wrong in 2005-06.
Measures to cut the revenue deficit and the fiscal deficit have been put on hold. If economic growth proceeds as scheduled and the Union finance minister can undertake brave measures in 2006-07, he may just achieve the 2009 zero-revenue-deficit target. Otherwise, the UPA will have to hope that it can win the next elections even if there are big holes in the balance-sheet.
There's been a determined effort to continue building infrastructure, especially at the rural level. Theoretically, it's all for the better. In practice, it has to proceed alongside reforms. There's no sense in electrifying the 1,25,000 remaining villages if the power sector's already astronomical losses rise even higher. One problem with Indian infrastructure is that it's created and managed in wasteful, inefficient ways. There wasn't even a murmur in the budget about trying to improve efficiency here.
It is in the banking sector that Chidambaram is embarking on major reforms. He wants to clean up the cooperative banking mess, but I'll bet the Left won't let him do it. He is also giving banks easier access to capital via the issuance of preference shares. Banks can also lend more of their capital as the SLR (statutory liquidity ratio) is coming down. They can securitise debt and create specialised over-the-counter derivatives to hedge risks.
Sounds good. But if a big bank goofs up with these off-balance-sheet instruments, there could be a mega crisis. Especially since the banking system is being arm-twisted into making larger allocations for the agricultural sector, and farmers are notoriously reluctant to repay loans.
The tax reforms don't seem much of a gamble. The corporate tax cut versus the lower depreciation rate will probably mean revenue neutrality. The cut in personal income tax rates is unlikely to lower income tax collections—the Laffer Curve will operate here. And, much of the extra personal savings (the famous Rs 1 lakh giveaway) will flow into the same sort of instruments in the short run. That means the government will continue to be able to tap these savings to fund its excesses.
The excise and customs rationalisations are part of a continuous process. Some of it was forced—customs duties on certain IT-related items had to disappear and it was only fair to reduce excise rates and give the domestic hardware industry a level playing field. I don't think corporate India has a great deal to complain about.
Chidambaram has gone all out to give the textile industry a platform to exploit the removal of import quotas. If these measures work, he will get a pat on the back as the sector could be a massive source of employment and economic growth. A major plank of this growth platform is dereservation of items on the small-scale industries (SSI) list in order to allow bigger players to create economies of scale. Once again, there will be howls of protest from the Left.
In most areas, the budgetary measures are not unexpected. Measures like the imposition of a services tax on builders' flats and specialised courier services are neither here nor there. If the economy stays buoyant, demand for these will stay high. If not, it certainly won't be the tax that hurts them.
The tax on Rs 10,000-plus cash withdrawals seems absurd but it won't make much of a difference in practice to the cash flow. The increase in STT (securities transaction tax) will have a marginal impact while the revised rules to offset derivatives losses are progressive.
Net-net, will you now have more money if you're a tax-payer? Yes. Will you have more flexibility in investing that money? Yes. Will your cost of living go up? Marginally—it won't hurt to smoke less and you can definitely resist buying the newer, funkier cellphone, cheaper though it may have become.
Could deficits spiral out of control? Maybe. Are systemic failures likely in the new securitised debt or OTC derivatives markets, and will these failures trigger a crisis? Sure. But that's part of the process of growing up as an economy. Call it economic development, if you like.