Return of the Dream Team: Manmohan Singh, Chidambaram and Montek plan new savings schemes and tax cuts

By Manoj Joshi and Aditya Menon

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If there was a clear winner in a day of fastmoving political developments, it was Union finance minister P. Chidambaram.

While the rest of the country was transfixed with the drama of how the Trinamool Congress would act on pulling the plug on the government and whether others would jump on to her bandwagon, Chidambaram. coolly went about planning his moves.

On Friday morning, well before the Trinamool acted out its theatre of the absurd on Raisina Hill, the finance minister went on the offensive.

Prime Minister Manmohan Singh
Finance minister P. Chidambaram
Deputy Chairman of Planning Commission, Montek Singh Ahluwalia

 Awesome Threesome: Prime Minister Manmohan Singh, pictured left, Finance Minister P. Chidambaram in the centre and Planning Commission chief Montek Singh Ahluwalia, pictured right

Shrugging of any remnant of the 'policy paralysis' that had plagued the government, Chidambaram announced a combination of savings schemes, tax deductions and duty cuts in an overall effort to spur the market and improve economic outlook.

As the Sensex jumped to a 14-month high, it was clear that the market had approved of the government's proactive measures.

In a coordinated move later in the evening, PM Manmohan Singh spoke to the nation.

He came out with a fighting speech combining as much emphasis as his soft-spoken persona permits, but with all the erudition at his command.

Shedding his 'economic doctor' image, he broke down economic issues to their simplest level to explain why the government had raised diesel prices and permitted foreign direct investment (FDI) in the retail sector.

The PM not only strongly defended the stand taken by his government but sought to do so riding on the legacy of his past when as finance minister between 1991-1996 he had ushered in the first phase of economic reforms in the country.

P. Chidambaram
CHIDAMBARAMS BAG OF GOODIES


Dismissing the Opposition uproar over the diesel price hike and FDI in retail, Singh appealed to the people for support, warning them not to be 'misled by those who want to confuse you by spreading fear and false information.'

He said these very sections had adopted the same tactics in 1991 and declared that they failed then and 'they will not succeed now.'

'The PM's comments are related to reforms that are going to make a huge difference in the time to come.

The diesel price hike was needed as the fiscal situation has been jeopardised. FDI in multibrand retail is not going to have an immediate positive impact except on sentiment.

But, in the long run it will prove to be beneficial for the economy at large,' said D.K. Joshi, chief economist at CRISIL.

REFORMS TEAM OF NINETIES


However, BJP leader Mukhtar Abbas Naqvi said, 'The PM appeared to be advocating the interests of foreign countries and not the Indians he leads.'

Among Chidambaram's announcements on Friday was the Rajiv Gandhi Equity Savings Scheme (RGESS), first mentioned in the Budget in March. It uses tax breaks to make equity investments more attractive to people who might otherwise put their money into gold.

'It will act as an alternative financial instrument and encourage more people to invest in this instrument rather than gold, which is a dead instrument,' Chidambaram said.

'Besides the equities of blue chip private and public sector companies, the investors under the scheme would also be permitted to invest through Mutual Funds and listed Exchange Traded Funds (ETFs),' he said.

The minister announced that he was cutting the withholding tax on overseas borrowings to 5 per cent from 20 per cent, which would make it easier for domestic companies to access funds from abroad.

He said that appropriate changes will be made in the Income Tax Act, 1961, under which the interest income of a non-resident investor was being taxed at 20 per cent.

With central banks in Europe and the United States making borrowing much cheaper abroad, this measure will allow India to take advantage of low-cost international funds.

Rajan Mittal, vice-chairman and managing director of Bharti Enterprises said, 'Policy decisions should bring growth back on track. Organised retail will complement kirana stores.

FDI in retail will not hurt small farmers as there is enough capacity to build a robust supply chain.' 'Funds-starved sectors like capital goods, infrastructure companies and road developers should benefit,' said Sandip Sabharwal, chief executive officer for portfolio management services at Prabhudas Lilladher.

Meanwhile, the government abolished import and excise duties on LPG cylinders - making it cheaper for consumers to go beyond the six cylinders subsidised by the state.

The change lowers the price of a 14.2 kg cylinder in Delhi from Rs 895 to Rs 798.

CHIDAMBARAMS TEAM


The point of departure of the PM's lucid address to the nation in Hindi and English on Friday evening was 1991.

He reminded the people that at that time, 'nobody was willing to lend us even small amounts of money then.' He said he knew what happened at that time and that he would be failing in his duty as PM of this great country if he 'did not take strong preventive action'.

Strikingly, three of the principal actors of the 1991 saga are the main players of the drama unfolding now. Manmohan Singh was the finance minister of the Congress government led by P.V. Narasimha Rao.

Montek Singh Ahluwalia was first commerce secretary and then finance secretary during the 1991-1996 period and Chidambaram was minister of state for commerce with independent charge in 1992-93 and 1995-96.

While Chidambaram's role has become more central to economic policy now, Ahluwalia as deputy chairman of the Planning Commission remains the PM's 'sherpa', faithfully implementing his ideas and policies.

As a mark of special confidence, Ahluwalia has been asked to go to New York to attend an investor meet (see My Biz pages).

The PM explained the rationale for the rise diesel prices, the cap on LPG cylinders and FDI in retail. Pointing to the Rs 1,40,000 crore subsidy of last year, he asked, 'Where would this money come from?'

On LPG, he said that the cap of six cylinders per year was targeting the poor who 'actually use 6 cylinders or less.'

Similarly, he explained the advantages of introducing FDI in retail, an action which would create 'millions of good quality new jobs in the country.'

 


 

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