DISEQUILIBRIUM: Falling off the fiscal cliff

Falling off the fiscal cliff

In the suspended particulate matterladen Delhi air, a new deadly toxin was released by the finance minister in Parliament last week.

It was clear that the jousting and jostling for pole position wasn't over.

Not by a long shot.

An old prickly cat fight was out in the open.

One that hadn't gone away, but one which was papered over once the erstwhile finance minister, the venerable Pranab Mukherjee moved to the top of Raisina Hill.

P Chidambaram teed off in customary style and opened a festering sore, "There are not just external factors, there are also domestic factors.

One of the domestic factors is that we allowed fiscal deficit to be breached and we allowed current account deficit to swell because of certain decisions that we took during the period 2009 to 2011."

Yes, bombshell, because the shrapnel got everyone and anyone in the immediate vicinity of the point of impact.

Old wounds were reopened as were old debates.

Did Pranab Mukherjee's dispensation as finance minister result in fiscal deterioration?

November 26, 2011 is when terrorists in buddy pairs struck Mumbai, the ensuing battles causing deep trauma across the nation and leaving unforgettable scars on Mumbaikars.

India's financial hub was crippled soon after the Western world saw a meltdown of epic proportions.

Lehman Brothers, Bear Sterns and what have you - iconic investment banks saw a run and the world was never the same again. India faced a double whammy - an attack on the State while also being impacted adversely by a global contagion.

P Chidambaram was instantaneously shifted from finance to home as Shivraj Patil was junked in the first flush of the barbaric terror attack.



Squandered stimulus

The PM himself took over the finance portfolio, working in conjunction with Montek Singh Ahluwalia and with crucial inputs provided by the outgoing FM.

On December 7, 2008 the government announced an economic stimulus package which essentially entailed additional plan expenditure of Rs 20,000 crore for critical rural, infrastructure and social security schemes.

Further, an across-the-board 4 per cent cut in ad valorem CENVAT rate except petro products was announced.

Simultaneously, measures were rolled out to boost exports, housing MSME and textiles.

Finally India Infrastructure Finance Company Ltd was authorized to raise Rs 10,000 crore to refinance bank lending for infra projects.

This worked like a charm as India was more or less insulated from the contagion.

Others will tell you that while it may have insulated India, it acted as a deterrent to greater growth paradigms simply because the stimulus was lopsided towards consumption expenditure and did not entail capital expenditure, which could have acted as a catalyst in a slowing economy.

Diseq Distilled

A second stimulus package came along on January 2, 2009 which to help maintain the momentum of expenditure at the state govt level, states were allowed to raise additional market borrowings of 0.5 per cent of their GSDP, amounting to Rs 30,000 crore for capex.

To bolster exports, more measures was announced.

Pranab Mukherjee took over as FM on January 24, 2009 and then went onto present the interim budget given that it was the election year.

On February 24, Pranab babu announced fiscal concessions like reduction in central excise duty from 10 to 8 per cent and reduction in service tax on taxable services from 12 to 10 per cent.

All this with an eye on the recessionary winds coming from the west.

Bottom line, this fiscal accommodation and relaxation led to a skyrocketing of the fiscal deficit from 2.7 per cent to 6.2 per cent of GDP in 2008-09 and the difference between the actual of 2007-08 and 2008-09 constituted the total fiscal stimulus.

All packages included, this worked out to Rs 186,000 crore.

P Chidambaram's profligate social security and ever ballooning subsidy expenditure created financial havoc in the pre-election year.

The rollback of the fiscal stimulus began in Union Budget 2010-11 - partial roll back of rate reduction in central excise by announcing a standard rate on all petroleum products from 8 to 10 per cent ad valorem, even as standard rate of service tax was maintained at 10 per cent, new services were brought into the tax net while in budget 2012-13, service tax rate was hiked from 10 to 12 per cent and all services except those in the negative list comprising 17 heads came into the tax net. In the same budget, the standard rate of excise duty was raised from 10 to 12 per cent.

The stimulus thus stood withdrawn.

If Pranab Mukherjee is to be blamed for anything, it is the retrograde and regressive taxation policies that he decided to unveil in his budget speech.

In his March budget last year, he introduced General Anti-Avoidance Rules (GAAR), which were to become effective a year later, "I propose to introduce a General Anti-Avoidance Rule to counter aggressive tax avoidance."

He also introduced a proposal to amend India's tax laws that would allow the government to collect taxes on older M&A deals such as the Vodafone acquisition of Hutchison mobile assets in India 2007, effectively transacted in an offshore tax haven of Cayman Islands.

This amendment was introduced in Budget 2012/13 to tax Vodafone where Pranabda said, "There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either to India or to the country of its origin."

All hell broke loose with these two announcements as investor sentiment took a hit almost overnight.


Blame game

From an investment hot spot, India became a leper overnight.

Interestingly all nine budgets presented by the UPA have been shared by these two worthy adversaries.

The wheels have now begun to come off the bus.

The last six quarters have seen first growth tapering off to five per cent and a tad over it in the first three quarters and the last three quarters have seen the bottom fall out with growth getting to sub 5 per cent.

The rot has set in far and wide in the economy, India's consumption economy is creaking, the sheer weight of its structural contradictions breaking its back and decapitating it.

Blaming one for the other's ills is not a sensible idea, the way forward is to provide a direction to kick start consumption in the country, remember that we consume 67 per cent of our own GDP.

Yes, we are on skid row and both Pranab Mukherjee and P Chidambaram are to blame for where we are today, but it doesn't behove a senior cabinet minister to take pot shots at someone who was once his colleague and is now the President.

Instead focus on the task of steering India.

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DISEQUILIBRIUM: Falling off the fiscal cliff

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