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Economy Oct 9, 2012

You should take Chidu's fiscal roadmap with a bag of salt

By R Jagannathan

When finance ministers announce "five-year roadmaps" for doing something they ought to have done in the previous five years, one should take their promises with bags of salt.

Talking at the Economic Editors' Conference yesterday in Delhi, Finance Minister P Chidambaram was all humility and honesty when he flagged the country's problems with these words: "I consider that it is my duty to place before the people the truth. India's economy is challenged," Business Standard quotes him as saying.

So far, so good. Who can argue with the reality, even though Chidambaram was not honest enough to admit that the mess was partly his own creation during UPA-1?

However, red flags should have gone up when Chidambaram - with a view to addressing these challenges - talked of yet another five-year plan to put the budget back in shape.

The evidence from UPA-1 and UPA-2 shows that roadmaps have not been kept even when it is the same government running the show.

According to the Hindustan Times, he said the government will soon dish out a "credible and feasible" five-year plan to curb the fiscal deficit. "After carefully examining the feedback on the Kelkar Committee's report (on fiscal consolidation), it is our intention to announce a credible correction beginning this year (2012-13) and ending with the fifth year of the 12th Plan (2012-17)."

Two questions arise.

One, how can Chidambaram announce a "credible" five-year plan when his party's lease on power ends in 18 months? He should be announcing an 18-month plan, not a five-year plan, which his successor government will surely throw in the dustbin. This, in fact, is what Chidambaram himself did with the previous government's "credible" fiscal consolidation plan when he took over as finance minister in 2004 in UPA-1.

Two, while it is good to have five- and 10-year plans, one wonders why a man who has been finance minister for six or seven years - once in 1996-98, again during 2004-08 and yet again from 2012 - should keep wanting new roadmaps every few years. Doesn't he know what to do by now?

The problem with five-year plans is that they are simply not credible even when the same party is running the show. When even this certainty is off, the credibility vanishes altogether.

Consider what Chidambaram said in his 2004 budget speech: "Under the FRBM Act (Fiscal Responsibility and Budget Management Act ), I am obliged to wipe out the revenue deficit by 2007-08. However, the NCMP (National Common Minimum Programme of UPA-1) has proposed that we do so by 2008-09. In my view, 2008-09 is a more credible terminal year; it will also coincide with the term of this government. Hence, I propose to move an amendment to this effect through the Finance Bill. I am committed to implementing the FRBM Act. The elimination of revenue deficit will open up fiscal space up to 3 percent of GDP for enhanced public investment without undermining fiscal prudence."

So what did Chidambaram really mean by this? He talked of a credible target with 2008-09 as the new terminal year. He sought a one-year postponement of the earlier FRBM target on the revenue deficit because his was a new government, and had different priorities, including the NCMP.

The point is this: there is unlikely to be any credibility attached to his new five-year FRBM roadmap, since we will have a new government in 2014, if not earlier. Any new government will want to push its own spending plans, and these will necessarily mean giving up Chidambaram's old "credible" fiscal plan, presumably with a more relaxed deadline.

But did Chidambaram deliver even on his new deadline of 2008-09?

Let's hear what he said in his 2008-09 budget speech, the year by which he had promised to wipe out the revenue deficit (the revenue deficit is the budget deficit excluding capital receipts and expenses).

As at the end of 2007-08, despite buoyant tax revenues, Chidambaram was still reporting a 1.4 percent revenue deficit. As for the promise of wiping it out in 2008-09 (the postponed deadline), he said he would postpone it yet again.

His justification: "In the case of revenue deficit, I will meet the target of annual reduction of 0.5 percent. However, because of the conscious shift in expenditure in favour of health, education and the social sector, we may need one more year to eliminate the revenue deficit. In my view, this is an entirely acceptable deferment."

In short, he deferred it again to 2009-10 - the obvious reason being the elections in 2009.

For readers who still want to know, the revenue deficit in 2012-13 is even higher at 3.4 percent - when Chidambaram was supposed to wipe it out in 2007-08 (under the NDA gameplan), then in 2008-09 and then in 2009-10.

And guess what? In the 2008-09 budget, Chidambaram talked about revisiting the fiscal roadmap after missing the target two years running. He said: "I intend to request the Thirteenth Finance Commission to revisit the roadmap for fiscal adjustment and suggest a suitably revised roadmap."

And guess who headed the 13th Finance Commission? Vijay Kelkar, the same gentleman who is now being asked to prepare another "credible" roadmap.

It's obviously not Kelkar's fault if his asked to keep drawing roadmaps that are constantly junked. But one thing is clear: don't trust five-year roadmaps.

The evidence from UPA-1 and UPA-2 shows that roadmaps have not been kept even when it is the same government running the show. How is it more trustworthy when the incumbent government is on the fiscal ropes and faces a general election in 18 months?

by R Jagannathan

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