Chidambaram’s Jugglery with Figures

There was once upon a time an old man waiting for his final call. His family didn’t really bother about him. Everyone knew that there wasn’t anything for him to bequeath to his kith and kin. An old friend visited him and explained what makes the mare go.

Don’t you remember your nursery rhyme?

Will you lend me your mare to ride a mile?
No, she is lame leaping over a stile.
Alack! and I must go to the fair!
I'll give you good money for lending your mare.
Oh, oh! say you so?
Money will make the mare to go.

He thought of a brilliant stratagem — a euphemism for a clever trick.  He had small pebbles collected in a large-sized pitcher and had its mouth covered in many layers and sealed. He always kept the pitcher under his watch and beneath his bed. And the jingling sound that the pebbles made striking each other, made everyone think these were the golden coins the old man had hoarded all his life.

The thought that he was leaving so much behind made everyone around look after the old man, providing tender care. The man had no guilty conscience. After all he won’t be around when the truth is out.

Chidambaram Trick

This is exactly what Finance Minister P. Chidambaram has done in the interim budget for 2014-15. He is shrewd enough to know that neither he nor his party is going to be around when the pitcher cover is ripped open after the elections. Similarly, Hope is what the Finance Minister is leaving behind the facade of the set of grand numbers put together by him which no one else other than only a very practiced magician like P C Sarkar could have conjured up.

GDP growth, fiscal deficit, revenue collections and expenditure targets are the four constituents of the budget-making exercise. Chidambaram has assumed a 13.4 per cent nominal GDP growth rate for 2014-15, a very optimistic 4.1 per cent target for fiscal deficit, 19 per cent growth in tax revenues and a significantly lower subsidy burden. Each of these assumptions is highly questionable.

Let me take just one. In the current fiscal, against an estimated Rs.40,000 crore collection from disinvestment, the government could garner in the current year just Rs.16,027 crore. This blunt reality has not prevented Mr. Chidambaram from projecting Rs. 36,925 crore for 2014-15. Knowing the present subdued state of the markets and no coherent policy on privatization, it is extremely unlikely that his target can or will be met.

Every country has its own date with Random Acts of Kindness Day set up in 2010 by Louise Burfitt-Dons who founded the UK Kindness Movement in 2005. (The Brits indeed have compelling reasons to be kind having looted the world mercilessly for centuries. It is a gesture of atoning for their past collective sins.) Ours, I’m told, falls on fell on February 17, the day Chidambaram presented his interim budget. (I’m not certain if he knew it.) However, there was a god-sent opportunity for him to show kindness to his compatriots. (Don’t worry even if it happens to be at the cost of the public exchequer.) Hence the concessions doled out in the Budget.

Anyone with a head on his shoulders would tell the Finance Minister to increase levies on automobiles to discourage buying since there’s just no space on our roads. But no. Kind Uncle PC reduced the excise duty to make cars and two-wheelers cost less and also consumer non-durables so that their sales go up. It was also to win votes for Rahul Gandhi. What a bold effort. Chinese have a more robust version of the traditional proverb to kill two bird with one stone. It’s: Killing two eagles with an arrow.

“High Targets”

“Your reach must be beyond your grasp. I set high targets,” said P. Chidambaram in all humility after presenting the Interim Budget that he laid out ambitious targets to keep the fiscal deficit for 2014/15 at 4.1 per cent of gross domestic product and revenue deficit at 3 per cent on the assumption of a nominal GDP growth of 13.4 per cent. “This is a budget of hope,” he said while fielding questions on massive expenditure cuts and lofty targets.

While Chidambaram might have averted a ratings downgrade by keeping the fiscal deficit below the “red line” at 4.6 per cent for the current fiscal year, in the process he has also made some fundamental structural changes that could potentially have far-reaching consequences.

Take, for instance, the cut in Ministry of Labour and Employment’s outlay from Rs 1,723 crore in 2013/2014 to Rs 656 crore for the next year — labour, employment and skill development are some of the most critical issues for an economy like India which is grappling to tap into its demographic dividend. The budget for the Ministry of Rural Development has been slashed brutally from Rs 61,810 crore to Rs 7,614 crore.

Allocations for the Ministry of Tribal Affairs are down by nearly half, Ministry of Women and Child Development is down from Rs 18,200 crore to Rs 889 crore, Ministry of Health and Family welfare is down from Rs 25,990 crore to Rs 7,726 crore. The rural development sector seems to have been the worst hit, with its outlay cut from Rs 50,646 crore in the current fiscal year to Rs 2,902 crore for the next year.

Such drastic spending cuts in socially crucial areas have been justified as ‘savings’ by the finance minister. “We over-provide in many departments and ministries in the hope that the economy will grow at a certain rate...for these are savings… you might call it cut in expenditure.”

The forced fiscal austerity, including reduction in grants to states, while keeping the outlays on subsidies relatively unchanged at more than Rs 2 lakh crore shows up as a poor accounting exercise.

Though the minister has met his fiscal deficit and current account deficit targets, but the math seems forced and, according to pundits, unsustainable. Postponing subsidy payments to oil marketing companies to next year, hastily going about disinvestment without strategic thinking, cutting crucial planned expenditure, and buffering up with profits and dividends of state-run companies is as short-sighted an approach as that of his predecessors.

Rough Deal for Defense

An area of utmost national importance at the present juncture is defense, particularly when China is making no secret of its territorial ambitions backed up by a formidable war machine painstakingly built over the years. A 10 per cent increase in the defense budget will take military spending in India to Rs 224,000 crore. (Rs 203,627 crore had been allocated in the budget for 2013-14 that ends March 31.) While Rs 89,588 crore has been set aside for acquisitions by the armed forces, Rs 134,410 crore will go towards payment of salaries and pensions and other miscellaneous expenses.) The major causality is the desperately needed modernization of the forces.

A close examination of figures shows that most of the 10 per cent increase in the budget has gone to meet the pay and allowances increase in the armed forces. In 2014-15, the pay and allowances of the armed forces will amount to Rs 127,082 crore.

Air Force takes the major hit where the shortfall in the outlay is nearly Rs 5,200 crore. In a year when the Air Force has to place orders for the complement of Medium Multi Role Combat Aircraft (MMRCA), does a shortage of funds makes any sense. According to defense experts the increase in modernization budget is, in real terms, no more than 3.5 per cent.

However, the most innovative — and potentially most costly — feature of the defense budget was the acceptance in principle of one rank, one pension (OROP). After years of dithering the long-pending demand of the pensioners has been accepted. The reason this year it found the right sponsor, namely, Rahul Gandhi.

Although Chidambaram announced that he was putting aside Rs 500 crore to finance OROP (One Rank One Pension), the consensus among defense administrators was that even conservatively, the aggregated cost of OROP across the forces and ranks would be anything between Rs 3,000 and Rs 4,000 crore, not counting arrears. This does not include the administrative cost of calculating OROP and will require a veritable army of accounting staff.

OROP means persons in the same rank — regardless of the date of retirement, the last pay drawn and the number of years served in a rank — will be entitled to the same pension. Typically, after a 10-year wage revision done via the Pay Commissions, a Major General may have put in anything between 32 and 35 years in service. However, the last pay drawn and DA (both of which are computed while calculating pension) could vary wildly, depending on how long he might have stayed in that rank.

“The case of every soldier is different. The Indian defense forces have 30 lakh pensioners. Even feeding that data in a computer is a mind-boggling task, let alone working out each case,” said Lt Gen HS Bagga, former Adjutant General in the Indian Army who has worked on OROP in the past. According to him, a veritable army of experts will be required just to address the administrative issues arising out of OROP.

The Congress party obviously will be the gainer, especially in constituencies that have a big section of ex-servicemen. Why didn’t the Government employees ask him to announce the appointment of another Pay Commission which would have ensured their vote as well as the bankruptcy of the next government?

Cannot the whole exercise be called, as high-flying business honcho called, a mere ‘tokenism’?