The Indian Budget 1996-97 The Indian Economy Overview

INDIAN BUDGET 96: Will Mr.P.Chidambaram be able deliver?

Finance Minister faces a tough task ahead

India's Finance Minister wants to attract 10 billion dollars in foreign investment and plans to come out with a growth oriented budget. But will his own party back him up?



Mr.Chidambaram with his panel of advisors, before the budget
There is a sense of uncertainty, if not unease among foreigners looking to invest in India and though no one who is actually here has any intention of pulling out, new investors have definitely put a freeze on their plans. Ever since the last general elections in May threw up a hung parliament with no one party getting a full majority, observers have been trying to make some sense of the unfolding political scenario. The first government, formed by the right wing Hindu nationalist Bharatiya Janata Party lasted only 13 days as it did not receive any support in parliament; the next one is a rag tag coalition of 13 parties, called the United Front, supported from the outside by the Congress and the Communists. It is headed by H D Deve Gowda, a former provincial chief minister who has no experience in national politics and not unnaturally, it is subject to the worst sort of pulls and pressures which could make consensual policy making a nightmare.

Within less than a month it has become apparent that many of the worst fears of observers about such a coalition getting bogged down in its own contradictions are coming true. The entire exercise of cabinet formation gave the first indication of the trouble to come. The Prime Minister had to accommodate nonentities and worse in order to placate powerful leaders of small parties which constitute the United Front. Quite a few of the new ministers have absolutely no administrative experience and one worthy, who got the sensitive interior affairs portfolio, has several criminal cases pending against him.

And the disparate elements who form the United Front have given enough notice that they have a mind of their own and mean to extract their pound of flesh even if it means contradicting their own government's agreed policies. Several ministers have made statements only to find themselves being contradicted by the Prime Minister who, it appears, is spending more time trying to keep his flock under control and less in giving a clear direction to the country.

All this would not matter if it was merely political infighting, because India has had more than its share of such politicking. But the pulls and pressures in the government have begun to impact on serious economic decisions which could spell trouble for the ongoing liberalization process started by the Congress government in 1991. Votaries of economic reforms-notable among them being the new Finance Minister, the Harvard educated P Chidambaram-have already found to their cost that they will not have a free hand to pursue market friendly policies. Chidambaram, who was the commerce minister in the Congress but left the party due to differences, has been catapulted to the Finance Minister's chair and big business, domestic and international, is looking towards him for positive growth-oriented signals. And he is ready to oblige them: in a recent conference in Singapore he said India would continue to welcome foreign investment and set a target of US$ 10 billion for the current year.

But translating words into policies is not so easy when you have staunchly Stalinist left-parties watching your every move. An austerity package for government servants announced by Chidambaram to curb spending was sharply criticized by the left and the trade unions and the Finance Minister had to beat a hasty retreat. The left has also declared it will fight the proposed entry of private sector into the state-owned insurance business, even though that policy is part of the Common Minimum Program (CMP), a document endorsed by all the constituents and supporters of the coalition. It is not difficult to feel sorry for the left parties which are caught between their hidebound ideologies on the one hand and the demands of compromise politics on the other. Indeed, in the provinces they rule within the country they have tried to give themselves a business-friendly look, but this has not pleased the rank and file; any attempt to go along with the reformist program of Chidambaram and his ilk will lose them valuable support.

Chidambaram has already had to backtrack on an important policy announcement he made immediately after assuming office, when he proposed an austerity package which would freeze government wages to present levels and save it over 30 billion rupees. The left parties and trade unions came down heavily on the proposal and Chidambaram had to extricate himself from the controversy by declaring that no jobs would be lost. Since then he has been careful not to rock the boat and maintained a studied silence.

This is small consolation to investors who want to know whether they should continue to factor India into their business plans or look elsewhere. Objectively speaking, India is an important market: it's emerging middle-class with its increased spending power is hungry for goods and services, its poor infrastructure requires billions of dollars of investment and its cheap and educated work force is a temptation for many manufacturers. But is the uncertainty worth it, especially when you take into account the horrendous bureaucracy which India has come to be known for?

Investors may yet be ready to overlook the hurdles and they are waiting for the forthcoming budget later this month which will give an important signal about the government's economic policies. All eyes are on Chidambaram as he attempts to balance political realities with economic convictions.

Chidambaram's brief is clear-he has to reign in the growing budget deficit, continue to fuel the ambitious 7 percent growth rate and signal to the outside world that India means business. Even he knows that the US$ 10 billion investment target compares poorly with what the Asian tigers and China are getting, but it is still a five fold increase for India compared to last year.

There is a long way to go before India reaches those investment levels, and only the first few tentative steps have been taken. Chidambaram wants to continue walking on that road-but will his own new found friends let him?


Sidharth Bhatia is a senior Indian journalist who runs a well known television program on Indian business and current affairs. A former newspaper editor and foreign correspondent, Bhatia has written for several publications in India and abroad.
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