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Last Updated: Monday, 28 February, 2005, 14:39 GMT
Leftward shift in Indian economy

By Paranjoy Guha Thakurta
India economic analyst

Finance minister Palaniappan Chidambaram
Mr Chidambaram has a balancing act to perform
That the survival of India's ruling Congress-party led coalition government is dependent on support from communist parties is evident from the Union budget.

The Harvard-educated finance minister, Palaniappan Chidambaram, has a reputation of being a gung-ho economic liberaliser in favour of market friendly fiscal policies.

He has, however, had to tailor his second budget in eight months to ensure greater intervention by the state.

The budget has upped outlays on heath-care, elementary education, rural development and a scheme for employment generation for the poor.

Prime Minister Manmohan Singh has described it as "outstanding".

Mr Chidambaram's budget has sought to reduce and rationalise personal income taxes while hoping at the same time for higher revenue collections

Mr Singh himself is considered to be the architect of India's economic reform programme that began in 1991 and which witnessed the dismantling of tight bureaucratic controls over many sectors and economic activities.

At that time Mr Singh, who had no political background, having earlier worked as an academic and bureaucrat, was serving as India's finance minister in a Congress government.

Laffer curve

Mr Singh and Mr Chidambaram have both had to temper their economic policy predilections, keeping in mind the fact that the ruling government depends on the 60-odd parliamentarians belonging to two communist parties and other leftist parties for majority support in parliament.

Indian farmers in a rice paddy
The budget has upped outlays for rural development

Perhaps more than the Marxists, inspiration for the budget came from a wish list sent to Mr Singh by Congress party leader Sonia Gandhi.

Ms Gandhi, it may be recalled, gave up the opportunity to become prime minister after the elections and instead chose to remain out of government.

She leads a body called the National Advisory Council that recently advised Mr Singh to increase government expenditure on the social sector and on an employment guarantee programme.

Mr Chidambaram's budget has sought to reduce and rationalise personal income taxes while hoping at the same time for higher revenue collections - a phenomenon economists call the effect of the Laffer curve.

Thin tax base

Barely three per cent of India's one billion-plus population currently pays personal income tax.

Bombay shanty town
Many poor people have yet to benefit from liberalisation

The bulk of the government's revenue comes from indirect taxes - in the form of excise and Customs duties.

The finance minister said that he could not accept the fact that only 80,000 people in the country officially declared an annual assessable income in excess of one million rupees ($23,000).

He added that his new tax proposals would widen the income tax net.

A budget proposal that has aroused controversy is a move to levy a tax of 0.01% on all withdrawals of cash from a bank that is higher than $232 a day.

Mr Chidambaram says this proposal is aimed at checking illegal monetary transactions and is not meant to enhance revenue.

Outcomes not outlays

India's foreign exchange reserves are at a record level of more than $120bn.

The country's exports are buoyant, having grown at more than 25% in dollar terms between April 2004 and January this year.

Consequently, the finance minister has cut the peak Customs tariff on imports of non-agricultural products from 20% to 15% to bring these more into line with prevailing levels of Customs duties in the fast-growing Asian economies.

Given the tenor and thrust of the budget towards poverty alleviation schemes and the finance minister's emphasis that what matters are "outcomes" and not "outlays", supporters of the left parties have welcomed the budget proposals.

After he presented his last budget in July 2004, the communists had been bitterly critical of Mr Chidambaram's decision to increase foreign direct investment limits on firms in the telecommunications, aviation and insurance sectors.

Policy statement

The left and Congress are going to be locked in electoral battles in states in the middle of 2006.

Hence, supporters of the two groups have periodically been at loggerheads with each other on economic policy issues.

The annual budget in India is much more than a mere statement of accounts of the government of the world's second most populous nation.

The budget attracts considerable public and media attention because it is also a political and economic policy statement.

The author is director of the School of Convergence and a journalist with more than 27 years of experience in print, Internet, radio and television.

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