Chidambaram on A View from Inside

My biggest sense of achievement is that we were able to demonstrate to this country and to the world that we can get on to a high growth path and sustain it. Our clout in IMF and World Bank has grown steadily since the 1990s. India has been favourably looked at as an investment destination for a long time. Even my first dream budget was path breaking, as it broke several moulds – one being that high tax rates were a way to raise revenue, says P Chidambaram

01 July, 2012 Opinion, Economy
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P Chidambaram, Union Finance Minister

The 1970s, when I was practicing law after returning from the US, were exciting political times in India. When the Congress Party split, Indira Gandhi was quite a magnet for young people. I saw it as the beginning of a brave new world, and was drawn to politics.

My political life though remained peripheral to my profession as a lawyer. It took centre-stage when I met Rajiv Gandhi after he joined politics in 1980. I still remember the date when I first met him: 16 September 1984. He had come to Tiruchirapalli to address a Congress public meeting and since I was the translator for his mother, I translated his speech. I got the opportunity to interact with him over dinner that evening.

When I got elected to Parliament in 1984, much to my surprise I was made joint secretary of the AICC. I began to divide my time between Delhi and Chennai. Before the year was over, I was offered the Textiles Minister’s job. I didn’t think I could take that portfolio because of conflict of interest, and turned down the offer. Nearly three decades later, I realise it was just the beginning of a varied, challenging career in politics.

As Minister of Personnel, Public Grievances & Pensions, I rewrote the rules regarding disciplinary action, revamped the UPSC examination and the curriculum in the Lal Bahadur Shastri National Academy, Mussoorie, and introduced a number of gender and disabled friendly rules. For example, unmarried women were not entitled to maternity leave. This didn’t make sense to me. Maternity leave is for the welfare of the child and the mother, regardless of whether the woman is married! In my view, that was sufficient to entitle her to maternity leave.

We need to understand the way the economy works. If incomes rise, savings rise. If savings rise, investments rise. If investments rise, foreign investments rise. If both domestic and foreign investments rise, again growth rate rises. A higher growth rate will mean more tax revenues and more jobs. This would mean more incomes to more people. One supports the other

In mid-1986 when Arun Nehru fell ill and had to withdraw from the government, I was given additional charge of internal security. I still remember walking from 7RCR to 3RCR with Rajiv Gandhi and asking him how long I was expected to hold additional charge. He said it was for a short while, but it continued for three years, the rest of the term of government.

Internal security means managing the country’s paramilitary forces, their recruitment, training, etc. On taking charge, I took stock of their status – number, recruitment, what weapons they possessed, what training facilities they had, what training programmes they were going through. This had never been done before. The DGs took several weeks to prepare the reports because they had never before taken stock either! We studied each paper and began planning the revamp of every force, in particular how the force should grow in the future. Of course, at that time we could not anticipate the challenges of terrorism and heightened militancy, but the seeds for rapid expansion of the forces were sown at that time. When I look back, perhaps this was a training ground for my role as home minister today.

An Export-Oriented Minister

In 1991, I was made Minister of State (Independent Charge) for Commerce. This was closer to my own training and education. Within days of the devaluation of the rupee in the first week of July, we were told that the cash compensatory support was to be abolished. I took the matter to the prime minister, Narasimha Rao, and told him no commerce minister could begin his term by abolishing a concession to exporters. It had to be a package. Both the prime minister and the finance minister, Manmohan Singh, saw the point.

After the devaluation, we announced a large package of reforms. By the end of the year, we had written a new 100-page export/import policy. It was released on 31 March 1992 and that was the beginning of trade policy reform.

We had moved to a dual-exchange-rate and because we wanted exporters to get the advantage of the dual-exchange-rate, we introduced Exim Scrips. But this was only an intermediate step until we united the two exchange rates. The Exim Scrips were extremely popular. Exporters took well to the idea that while exports would become freer, imports would also become freer. A mindset of over 35 years had to be broken, and I think by the time Narasimha Rao’s tenure ended we had broken that mindset once and for all.

A lot of political parties questioned making imports freer, fearing that this country would be swamped by imports. My reaction was, so what? Every import will bring jobs, boost exports and business.

I personally took up the challenge of writing the foreign trade policy. I wrote every line of the policy, chapter by chapter, over a period of three to four days. And as every chapter of the policy was being written, the handbook was also being written by the commerce secretary.

In my second stint in the Ministry of Commerce (from February 1995), for the first time the government called business houses, one by one, and asked them what their intentions were about exports, what they wanted the government to do, what kind of support they wanted, which their markets were, what new products they had. We spent time with each business house to find out what could be done to help them.

When the first draft of the industrial policy resolution ran into trouble in the Cabinet due to proposed rationalisation of industrial licensing procedures, Narasimha Rao called Montek Singh Ahluwalia and me to his office and said, “Do something, the ‘old guard’ is resisting any change to the Industrial Policy Resolution of 1956.” In the document, we added a paragraph each on the contributions of Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi. We connected the three and said from these flow the new policy. It was taken back to the Cabinet and approved in minutes.

“Dream Budget”

My first stint as finance minister from June 1996 was a completely unexpected development. I got the opportunity to present my second, and full year’s budget in 1997. Many call that budget a “dream budget”. It was path-breaking, I agree, because it broke a number of moulds. One was that high tax rates were a way to raise revenue. All my training told me that high tax rates did not bring more revenue; lower tax rates bring you more revenue. In any case, the tax base was so narrow, so tiny, that I decided to reduce the tax rates. I am glad that the three rates which I introduced then – 10, 20 and 30 per cent – have survived four finance ministers over nearly two decades.

I started the practice of showing the budget speech to the RBI governor before it was delivered because I think fiscal policy and monetary policy have to work together. I also started the practice of showing each paragraph pertaining to a ministry to the secretary of the ministry concerned before it went to print and we even got their signatures on the paragraphs so that they couldn’t say this fact or that number was wrong.

Along with tax rates, I also cut duties, launched the black money amnesty scheme, loosened FII investment limits, opened up insurance. I could do all this because the Prime Minister, Deve Gowda, told me I could do whatever I thought appropriate; he gave me a free hand.

For the first time people recognised that the budget was a powerful platform to canvass ideas. Succeeding finance ministers have also used Budget Day for this. We threw up ideas. Many were implemented that year; some did not get implemented, but at least the ideas were there. Take for example insurance. It took a long time. My bill was defeated in the third reading, unfortunately. On Clause 13, backstage, I offered Atal Bihari Vajpayee that I would introduce a provision capping the FDI at 20 per cent. He agreed, but Murali Manohar Joshi did not. So what could he do? I asked that he keeps his word that he would support the bill. Ultimately, when the NDA came to the power, they passed the same bill with a cap on FDI. What is important is that the ideas were there. We should continue to use the opportunity of presenting a budget to sow ideas, which will take root, which will then grow into projects or programmes or legislation over a period of time.

The High Growth Years

In 2004, the Congress came back to power and formed the UPA-I government. Sonia Gandhi had been kind enough to ask me to come back to the party and offered me a ticket. When I met Manmohan Singh after his election, he said he was looking to me to help the government. As I had been away from the party for nearly seven or eight years, I didn’t expect to become a minister in the government and told Singh that whatever he wanted from me in Parliament, I would be happy to do. I got an unexpected offer – a second stint as finance minister.

We recorded the highest growth rate period ever (2004-2008). We had three successive years of over 9 per cent growth. The average for those four years was 8.8 per cent. If you want to understand what 8.8 means, the average for the NDA government, including the last good year under Jaswant Singh, was 5.8. It was clearly a boom period.

The tax-GDP ratio moved up sharply up till 2008 and then because of the recession it dipped a bit. Clearly, the Laffer Curve was working; tax revenues overshot the budget every year. We were able to collect 20 to 25 per cent more year-on-year because we kept tax rates low. I think all finance ministers after my term have acknowledged the wisdom of lower rates. In fact, in the DTC (Direct Tax Code), the proposal is to lower it even further.

Many call my 1997-98 budget a “dream budget”. It was path-breaking as it broke a number of moulds. One was that high tax rates were a way to raise revenue. All my training told me that high tax rates did not bring more revenue; lower tax rates bring you more revenue

We triggered a virtuous cycle of high growth, high investments, high savings, marked up incomes, and better prices to agricultural products by raising minimum support prices. Average inflation was only 5.5 or 6 per cent. We managed a massive agricultural loan waiver programme, expanded the education loan programme, and rolled out rural employment guarantee scheme now known as MGNREGA.

In 1997, the government signed an agreement with the RBI that abolished automatic monetisation of government securities, which I think was an important step. The FRBM (Fiscal Responsibility and Budget Management) Act had been passed by the NDA government but they did not have the courage to notify it. One of the first things I did after I took over as finance minister in May 2004 was to notify the FRBM Act. I was advised not to notify it, as it would restrict my space. I was sure we had to notify it, otherwise where was the discipline going to come from? I was always conscious that we had to work towards bringing the fiscal deficit to below 3 per cent and the revenue deficit to zero. We worked towards that. By March 2008 we had indeed brought the fiscal deficit to below 3 per cent.

VAT was unfinished business. It started in the NDA government. Neither Yashwant Sinha nor Jaswant Singh could tie it down. When I took over, it became clear to me that the deal maker or deal breaker was the compensation that would be paid for anticipated losses as a result of introducing VAT. Now, one could have taken a pessimistic view and thought there would be huge losses so how could we compensate the states, which was the stand of the NDA government. The other way was to take an optimistic stance. Why assume there would be losses? Why would VAT not be a net gainer to state governments? After all, in Haryana, which had introduced VAT well in advance of any other state, VAT had brought in more revenue. So I decided to take the risk and compensate VAT losses. I told the state finance ministers, “Yes, I will compensate you for the VAT losses, go ahead.” That clinched the deal; we were able to introduce VAT.

A good part of the GST work has been done, though not entirely. The entire DTC Bill has been drafted. I have applied my mind to every section, every line. We have an Income Tax guest house in Delhi. I would retire to that guesthouse every weekend, and dictate every section of the Act to my trusted stenographer. It would come drafted from the CBDT task force, which I would polish and re-draft into what I thought was appropriate legal language.

In those four years I also undertook massive reforms in tax administration aided by huge technology induction. We made scrutiny computer based, thereby almost completely abolishing discretion. Based on certain parameters, the computer picks up cases to be scrutinised. Scrutiny and processing have been set up centrally in Bangalore and a couple of other places. This has given confidence to the taxpayer as well as the tax collector that filing an income tax return, assessing it and collecting the tax is no longer a painful process.

Move to Home Ministry

December 2008 was the most horrific time, most depressing. At the time of the Mumbai attack, I was visiting my constituency. It was a Saturday when I got a call asking me to rush back to Delhi by 5 PM. There was an extended working committee meeting at 10 Janpath, which had been deferred till I reached. The working committee expressed its shock and deep regret at what had happened in Mumbai and the general mood was that Shivraj Patil should step down. Nobody explicitly made the demand though. The next morning, on Sunday, he tendered his resignation. I was called by the Prime Minister’s Office to meet the Prime Minister at 9 am where I was told that a decision had been taken by him and the Congress President that I would move to Home. I was very reluctant but I had to move.

I was mentally prepared for a six-month tenure in the home ministry. For one reason or another, six months have now extended to little over three years. It’s a job, someone has to do it.

Immediately after the Mumbai attack, I was able to pass amendments to the UAPA (Unlawful Activities [Prevention] Act) and the NIA (National Investigations Agency) Act. The UAPA Act did provide for the NCTC (National Counterterrorism Centre) in Section 43A. With the legal provision made, if we had announced the NCTC within a couple of months thereafter it might have sailed through; I don’t know.

Employment is a big issue. And here skill development is critical. Skills have two functions. They are necessary to make unemployable people employable and to make employed people more productive

What I am clear about is that we need counter-terrorism capability with operational capability. Others who have looked into the matter have also stressed this. The Group of Ministers headed by Jaswant Singh and the Second Administrative Reforms Commission have said so.

We have put in place in the last three years a good analytical group at the central level, a reasonably good one at the state level, but we don’t have counter-terrorism capability. Yes, if there is a terrorist attack, a force will immediately arrive and pick up the forensic evidence and chase the culprit. That is not the same as counter-terrorism. Counter-terrorism is about anticipating sources of threat and places of threat, going after them proactively and apprehending them before they are able to launch a terrorist attack. That is the capability we don’t have yet.

It has taken us two and a half years of debate within the government to agree on the contours of an NCTC. It is a much-watered down version of the NCTC that I had contemplated. But that doesn’t matter. This is a beginning.

Refuelling Growth

If we simply apply ourselves to promoting and sustaining high growth over a long period of time, even the poorest in India will come out of poverty. A rising tide lifts all boats

Within the government, I continue to emphasise that growth is a pre-requisite for inclusive growth. A large number of programmes, where we reached out to the poor directly were possible because of high growth. You cannot have inclusive growth without growth. Where is the money going to come from for all these grand schemes that we are introducing? It cannot come from borrowing; it has to come from government’s own resources. And government’s resources are only tax and non-tax revenues, mainly tax revenues, and that will come only if we continue to grow at a clipping pace.

In the high growth years, everything supported everything else. I think we could have continued that roll but for the international crisis that hit us in September 2008. We can replicate that growth. We need to understand the way the economy works. Each growth factor tends to support other factors to grow faster. If incomes rise, savings rise. If savings rise, investments rise. If investments rise, foreign investments rise. If both domestic and foreign investments rise, again growth rate rises. A higher growth rate will mean more tax revenues and more jobs. This would mean more incomes to more people. One supports the other. That’s my philosophy of how economic growth can be fostered and sustained over a long period. We should not allow any factor to derail this growth. If investments collapse, growth will derail. If savings collapse for some reason, growth will be derailed. We have to keep a careful, watchful eye over every factor that fosters, promotes and sustains growth.

If there is all-round growth and growth is sustained over a period of time, even the very poor will come out of poverty. I don’t think you need to panic or despair that the poor will always remain poor. There are numerous examples of extremely poor countries having banished poverty. In 1960, when I first visited Singapore as a student, Singapore was worse than the Chennai, which I had grown up in. Malaysia, South Africa, Mauritius, all were poor countries. China and India were on par as late as 1980. Several countries have lifted all their people out of poverty. Malaysia, for example, has virtually abolished poverty. We tend to panic; we tend to despair because our time horizon is only five years. We are not able to think beyond five years, whereas the Communist Party of China is able to think for 30 years. If we simply apply ourselves to promoting and sustaining high growth over a long period of time, even the poorest in India will come out of poverty. A rising tide lifts all boats.

Unfortunately, the people who are pro-poor are actually pro-poverty, and our agriculture story and rural story sort of bears that out. If two-thirds of your work force, approximately 400 million people, is engaged in agriculture and agriculture contributes 18 per cent of your GDP, then that two-thirds will continue to remain poor because their share is only 18 per cent of the pie. You can never become rich when the average holding is less than a hectare. Nearly 80 per cent of holdings in India are less than a hectare and 60 per cent of that is rain-fed farming. How can anyone on one hectare of land or less which is rain-fed earn a decent income to support his family? No family dependent on agriculture alone can ever get out of poverty. There can be some improvement because of other services provided by the State – health, education, roads, electricity. But, basic income will remain low, you cannot move out of income poverty. Agriculture will give you only so much income. Unless, of course, as I say jocularly, the farmer discovers either oil or gold in his field. Therefore, the answer, if you really are pro-poor, is that a large number of agriculture dependent population has to shift to industry and services. Holdings have to be consolidated. I am not saying anything against land ceiling. Let the land ceiling remain, but the holdings have to become economic holdings where a person can earn a decent income out of agriculture.

Looking Ahead

Employment is a big issue. And here skill development is critical. Skills have two functions. They are necessary to make unemployable people employable and to make employed people more productive. We are way behind most countries in imparting skills to our people. I have persuaded three banks to set up training institutes in my constituency. They impart skills for village crafts, to people who make idols and to people who do wood work. Somebody has to teach them new ways of doing it, with little wastage and greater productivity. Skill development is going to make more jobs available for our young people and make them more productive, which is why we started the National Skills Development Corporation when I was finance minister.

Today, the lowest sustainable unit of administration is the district, certainly not the state. You can’t administer a state like Uttar Pradesh or Bengal or Maharashtra that has vast land from one central location. It has to be administered at the district level. People passionately advocate sub-district units – the Panchayats and Panchayat Samitis. I believe the district is the appropriate level where you can introduce governance reforms. In the Integrated Action Plan that we have introduced in 60 Naxal affected districts, we have empowered three district level officers – the collector who is an IAS officer, the Superintendent of Police who is an IPS officer, and the DFO (District Forest Officer) who is an Indian Forest Service officer – to run the programme. The programme is a roaring success.

At the state level, fractured election verdicts, too many political parties, and caste and religious pulls have made the kind of parliamentary democracy we have very fragile, very shaky. We should have parliamentary democracy and representatives like MLAs and MPs elected from territorial constituencies. But we should really ask ourselves how we can insulate the executive government from fast-changing political situations so that the executive can continue to function for the term for which it was elected. These are serious issues which have to be examined in great depth.

As told to Sameer Kochhar, Editor-in-Chief, INCLUSION

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