TCA Srinivasa-Raghavan: The mistakes FMs make

LINE & LENGTH

The services sector will become a weapon of mass taxation. Untold misery lies ahead.

From TTK's infamous Budget in 1959 until 1985, when V P Singh started reducing taxes, the citizen used to cringe and cower as Budget day approached. This was because taxes had kept increasing throughout that period.

The reason was simple.
In order to finance, initially, investment in the Five-Year Plans, and then, progressively, waste in government, the finance ministry kept coming up with new things to tax. When that list grew too big by the mid-1970s, it started raising the rates.

Not to put too fine a point on it, it was pure fiscal terrorism.

In 1985 a new generation of politicians with a different world-view took charge. They reversed the tax philosophy of the previous two decades. So the next 20 years saw steady tax cuts.

And then came P Chidambaram, Version II, in 2004.

In the seven intervening years since his "dream" Budget of 1997, the only thing that doesn't seem to have changed about him is his name. Certainly, in respect of his approach to taxation and economic reform, he is not the Chidambaram we knew, the knight in shining armour.

Like T T Krishnamachari (TTK) in the late 1950s, he is doing the bidding of his masters beyond the call of duty.

TTK was asked by Nehru to find the resources to finance growth via the Second Five-Year Plan, which had a huge investment component. Mr Chidambaram is being asked to finance redistributive waste and he is being as dutiful as TTK.

The reward, for the time being at least, is also the same: support from the PM""grudging or otherwise, we don't know. But the result is that he is re-introducing the old terror.

Like TTK before him, he has found a new untapped source of revenue. His weapon of mass taxation is a virtual kamadehnu, the services sector.

This, believe me folks, is going to be terror without end because of the way services are defined, namely, anything that doesn't come out of the ground, and is not manufactured by a machine, is a service. The residuary nature of services has ensured that our goose is well and truly cooked. Wasteful governments and corrupt taxmen will fatten at our expense.

But that is for later. In the meantime, Mr Chidambaram should not count on the gratitude of his party. After all, when the Congress Working Committee met to discuss the election debacles in the Punjab and Uttarakhand, it quickly turned on him. How could you let inflation go up so much, it asked.

Sonia Gandhi also says that it was high prices that cost the Congress dear in those two elections, whereas, actually, everyone knows that it was the mistakes made in the choice of candidates that ensured defeat. For that she was primarily responsible. But now someone else must take the blame.

This would not be the first time this has happened, of course. TTK had also thought, naively, it turned out, that the party would be so grateful to him for arranging finance for the Second Plan that there was no danger to his post.

But as with all political parties in power, the party exists to take credit; the finance minister is there only to take the blame. That it was genuinely a party in those days""and not a unit set as it is now""doesn't make much of a difference to the basic rules of the game.

The party got rid of TTK when the going got tough. Everyone thinks it was because of the Mundhra affair. But Mundhra was the reason why Jawaharlal Nehru asked him to go. The party, for its part, didn't give a damn about all that. It had been waiting to get TTK. It put pressure on Nehru primarily because he had imposed new taxes at a time of rising inflation. The Mundhra affair merely provided it the excuse.

However, on a longer view of things, it is a matter of passing interest to economic historians what happens to a finance minister. What is infinitely more important is the direction he sets for tax policy, especially when governments are under party pressure to increase expenditure so that sitting MPs can hope to win in the next election.

The problem with what Mr Chidambaram is doing lies precisely here. He is setting off his preference for low tax rates by finding more things to tax, like rent. For heaven's sake, couldn't he have asked someone? He should actually be devoting far more energy to getting far more people to pay income tax, including the crooks in his own party, if only to show what a good chap he is.

When a finance minister expands the list of things to tax as TTK did then, and as Mr Chidambaram is doing now, he thinks it doesn't matter because he is keeping the rates moderate and that they will remain low forever. Some finance ministers think that they too will remain forever.

But life can be cruel, and when the next chap comes along""as he inevitably does""he can, and does, raise the rates. That is why history regards TTK as a fiscal Attila and V P Singh as fiscal Florence Nightingale.

Until his Budgets of 2004, 2006 and 2007, Mr Chidambaram was the latter; now he is well on his way to becoming the former.