A K Bhattacharya: Second innings, second Budget

RAISINA HILL

With less than a week to go before the announcement of the Union Budget for 2005-06 on February 28, the consensus among most officials in North Block is that Finance Minister P Chidambaram's biggest challenge is going to be how he can outdo himself.

The challenge comes not from what he did in his 2004-05 Budget, but from the landmark taxation measures he unveiled in his 1997-98 Budget.

Expectations, therefore, are running high. And Chidambaram himself has done precious little to contain them. On the contrary, he may have fuelled such expectations by allowing his forthcoming Budget to be dubbed as a "dream" exercise by a "dream" team.

Nobody seems to be conscious of the fact that his "dream" Budget of 1997-98 was prepared by a team that did not have one crucial member of the "dream" team that is at the helm today.

Manmohan Singh was then in the Opposition and was indeed critical of Chidambaram's steep tax cut initiatives in 1997. So, the challenge today may be even more formidable than what most people think.

Historically, however, the second Budget of most governments has been more bold and imaginative than the first. There are reasons why this is so.

The first Budget of a new government is usually prepared in a hurry, with little time available to the finance minister. There is a feeling that whatever the finance minister may do will not be able to yield the desired results because almost half the year would be over before the Budget proposals actually get implemented.

This dampens the initiative and the finance minister in his first Budget takes only those measures that are immediately required and reserves his best initiatives for the second Budget.

And the second Budget becomes even more crucial because by the time the third Budget comes nearer, most governments start preparing for the next battle at the hustings.

These preparations also rob the finance minister of any chance to experiment with bold measures. Chidambaram's budget for 2005-06 should be no exception to this trend.

Manmohan Singh's first Budget, presented in July 1991, was far less forward-looking than the Budget he prepared in February 1992. His 1991 Budget raised corporation tax rates and excise duties.

The indirect tax reforms recommended by the Chelliah committee began getting implemented only from the 1992 Budget. Chidambaram's first Budget in July 1996 did contain the path-breaking taxation proposal of the minimum alternate tax on India Inc, but the real dose of tax rationalisation was unveiled only in Feb 1997.

Even Yashwant Sinha's first Budget in June 1998 pales into insignificance when it is compared with what his Budget in February 1999.

So, what can Chidambaram announce on February 28 that will once again prove that the second Budget of a government is always more bold and imaginative than the first? The big dilemma before him is whether he can afford to reduce the rate of corporation tax from 35 per cent to 30 per cent.

Left to himself, he would certainly like to announce the reduction and become a darling of the corporate sector yet again. But he has three problems.

One, can he cut the corporation tax rate and hope to compensate for the loss in revenue through greater buoyancy in tax collections as a result of lower tax incidence and the expected rise in corporate sector profits?

His advisors may have already warned him of the dangers of cutting the corporation tax rate without reducing the scope of various exemptions enjoyed by the corporate sector.

For instance, they are of the view that a corporation tax rate cut is possible only when the depreciation rates are also suitably reduced, so that tax collections do not suffer.

Remember that the finance minister has to function within the broad parameters of fiscal and revenue deficits laid down by the Fiscal Responsibility and Budget Management Act.

And that gives rise to Chidambaram's second dilemma. Should he tinker with the depreciation rates? If he does reduce the depreciation rates, he might manage the downside risks of a possible drop in revenue collections, but he also runs the risk of losing the feel-good factor that he would have created with a tax rate cut.

More importantly, during his first visit to Mumbai, Chidambaram told investors and India Inc that his priority was to promote investment in the economy and he saw himself as the minister for investment.

A cut in depreciation rates might militate against that reputation he had sought to build for himself.

The third dilemma over the proposed corporation tax rate cut will come from the Left. Chidambaram cannot afford to create an impression that his Budget is all about giving concessions to the corporate sector.

He has to balance all such incentives with even more goodies for the rural poor and the common man.

Chidambaram's big challenge arises from the fact that he is remembered as the man who slashed tax rates across the board in all sectors and income slabs.

Successive finance ministers could only tinker with those rates, but failed to muster enough courage to phase out the exemptions. That would have been the ideal way of completing the tax reforms process initiated by Chidambaram.

But that was a difficult job. The ball is now back in Chidambaram's court. Having achieved the easier part of taxation reforms "" by slashing tax rates, he is now called upon to implement the difficult part "" by removing the exemptions.

Can he do it? For an answer, wait till Monday.