Manas Chakravarty: The agony of being Chidambaram

WATCHWORD

Readers will no doubt be aware of the debate on the tax to GDP ratio that is being carried out in this newspaper, a debate that has since spilled over to the rest of the media.

The ball was set rolling by an economist pointing out that we pay quite a lot of taxes, thank you, and those who say otherwise don't know their elbows from other portions of their anatomy.

At least, that's what I hope he meant, although he seems to have rested his case on "significance levels" and something he calls an "India dummy".

That sounded the war cry to another economist, who lost no time in rebutting him with, among other things, the "log of the dependent variable and the square term of log per capita PPP GDP as an additional explanatory variable".

Not to be outdone, another pointed out with glee that "per capita GDP, in a single equation formulation, is an exogenous given".

They needn't have bothered, because it's pretty clear that the reader's sympathy will almost certainly lie with the guy who wants to reduce taxes, irrespective of whether they believe India is a dummy or not.

But while you and I may shrug our shoulders and roll our eyes heavenwards when confronted with a regression coefficient, passing on lightly to less taxing matters, there's one person who can scarcely afford to do that.

I'm referring, of course, to Mr Chidambaram, who's spending sleepless nights wondering whether the tax to GDP ratio is low, as mentioned by economists A, B and C, whether it is too high, as contended by economists D, E and F, or whether it is just right, as pointed out by Goldilocks.

Unlike you and I, he really does need to know who's right, so that he can do the right thing on Budget day.

Nor is the tax to GDP ratio the only issue on which the finance minister has to make up his mind. Should he, for instance, use our foreign exchange reserves to fund infrastructure? It was the Planning Commission that set that particular cat among the economists.

As usual, several of them have lined up in support of the proposal, others have been vociferously critical of it, and one of them has said that all the different ways of looking at the problem have their own validity.

Most of us, of course, wouldn't take a second look at macro figures, knowing all too well how they are compiled. I recall, in this connection, a banker friend of mine who was branch manager at a rural branch.

One fine day, busy swatting his daily quota of flies, he was surprised by an urgent telegram from head office, asking him to immediately report the number of Sikhs, Muslims, Jains, and Christians he had financed.

The data were required for a reply to a parliamentary question. There was no way in which one could find out the data, because the loan accounts didn't identify the borrower's religion.

But that didn't prevent my friend from replying to the telegram promptly on the basis of his own rough estimate of the percentage of Muslims in the village population and multiplying the number of borrowers by it.

Doubtless, the same methods were used by branch managers across the length and breadth of the country. What's more, the consolidated figures must have formed the basis of many an impassioned, but completely misleading, debate in Parliament.

Policies to lend more to the minorities may have been fashioned on the basis of that report.

But can the finance minister afford to ignore the economists? Will he listen to those who say we need higher taxes, or to those who want to lower taxes?

Will he cast his lot with those who want more government spending, or will he be in the company of fiscal fundamentalists? His problem is even more complicated because of his reputation for delivering dream Budgets, on the one hand, and being part of the Dream Team, on the other.

On Budget day, he will bear the heavy burden of these twin dreams.

There is, however, one solution, much favoured by economists. Chidambaram should do exactly as he pleases, and let the Invisible Hand sort out the mess.