Union Finance Minister P. Chidambaram unveiled a "dream budget" in 1997, which reduced income-tax to a level that made evasion a worse option than compliance. For five years, the economy had been enjoying the benefits of the liberalisation started under P.V. Narasimha Rao and greenfield sectors such as telecom and information technology were throwing up shoots. New players entered the corporate sector, enabled to compete with more established players through the level playing field created by de-regulation. Sixteen years later, the dream is evolving into a nightmare, with a sharp increase in the number of domestic players seeking the safety of NRI status in London, Dubai and Singapore. While FDI flows appear robust, much of this is accounted for by "round-tripping", where illicit funds leave the country and return through financial intermediaries based in offshore tax havens.
Business leaders are reluctant to go public about the present state of affairs, largely out of fear of the consequences of such criticism. Many owe huge amounts to the domestic banking industry, while others have run afoul of tax and exchange regulations in their quest to compete globally, and are afraid of investigation and prosecution. Others are wary of the many ways in which rules can be tweaked by an administration to incorrectly implicate them in situations where much of their attention gets diverted from business to proving their innocence through a legal system that usually takes decades to deliver final justice. Officials are wary of the unpredictability of the Indian voter, and hesitate to go public about their misgivings, for fear of reprisal. However, both are voluble to those they trust to keep their views confidential
Both officials as well as businesspersons are unhappy at what they see as "policy framed on the basis of television talk shows". In a climate where the political executive is over-concerned about the "image" presented to television audiences, policies get changed with a swiftness not seen in the overall administration. Just a week of negative coverage has sufficed to shelve the Agusta Westland helicopter deal, where half the money has been paid but only three of 12 machines have been delivered, or half the number already paid for. "Even if policy is tough, we can adjust to it. What is killing sentiment is the uncertainty. Nothing is certain any more, even after all the approvals have been secured", a businessperson who has established a global presence lamented. Another pointed to the "lack of clarity" about key approvals, such as environmental clearance, with "criteria getting changed, sometimes by the week". Land acquisition has also become "a swamp", according to a third businessperson, who said that "collectively, those domestic businessmen with the capacity are investing in markets other than India, which has become a country where an agitation by a few hundreds can halt a billion-dollar project".
Thanks significantly to the RBI's monetary tightening and interest rate hikes, a senior official estimates that "bank debt restructuring will cross Rs 400,000 cr, or the same as the total subsidy bill of the government". Diminishing optimism about the Indian market has combined with rising incapacity to compete globally (because of new imposts and regulations) to create (in the words of the SBI chairman) "a lack of demand for Indian companies". This is precisely the time when a nervous finance ministry has tightened its screws on the corporate sector through a flurry of demands and penalties. "How can we flog a dying horse and expect it to run?" a senior official lamented, pointing out that "a lack of buoyancy in the economy has made efforts at boosting revenue much more difficult to attain".
The official was critical of the government's tendency to "look only at Foreign Institutional Investors (FIIs) while framing policy", pointing out that "those who make several hundred crores a year from speculation in shares and commodities in India seldom pay even 5% tax on their earnings". He wanted a flat tax of "at least 15%" to be levied on the remittance of cash gains made by FIIs from India, saying that the fear of negative sentiment is "misplaced", because "the revenue benefits of such a tax will outweigh that significantly". He pointed out that for years, the government "seems interested only in money flows into India rather than investment in machinery or infrastructure". Another official warned that "in a situation where even domestic players are getting out of the infra sector, to expect large FDI inflows is unrealistic", pointing out that "in the house construction sector, whose 30% annual growth cushioned UPA-I, growth has almost disappeared". Telecom and power are other sectors that have slid into crisis since 2007, with huge loans outstanding to banks by the former and a loss of nearly Rs 3,00,000 cr by players in the latter (power) field, both in generation and in distribution.
A senior official pointed to the "absence or unreliability of records" as the reason why "so many probes are continuing interminably", giving the example of Coalgate, "where many records are either illegible or absent". At the same time, "decisions get taken without reasons being provided". He gave as an example the recent blacklisting of four domestic infra companies from a port project "on security grounds", asking why, if the promoter of one of the impugned companies was a threat to security", banks continue to lend him huge amounts of cash and Cabinet ministers attend his family functions". A senior official who has attended several high-level meetings on the economy, laments that "there is a day-to-day approach, without a long term overall strategy" over much of the policy-making matrix.
Just as Prime Minister Manmohan Singh seems to have blotted his historical copybook by his failure to prevent the economy from sliding into lower and lower levels of growth, will the finance minister be able to repeat his 1997 feat and turn around expectations and reality, or will 2013 be Chidambaram's nightmare budget?