March 3 (Bloomberg) -- Indian Finance Minister Palaniappan Chidambaram' s annual budget is one part Robin Hood and another part Houdini. It's hard to say which one is worse.
In his Feb. 29 budget speech in parliament in New Delhi, Chidambaram announced a 600 billion-rupee ($15 billion) debt waiver for farmers.
This sum, which amounts to a staggering 10 percent of the government's tax revenue in the current fiscal year, would have sufficed to create 15,000 megawatts of new power-generation capacity, enough to significantly reduce the country's perennial and debilitating electricity shortages.
There's no denying that farming in India is facing a crisis. Productivity gains have stalled. The overall economy has grown an average of 8 percent per annum since 2002, adjusting for inflation. In this six-year period, real agricultural output has expanded 2 percent annually with high year-to-year volatility.
Reports of indebted farmers committing suicide have dominated newspaper columns and political debates, putting pressure on the government to take drastic measures.
With general elections very likely to be held later this year, Chidambaram didn't disappoint the ruling coalition. It is, after all, impossible for any government to be returned to power in India without the support of rural voters.
So Chidambaram decided to play Robin Hood.
Playing Robin Hood
He even defended the debt-forgiveness plan as a bonanza for the banking industry, which, he said at a post-budget press conference, would now be rid of potential bad loans.
The least the finance minister could do was to acknowledge the ``moral hazard.''
Voters in India have been known to shun the incumbent party.
So if the ruling Congress Party-led coalition manages to return to power, debt forgiveness will be equated with political nirvana. From time to time, the weather and commodity-price risks inherent in the farming business would shift to the hapless taxpayers. No political party will object because none of them can afford to be seen as anti-farmer.
Chidambaram' s performance was so subtly masterful that the taxpayers aren't even sure if they have been robbed.
The budget left the corporate-tax rate unchanged and cut the excise levy on manufacturers to 14 percent, from 16 percent. The income-tax burden on individuals will also be somewhat lower now. Only the charge on short-term capital gains -- profit on securities sold within a year of purchase -- was raised to 15 percent from 10 percent.
Touch of Houdini
As for the write-off, it doesn't even show up as a budgetary expenditure.
And that's nothing short of a Houdini trick.
Analysts aren't yet sure just how the financial system will be compensated. One possibility is that banks will be given government bonds with which they can replace their impaired assets. Chidambaram himself has been evasive.
All he said is that the government would provide liquidity to the banking system as loans to the farmers are written off over three years.
``You must allow me that I have some intelligence, '' he said. ``I have done my homework.''
Investors certainly would hope so. This penchant for keeping large increases in expenditure ``off-budget' ' has already assumed odious proportions.
Oil companies are being compensated through special government bonds for keeping retail fuel prices low. This has a clear, known fiscal cost, which is nonetheless not included in the budget deficit. A similar strategy has been adopted to tackle food inflation.
Today's headaches are merely being transferred to tomorrow.
Off-Budget
One day the bonds will have to be redeemed; when cash leaves the exchequer, the expenditure will have to be brought on budget. By then, it may be another finance minister's problem.
To be sure, Chidambaram did, in his budget last week, say that this particular accounting practice needed to be reconsidered. But any such review is still about two years away.
There are other problems with Chidambaram' s most recent budget. The minister hasn't made any provision for the hefty salary increases for civil servants that he may announce after the Pay Commission, which resets the wages of government workers every 10 years, submits its report by March 31.
The panel's recommendations are widely expected to be generous, jeopardizing several years of fiscal consolidation.
``Recent fiscal gains, a cornerstone of the sovereign's improved creditworthiness, could not only come under threat but be severely reversed by this pay review,'' says Standard & Poor's analyst Sani Hamid in Singapore.
Enough `Headroom'
In all fairness, the budget ought to have given investors a chance to gauge the risk.
The state-owned Indian Railways, which has had a separate budget since 1925, did just that last week by acknowledging that its wage bill for the next fiscal year may get bloated by as much as 50 billion rupees.
Chidambaram chose not to make the adjustment.
The finance minister's response is that he has enough ``headroom'' in the budget to meet any salary increases that the pay panel may recommend.
Investors would have preferred to see evidence of that headroom because his projections for tax collections appear to be rather optimistic.
As an increasingly important part of the global economy, India needs to gain credibility for its budgets. That means making them more transparent, and less magical.
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