PC at Home in Finance

During his first stint as finance minister in UPA during 2004-08, Palaniappan Chidambaram oversaw India's strongest growth surge in the past 2 decades. Hopes again run high as the pro-market reformist takes over as the new finance minister HEMA RAMAKRISHNAN NEW DELHI      Amonth ago, a senior bureaucrat asked Palaniappan Chidambaram if he would be happy returning to North Block. The answer was not an emphatic yes. He merely told him that the economy was going through troubled times and he wasn't sure if he would get full political support to carry out reforms.  Clearly, his second innings in UPA II will prove to be much more challenging than his first --from 2004 to 2008 -- when the economy was on a roll. "He is passionate about expenditure control, tax reforms and also realising revenues. Regaining fiscal control will be his top priority," said a senior finance ministry official who worked closely with him during his earlier innings.  Chidambaram set the tone in the 2004 budget, promising to wipe out the revenue deficit by 2008-09. This would open up fiscal space of up to 3% of GDP for enhanced public investment without undermining fiscalprudence. He created the fiscal space that enabled the government to offer a stimulus package after the global financial crisis. That cushion, unfortunately, is missing now, but Chidambaram's admirers say he has the ability to think out-of-the-box. He signed off from the finance ministry in 2008, after nearly completing the direct taxes code (DTC) that embodied a principle: low rates of tax on the broadest possible tax base so that the burden on individual taxpayers is low. The general anti-avoidance rules (GAAR) to curb sharp tax practices was his brainchild. His successor Pranab Mukherjee diluted the code, but retained GAAR that made foreign investors jittery.  Tax authorities also raised controversial demands on telecom company Vodafone during Chidambaram's tenure. And in this year's budget, Pranab Mukherjee retrospectively changed rules about how Indian assets traded by foreign companies should pay tax to bring Vodafone under the net. The PMO wanted a prospective amendment, but Mukherjee did not relent.  "Chidambaram is a disciplinarian and would never defy any decision taken by the prime minister on budget proposals," recounts an official. Always on the top of his portfolio, he is considered adept at handling pressures from industry.  But he has had his share of unpopularity too. Two taxes that he introduced – fringe benefit tax and the banking cash transaction tax— had to be scrapped later. He also waived off farm loans worth . 60,000 crore in 2008, a year ahead of general elections. Critics dubbed this as a political gimmick, saying the waiver would slow down fresh loans to deserving farmers.  A micro manager with a penchant for details, Chidambaram is known to respect institutions. "Regulators enjoyed complete autonomy during his tenure. He was professional and would listen to others and give reasons if he disagreed with them," says D Swarup, former Chairman of PFRDA.  Insurance regulator J Hari Narayan echoes a similar view. Chidambarm was decisive and encouraged regulators to do their best, he says. The man widely considered a reformer and a darling of the stock market has his task cut out: investment must be revived and inflation tamed.  In 1997, he slashed tax rates, opened up FDI and carried out disinvestment. Now he has to convince allies on signing up to key reforms, be it FDI in multibrand retail or the goods and services tax.  Chidambaram's close analysis of complex issues and respect for collective responsibility may be tested as never before as he faces a challenging economic and political environment.