Had he lived in Europe during the time, Finance Minister P. Chidambaram would have been one of Napoleon’s favourite generals. He has all the skills for his job; more importantly, though, he has enjoyed all the luck and more in his second innings. Thanks to a compounded annual growth rate upward of 8.6 per cent over the last four years, Mr. Chidambaram has had an enviable situation of an overflowing exchequer.

Particularly amazing has been the growth in direct tax revenues. Between April 2007 and mid-January 2008, net direct tax revenues to the centre grew increased by 42 per cent to Rs.217,149 crore, which was over four-fifth of the budget estimate for 2007-08. Given the hiccups in industrial growth during the second half of 2007-08 and the strengthening of the rupee, excise and customs collections may not be so buoyant. But it is a safe bet that the revised estimate of net tax revenue for 2007-08 will exceed the budget targets. No recent finance minister has achieved such results. Mr. Chidambaram will have done it thrice in a row.

Such bountiful revenue will give the FM considerable room for manoeuvre. The question is: how much of a long rope will he give to expenditure? As I write this, the budget has been prepared for all intents and purposes; and by the time you read this, everything will have been cast in stone. But when things were fluid, what might have been the factors that the FM had to take into account?

To my mind, there would have been four. The first factor is political. The government is in its final lap and this budget will be structured with an eye to impending elections. That implies an expansionist budget targeted at rural India, the social sector, employment generation and micro and small enterprises. I, therefore, expect significant percentage increases in outlay on the various planks of the Bharat Nirman programme, such as drinking water and sanitation, rural roads, rural electrification and rural housing. I also expect more on Sarva Shikhsya Abhiyan, the mid-day meal scheme and the National Rural Health Mission. Most likely, the largest absolute increase in expenditure will be on the National Rural Employment Guarantee Scheme.

These and other social sector heads will comprise a large part of the budget speech. But even with a sizeable increase in outlays, in the aggregate these will not amount to much in the backdrop of stellar revenue buoyancy. Certainly not of a magnitude where anyone can accuse the FM of being a fiscal profligate.

The second factor the distinct possibility of an economic slowdown. Mr. Chidambaram is a realist who understands numbers, especially early warning signs. Given the present state of electricity, roads, highways and ports, it is very unlikely that industry can expect to continue growing at double-digits. Growth of the Index of Industrial Production has fallen from 11.2 per cent in April-December 2006 to 9 per cent for April-December 2007, and is trending down. Our estimate is that India will be looking at a GDP growth of somewhere between 7.5 per cent and 8 per cent in 2008-09. Lower growth may require some expansionary sops. And I believe that the FM will offer a few, without too much pressure on the fisc.

The third factor is a guillotine called the Seventh Pay Commission. Mr. Chidambaram had the misfortune of being at North Block when the Sixth Pay Commission was implemented. It seriously hurt the exchequer and scarred him as well. He knows of the pressures for substantial increases in civil service pay; and he knows how it can rock the exchequer. The FM will need to stash away a sizeable chunk of revenues to make these payments. And to go easy on major expenditure outlays, knowing that a big splurge is around the bend.

The fourth factor is fiscal rectitude, and the Fiscal Responsibility and Budget Management Act. Will Mr. Chidambaram meet the FRBM targets for 2007-08 and 2008-09? And leave a much stronger exchequer for his successor? I believe he would want to; but he may not be able to given the possibility of a slowdown, additional civil service pay and election year sops.

On balance, what should we see? Lots of stuff on social sector expenditure; some sops to industry; a hold on reducing customs duties; talk on the additional resource needs for meeting the Seventh Pay Commission; some talk too on the need for a strong exchequer; and, of course, couplets from Thiruvalluvar and other poets. High on politics; but basically safe. Or so I hope.

 Published: Business Standard, February 2008