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The New Hero - Views on News from Equitymaster
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  • Feb 28, 1997

    The New Hero

    Strange, isn't it? Between July 1996 and February 1997 (excepting the last 7 hours of February, that is) most of us believed that we had a useless bunch of people ruling the country and many were convinced that the Indian economy was heading for a recession. Farmers, we thought, are best left to farms and these MBAs from Harvard are probably as useless as those Not Required Indians (who keep on promising this country all the investment it needs but till today have brought in 1% of the amount of money repatriated by the hard working Indians in the Middle East).

    And, yet, by the fading evening of February 28 the country has a new hero. Mr Chidambaram has done what few previous Finance Ministers have done: he has had the guts to dream the Impossible Dream. And his fellow coalition partners have supported it. In the fourteen years that I have been following budget speeches, this is the first time that a Finance Minister has quoted the leader of another nation in his budget speech - the late Deng of China - and has told the nation that we should do to India what Deng did for economic China. We finally have a role model based on creation of wealth rather than the previous model which was concerned about the distribution of wealth - the sole reason for the poverty and misery of over 600 million people.

    When Deng was taunted by the Communists during the days of the Cultural Revolution for his more business-like ways in running China, Deng said: "I do not care if the cat is white or black as long as it catches mice". After taking over command in post-Mao China, Deng turned the Communist red cat into a capitalist cat concerned about the black ink of the bottom-line. Mr Chidambaram has had to deal with a 13-coloured cat covering the entire spectrum of colours from Communist red to Socialist blue to his own Harvard-educated shades of black. And this man - and this 13- party coloured cat - has given you one of the three historic budgets of India.

    V. P. Singh's 1985 budget had the backing of Prime Minister Rajiv Gandhi - a man fascinated by gadgets and technology - and had the power of the largest majority that the Congress has enjoyed in Parliament since Independence. Mr Singh slashed taxes and gave us the freedom to begin an exercise in the creation of wealth. Dr Manmohan Singh's 1991 budget had the tactical support of a minority Congress government - the first without a Nehru clan member at its helm. Dr Manmohan Singh's budget also had the support of the IMF and the World Bank who were concerned about India's pitiful foreign exchange reserves. In that sense, Dr Singh's budget was outward looking: what do we need to get more foreign exchange, what do we need to make Indian companies more competitive so that they can increase exports, what do we need to do to attract foreign exchange? Finance Minister Chidambaram's 1997 budget is home-grown, the work of a farmer and his friend who has had the privilege to study abroad but has returned to his native place.

    Finance Minister Chidambaram's budget is explosive: it is the take-off layer that was needed to ignite the rocket fuels of the 1985 and 1991 budgets. The sharp reduction in corporate taxes and personal income taxes will let loose a rush of wealth creation and the entrepreneurial energy that seems to lie within every Indian (barring the government employees we deal with) should be good enough to take this country on a 8% GDP growth rate. For all the sceptics who say that Mr Chidambaram is a gambler praying for the integrity of the Indian people and hoping that they will pay their share of taxes, a study in history is necessary.

    In 1985 then Finance Minister V. P. Singh cut taxation rates dramatically and over the next 12 months he was rewarded with a 25% increase in tax collection. Once you are in the tax net and have paid taxes, getting out is difficult, hence, tax collections tend to rise every year based on a one-time change in the laws. The fiscal deficit is not a concern: as long as we pay those taxes due from us. If we are stupid enough to still generate black money and avoid paying taxes, I hope that the next budget takes the tax rate back to 97.5% - the level it was at in 1975 when Mrs Gandhi's socialist policies attempted to strengthen the weak (the poor) by weakening the strong (the wealth creators).

    And the magic has already had an effect. Between 6 p.m. on February 28 and 4 p.m. on March 1, the stock markets jumped by 380 points (11%) and the estimated wealth created in terms of market value of all shares listed increased by Rs 47,200 crores. Assuming that there are 20 million people who hold shares in this country that means that the average increase in wealth is about Rs 23,600 per person. It's like we all got a 21-inch colour TV set as a gift. And the only thing we have to do is pay our taxes. Not a bad deal at all considering that the tax rate in India is now lower than the rates of tax in USA, UK, Malaysia, Thailand, Indonesia and all of Europe!

    Like the home-grown budget, this is a home-grown stock market rally. The upward move from 2,800 levels in December 1996 to 3,857 on March 1, 1997 (up 38% in 3 months) has been driven entirely by domestic, speculative money. Neither the domestic mutual funds nor the FIIs have participated in this run up. But FIIs are waiting in the wings. They were taken by total surprise and they are badly underweight in a market that is probably one of the best performing markets in the world so far this year. Their buying orders will fuel the rise northwards. A 4,000 level for the BSE-30 Index may have been breached by the time you read this. There will be the cautious who will want to ask if all this is for real, if this budget can really change the economy. Let them do the asking. Call your broker and buy well managed companies. A 4,500 index level is the target for the year.



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