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The New Hero

Feb 28, 1997

Strange, isn't it? Between July 1996 and February 1997 (excepting the last 7 hours of February, thatis) most of us believed that we had a useless bunch of people ruling the country and many wereconvinced that the Indian economy was heading for a recession. Farmers, we thought, are best leftto 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% ofthe 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 hasdone what few previous Finance Ministers have done: he has had the guts to dream the ImpossibleDream. And his fellow coalition partners have supported it. In the fourteen years that I have beenfollowing budget speeches, this is the first time that a Finance Minister has quoted the leader ofanother nation in his budget speech - the late Deng of China - and has told the nation that we shoulddo to India what Deng did for economic China. We finally have a role model based on creation ofwealth rather than the previous model which was concerned about the distribution of wealth - thesole 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 morebusiness-like ways in running China, Deng said: "I do not care if the cat is white or black as long as itcatches mice". After taking over command in post-Mao China, Deng turned the Communist red catinto a capitalist cat concerned about the black ink of the bottom-line. Mr Chidambaram has had todeal with a 13-coloured cat covering the entire spectrum of colours from Communist red to Socialistblue 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 bygadgets and technology - and had the power of the largest majority that the Congress has enjoyed inParliament since Independence. Mr Singh slashed taxes and gave us the freedom to begin anexercise in the creation of wealth. Dr Manmohan Singh's 1991 budget had the tactical support of aminority Congress government - the first without a Nehru clan member at its helm. Dr ManmohanSingh's budget also had the support of the IMF and the World Bank who were concerned aboutIndia's pitiful foreign exchange reserves. In that sense, Dr Singh's budget was outward looking: whatdo we need to get more foreign exchange, what do we need to make Indian companies morecompetitive 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 friendwho 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 ignitethe rocket fuels of the 1985 and 1991 budgets. The sharp reduction in corporate taxes and personalincome taxes will let loose a rush of wealth creation and the entrepreneurial energy that seems to liewithin every Indian (barring the government employees we deal with) should be good enough to takethis country on a 8% GDP growth rate. For all the sceptics who say that Mr Chidambaram is agambler praying for the integrity of the Indian people and hoping that they will pay their share oftaxes, a study in history is necessary.

In 1985 then Finance Minister V. P. Singh cut taxation rates dramatically and over the next 12months he was rewarded with a 25% increase in tax collection. Once you are in the tax net and havepaid taxes, getting out is difficult, hence, tax collections tend to rise every year based on a one-timechange in the laws. The fiscal deficit is not a concern: as long as we pay those taxes due from us. Ifwe are stupid enough to still generate black money and avoid paying taxes, I hope that the nextbudget takes the tax rate back to 97.5% - the level it was at in 1975 when Mrs Gandhi's socialistpolicies 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 marketvalue of all shares listed increased by Rs 47,200 crores. Assuming that there are 20 million peoplewho hold shares in this country that means that the average increase in wealth is about Rs 23,600per person. It's like we all got a 21-inch colour TV set as a gift. And the only thing we have to do ispay our taxes. Not a bad deal at all considering that the tax rate in India is now lower than the ratesof 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 from2,800 levels in December 1996 to 3,857 on March 1, 1997 (up 38% in 3 months) has been drivenentirely by domestic, speculative money. Neither the domestic mutual funds nor the FIIs haveparticipated in this run up. But FIIs are waiting in the wings. They were taken by total surprise andthey are badly underweight in a market that is probably one of the best performing markets in theworld so far this year. Their buying orders will fuel the rise northwards. A 4,000 level for theBSE-30 Index may have been breached by the time you read this. There will be the cautious whowill want to ask if all this is for real, if this budget can really change the economy. Let them do theasking. Call your broker and buy well managed companies. A 4,500 index level is the target for theyear.

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