Mr Chidambaram will announce the third Budget of the UPA government on February 28. The speech will be made against a backdrop of unprecedented macroeconomic health and stability.
GDP growth during the current year will be around 7.5 per cent, following 8.5 per cent and 6.9 per cent in the two previous years. The average rate of inflation for the current year will be slightly over 5 per cent, despite a rather unfriendly global oil scenario.
Notwithstanding the Reserve Bank of India's anti-inflationary stance over the past year and a bit, interest rates have not increased to a level which poses a threat to the ongoing expansion.
Strict compliance with the goals of the Fiscal Responsibility Act may be a source of some concern, but the direction of fiscal management is positive. And, foreign funds continue to find Indian investments attractive, indicating the durability of the levels of capital inflows.
In the current political environment, this kind of macroeconomic situation could well be a huge incentive to play it safe in the Budget. A minimalist approach will neither evoke criticism for not addressing immediate problems, because there aren't too many of them from a purely budgetary perspective, nor give political allies or opponents much room to complain.
But, it also provides an enormous opportunity for major initiatives, which both make economic sense and have enough time to work towards generating political dividends.
Of course, Mr Chidambaram may well be a little wary of fulfilling expectations of "dream Budgets". His 1997 Budget, taking advantage of three years of 7 per cent plus growth, initiated path-breaking tax reforms. In the year following, however, growth slumped to below 5 per cent and the government collapsed.
However, looking at the economic situation rationally, there is a virtually non-existent chance of the same thing happening. There is, therefore, little risk of a good Budget getting a bad rap because of subsequent developments that had nothing to do with it.
More importantly, the 2006 Budget needs to be motivated by the principle that even a healthy economy needs regular policy stimuli to keep it going. Perpetual motion is as much a myth in physics as in economics.
Over the last fifteen years, the opportunity for genuinely big-bang Budget announcements has dwindled. Most of the opportunities for sweeping reform initiatives, be it on the tax, trade or financial fronts, have already been exploited.
But there are several second-level activities that need to be continuously engaged in to ensure that the big ideas have their full impact.
Virtually all recent Budgets have comprised these kinds of initiatives, which has increased the challenges of communication. Last year, for example, virtually all of the post-Budget analysis was focused on the fringe benefits and cash withdrawal taxes, which were just two of several measures, many of which also deserved some measure of attention.
Given these three constraints - the opportunity for significant initiatives, the lack of opportunity to do something grand and the need to communicate the underlying philosophy of the Budget effectively - the process would benefit by organising the speech into some well-defined themes and linking specific measures, which may appear insignificant when viewed in isolation, to one or more of these themes.
Three broad themes are appropriate from both economic and political perspectives. The first is "co-ordination". Most policy initiatives need concerted action by many agencies at multiple levels to succeed. The good intentions and enthusiasm of one agency cannot overcome the inertia and resistance of several others.
The best example of co-ordination achieving significant goals in recent years is the collective decision by state governments to implement VAT. A combination of economic self-interest, a recognition of the benefits of acting in concert, and positive reinforcement by the central government led to this.
There are two levels at which the Budget announcements can exploit this experience. One is to push the process of inter-state fiscal co-ordination forward by way of expediting the entry of full VAT treatment for cross-border transactions.
This has always been the logical end-point, but there is some fuzziness about how it would ultimately work. Clarity on and resource commitments to the mechanisms needed at both the central and state levels to bring this about would be an effective follow-up to a great beginning.
The other is to look for ways to play the same role in other areas requiring a combination of collaborative action and central reinforcement. The most important of these is power sector reforms.
The large potential benefits of open access to state power grids and movement of power across state boundaries unrestricted by entry and exit taxes of other barriers will not be realised without a process similar to that of the VAT implementation.
To the extent that it requires a combination of sticks and carrots, the Budget is an appropriate occasion to set the ball rolling.
The second theme is "competitiveness". The National Manufacturing Competitiveness recently published its draft strategy report. It underlines and reinforces the core of competitiveness - many things, for which many different people have responsibility, contribute to it.
In the specific context of the Budget, a combination of tax and expenditure measures needs to be initiated, assuming that the government has accepted the broad merits of the recommendations.
It would be useful to communicate all these initiatives within the umbrella theme of competitiveness, rather than as stand-alone measures that run the risk of being dismissed as insignificant.
The third theme is "security". The rural employment guarantee programme has been hotly debated with respect to its potential costs and barriers to implementation. But, its central objective, which is to provide a publicly funded social safety net, is unobjectionable.
Once that objective is accepted, it is the government's responsibility to devise a cost-minimising solution. Social security, whether in old age or during periods of unemployment, are indispensable components of a labour market framework, which will facilitate job growth instead of hindering it, as is the case now.
The Budget can contribute meaningfully to the process both by designing solutions and committing resources. Without this, the quest for security, however legitimate in and of itself, will chase potentially disastrous solutions, like expanding the scope and coverage of job reservations.
In sum, the Budget announcement remains an important opportunity to communicate the economic strategy of the government and how the various measures in the Budget relate to the strategy. The absence of a grand, unifying theme does not dilute the significance of that opportunity. A combination of less sweeping themes could exploit it just as well.
The author is chief economist, Crisil. The views here are personal.
