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RPT-INSIGHT-India's crisis within a crisis; finance minister fights on two fronts
September 2, 2013 / 2:51 AM / 4 years ago

RPT-INSIGHT-India's crisis within a crisis; finance minister fights on two fronts

By Sanjeev Miglani
    NEW DELHI, Sept 2 (Reuters) - Late last month, with their
doors shut to the mounting market panic outside as investors
fled the country, India's cabinet ministers gathered to give
final approval to a cheap food scheme for the poor.
    It was hardly a difficult decision for a government that
needs to shore up its sagging popularity before elections due by
next May. But officials familiar with the discussion say there
was one dissenting voice over what is now destined to become one
of the world's largest welfare programmes.
    Finance Minister P. Chidambaram, already struggling to
convince doubters that he will keep the country's hefty fiscal
deficit under control, made a last-minute attempt to trim the
huge cost of the plan, estimated at about $20 billion a year.
    Chidambaram's ultimate failure to win colleagues around -
despite his famed eloquence - is emblematic of the predicament
he faces: he must stop investors heading for the hills as
economic growth skids to its slowest pace in a decade, but he is
surrounded by politicians who haven't grasped that there is a
crisis at hand and want to spend their way to the ballot box.
    In many ways, Chidambaram has been grappling virtually alone
with India's economic emergency since he became finance minister
for a third time 13 months ago.
    Cabinet colleagues, wayward allies of the ruling coalition
and an obstructive opposition have together stood in the way of
bold steps that might have averted this year's collapse of
confidence in the India story.
    It is a crisis within a crisis.
    With elections looming, that won't change anytime soon,
which means Chidambaram will find it difficult to take robust
policy action if the situation goes from very bad to worse.
    "If parliament is not able to point to the direction in
which the country's economy will go, parliament is not able to
agree on, say 10 steps which the government should take today
... what kind of a message will it send to the rest of the
world?" he asked lawmakers in frustration last week as the rupee
tumbled ever-lower into uncharted territory.
    "The fact is, the polity of this country is divided on
economic policies and that is understandable ... My plea to
everyone, despite our differences: can we agree upon some
measures which have to be taken in order to lift the country's
economy from what it is today?" he said.
    Chidambaram was not available for an interview for this
    An almost comic spectacle of the country's policy deadlock
played out in parliament last month as the monsoon session of
the legislature got under way.
    Lawmakers were so busy bawling at each other over issues
that might sway voters - a corruption scandal, the partition of
a southern state and communal violence - that over its first
seven days the lower house spent just 12 minutes on legislative
work and there were 11 sittings before a single bill was passed.
    While New Delhi appeared nonchalant at the economy's bind,
investors were not: they fled. The rupee has tumbled more than
20 percent since May and the fall in August was the biggest for
any month on record.
    In a matter of a few years, India has turned economic
expansion of 8-9 percent into growth now struggling to reach 5
percent. The current account, the broadest measure of a
country's international trade, has a record deficit, the
manufacturing sector is shrinking, and credit ratings agencies
are hovering.
    "Our primary concern is that the policy authorities still
don't 'get it' - thinking this is a fairly minor squall which
will simmer down relatively quickly with fairly minor actions,"
said Robert Prior-Wandesforde, head of Asia economics research
at Credit Suisse.
    For sure, India is one of several emerging markets from
Brazil to Indonesia hit by a flight of capital due to rising
U.S. interest rates ahead of an expected tapering of the Federal
Reserve's massive bond-buying programme that unleashed liquidity
across the world. It is doubtful that any policy action in New
Delhi could do much to turn the tide.
    Nevertheless, India's response has been less decisive than
other emerging market economies. Most steps taken so far to
address the problem have been small, such as lowering the cap on
transfers of money abroad and slapping import duties on
flat-screen TVs, measures aimed at reining in the world's
third-largest current account deficit that is approaching $90
    Some proposals have smacked of desperation. One minister
last week suggested curbing diesel consumption by the railways,
a bigger economic lifeline than in most countries, and the armed
forces to cut import costs, an idea that got no traction.
    The Economic Times newspaper reported on Saturday that the
central bank wants Hindu temples to deposit their hoards of idle
jewellery for conversion into bullion to meet demand for gold in
the world's biggest consumer of the precious metal. The idea is
that such a measure would reduce import demand for gold.
    The last time Chidambaram was finance minister, in
2004-2008, growth was motoring at a near-double-digit clip: he
used to call himself a "lucky finance minister" because of the
neat timing. But fortune has hardly been on his side since
returning to the job last year.
    Aides say he has come under huge stress in recent weeks, but
in public he has kept his cool, not surprising for the
Harvard-educated lawyer who sharply told an interviewer earlier
this year: "When did self-confidence become a vice?"
    Financial markets have long had just as much faith in the
smooth-talking politician as he has in himself. They remember
his pro-business 'dream budget' of 1997 that brought taxes down,
and when he returned to the finance ministry last year investors
were thrilled, anticipating a new push for economic reform to
end years of policy drift and an economic slowdown.
    A short burst of reforms, including the opening up of
retailing and aviation to foreign investors, followed.
Chidambaram also succeeded in bringing down the fiscal deficit
to 4.9 percent of GDP in fiscal 2012/13 from 5.8 percent,
helping avert a sovereign credit rating downgrade.
    However, the reform drive soon lost momentum, in part
because of the main opposition party's recalcitrance in
    But resistance within Chidambaram's Congress party was as
much to blame.
    Two senior ministers leaned on Prime Minister Manmohan Singh
earlier this year to reverse a decision allowing 100 percent
foreign direct investment in domestic pharmaceutical companies,
a finance ministry source said. But Chidambaram pushed back,
saying that if they had objections they should take them to the
cabinet rather than surreptitiously lobbying the prime minister.
    At a meeting in July, three ministers got together to push
through extra funding for roads in the far-flung northeast and
Jammu and Kashmir state, overriding cost concerns raised by the
finance ministry.
    And last month, Chidambaram wanted his colleagues to stick
to the original version of the food security bill under which 18
out of 29 states would get less wheat and rice than allotted to
them under an existing public distribution system because of a
drop in the number of poor there.
    But other members of the cabinet resisted him, warning that
the opposition could block the landmark bill - which guarantees
810 million Indians grain at a fraction of market prices - when
it got to parliament. Their argument carried the day, at an
additional cost of 50 billion rupees a year.
    "There is no point fighting it beyond a point," said a
finance ministry official, recalling the wrangling over the
legislation. "What we have said is that it's fine: you do this
because that is the demand of the constituents, but you will
have to cut somewhere."
    Many in the left-leaning Congress led by Sonia Gandhi
believe that the fruits of India's fast growth since it
unshackled the economy from the grip of the state in the early
1990s were not shared with the country's millions of poor, and
that electoral success lies in more distribution.
    Critics say the problem is that a new group of aggressive
second-rung leaders in the Congress party, pushing for
'inclusive growth', are setting out new principles of economic
policymaking, creating further dissonance within government.
    "Individual ministers and ministries are all running on
their own. Nobody is looking at the national interest," said
former Home Secretary G.K. Pillai, who served with Chidambaram
when he was brought in to fix homeland security after the 2008
attack by militants on the city of Mumbai.
    "Everyone has his own view, which is why you have different
interpretations of cabinet decisions. The lack of leadership is
    The criticism may seem odd. Prime Minister Singh took bold
steps in 1991 as then finance minister to set India on a high
growth path after a balance of payments crisis, earning himself
a place in history as the architect of India's emergence as a
global economic power.
    Now, he is routinely derided by the opposition and media for
the policy drift of recent years. The 80-year-old broke his
silence on Friday after weeks of market turmoil, telling
parliament that whatever critics might say he still enjoys wide
respect around the globe.
    But when it comes to dealing with the currency crisis,
markets will be hanging on every word of Chidambaram, not the
prime minister. Congress party insiders say the finance minister
plays a dominant role in cabinet meetings, often calling the
shots even as the prime minister sits by.
    The stakes are high for Chidambaram himself, who has been
talked about as a potential successor to Singh if his party wins
the election and Rahul Gandhi, the heir to the Nehru-Gandhi
dynasty's mantle, insists on a behind-the-scenes party role for
himself - like his mother, Sonia.
    The baby-faced Chidambaram, who is from a wealthy business
community in the southern state of Tamil Nadu, has a reputation
for intellectual prowess, but also for arrogance that has made
him enemies within his own party and on occasion alienated
public opinion.
    Political constraints ahead of the election have so far made
potentially unpopular policy steps difficult to take, but if
Chidambaram is indeed eyeing the premiership he may be reluctant
to press for them himself.
    Sanjaya Baru, a former media adviser to the prime minister,
wrote in the Indian Express newspaper that the political climate
has made Chidambaram less enterprising than he was in his first
stint as finance minister in the 1990s and less confident than
he was in the second.
    "Now placed firmly in a potential line of succession to the
top and with his hands constrained by the party's need to
prevent any political mishap before an election, P. Chidambaram
Mark-3 has proved to be more risk-averse," he said.

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