A tough call for UPA

A tough call for UPA

A disaster is looming large and nobody is talking about it; thanks to Advani-Modi row, match-fixing, Railgate and what not
 

Finance Minister P. Chidambaram, like all harassed finance ministers, always looks for a ‘fall guy’. His recent utterances suggest that it is RBI Governor D. Subbarao’s turn. Subbarao is firmly targeted on inflation—particularly consumer price inflation—and would not budge an inch by lowering policy rate until he sees result on the price front.

But prices have belied all hopes given periodically by government sources. After 2010, when inflation spun out of control, government spokesmen began assuring at every opportunity that the “worst is over”. Actually it was only the beginning. Perhaps to convince the RBI Governor, a stickler for monetary discipline, some tentative measures were taken to bring down WPI inflation under five per cent, but the retail inflation raged 9.39 per cent in May, with food inflation at a dizzy 10.65 per cent. In the mid-year policy statement last week, Subbarao was naturally not amused.

The government is also rattled by the rupee touching the astronomical dollar exchange rate of 60 as it did last week. It would do anything within its power to take it back to Rs 52-53 or less, a rate at which it can at least import oil, coal and liquefied natural gas to keep the wheel of industry spinning. Chidambaram has tried to put a brake on the rupee exchange rate by raising import duty on gold from 6 per cent to 8. But Indians are still hoarding gold not because they’re mad about the yellow metal, but since they’ve little faith in their own currency. If the FD rates offered by banks were enough to hedge inflation, how could a financial swindle like Saradha chit fund unfold in eastern India? And if the country has little faith in its currency, how will its industrialists remain unruffled? It is expected, therefore, that they’re desisting from committing new investments on a scale worth mentioning. Chidambaram says there is “no need to panic” over rupee falling, but there is actually very little that he or RBI can do over it in the short term. With foreign reserve at a modest US $299 billion, there is not much wiggle room left for him to enhance dollar supply. India's import-export gap is now pegged at $22 billion a month and with the falling rupee it will touch $25 billion. It the rupee fall continues and import-export stays where it is, the reserves will fall to $250 billion by December import-export gap will also of the like amount. To top it all, the Manmohan Singh government has been unable to curtail wasteful government expenditure. If the revenue generation is higher so is the expenditure. The government has failed to generate enough confidence amongst the foreign investors to set up shop here.

For example, it has cleared FDI in retail but it lacks the authority to make the states relax the local laws so that producers are enabled to sell their ware directly to retailers—an essential precondition for global retailing. On the other hand, populism has made it impossible for any serious investor to acquire land or even for public purposes unless 80 per cent of the land-losers sell their plots directly and willingly. On land and environmental issues over 250 infrastructure projects are gridlocked. The Cabinet Committee of Investment may keep clearing projects. But there is no visible change on the ground as no bureaucrat is willing to put his signature on any file in the election year. It took one year for the government to make Coal India Limited to guarantee coal supply to power and steel plants cleared years ago. That too after Pulok Chatterjee, Principal Secretary to the PM decided to buy the bullet.  Still no one is sure when these decisions will be implemented.

Even a high dose of government spending could brighten the gloomy investment climate, if only the Centre had the means to spend. At 67.59 per cent of GDP, India’s public debt is the highest among emerging economies. Besides, there is the rock of Gibraltar of an RBI Governor, who must see consumer prices falling first, and for a considerable period. That puts the government between a rock and a hard place, literally.

It is unlikely that RBI Governor will relent. India’s constitutional bodies have acquired a dynamics of their own, regardless of what the law says, and who is “whose” appointee. Though RBI Governor does not enjoy as much autonomy as CAG or the CEC, he has so far stood up boldly against attempts by the executive.

So, pre- or post-Subbarao, there is little chance of the Centre being able to force banks to lower interest rates without improving the economic environment. There is no likelihood of this improvement in sight.

For the election, 11 months make the wait too long. So many things can happen. A contraction of the US economy, for example, can create a tsunami of capital flight from emerging markets, notably from India, with its poor record of fiscal discipline. An ill-conceived though well timed plan like the Food Security Bill, if enacted and made operational, may not only more than double food subsidy—from present Rs 90,000 crore to Rs 210,000 crore—but create an unprecedented black market in grains worth Rs 22 a kg distributed at two rupees. The blackmarketeers can switch from gold to grain. The welfare baits may boomerang, with a fiscal deficit entirely out of control by May 2014. The depreciation of rupee, rising export-import gap and everything for free (education, grain, health, MANREGA & what not) for 70% of rising population, is recipe for disaster for the UPA.

With the risks of waiting till May 2014 so high, there is a school of thought in the UPA Establishment that election be held sometime in the autumn this year. This is a rational expectation unless Chidambaram can do a miracle.
(The author is National Editor of the Lokmat group in Delhi)