Crisis within a crisis; FM fights on two fronts

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 the economic emergency since he became finance minister for a third time 13 months ago.
Cabinet colleagues, wayward allies of the UPA 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 members of parliament (MPs) 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 story.

Authorities “still don’t get it”

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.

MPs were so busy bawling at each other over issues that might sway voters - a corruption scandal, the partition of Andhra Pradesh and communal violence - that over its first seven days the Lok Sabha spent just 12 minutes on legislative work and there were 11 sittings before a single bill was passed. While New Delhi appeared non-chalant at the economy's bind, investors were not: they fled. The rupee has tumbled more than 20 per cent 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 per cent into growth now struggling to reach 5 per cent. 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 US 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 billion.

Cabinet wrangling

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 per cent of GDP in fiscal 2012/13 from 5.8 per cent, 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 parliament.

But resistance within the Congress was as much to blame. 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 Rs 50 billion 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."

The stakes are high for Chidambaram himself, who 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.