Economy Jun 18, 2013
The completely pointless Union cabinet reshuffle yesterday (17 June) tells us three things: one, the Congress party has given up on its government; two, from now on politics will dictate policy and not economics (assuming the reverse was ever true of UPA); and, three, the role of P Chidambaram is not so much to push reforms as to keep up the illusion of forward movement alive so that the economy does not capsize in the run-up to the elections.
So when The Economic Times promises a "Ferrari" of reforms on the "slow road" to growth, it does not see any contradiction. A Ferrari is no better than an bullock-cart on the bumpy road to elections. When electoral logic comes smack in the way of reforms, it sets economics against politics.
To get back to where we started: the Congress party has come to the conclusion that the Manmohan Singh government has been damaged beyond repair and no amount of cabinet tinkering will change this perception. This is why the party inflicted a bunch of golden oldies and non-performers on the cabinet. Neither Sis Ram Ola (85), nor Mallikarjun Kharge (71), nor Girija Vyas (66), nor Oscar Fernandes (72) is there in government to improve its performance or refurbish its image.
The four cabinet ministers (three are new inductees, barring Kharge, who gets a promotion from labour to railways) have an average age of 73 - nearly thrice as high as the country's median age. They are all time-servers or party loyalists who needed to be rewarded or kept away from their home states to prevent them from causing trouble to the party in the run-up to 2014.
On the other hand, who got pulled out of government is more interesting: Ajay Makan and CP Joshi. Relative performers are gone from government. Both are fresher faces for the party and seen as spokespersons who can effectively counter the rising tide of Narendra Modi. This is, of course, the right move, but the Congress cannot then pretend that Modi does not bother them and yet realise that it needs better spokespersons to strengthen its political flanks - even at the cost of government.
Clearly, for the Congress governance is over, and the party's electoral prospects are supreme.
The second point is thus that economics no longer matters; reforms are secondary to political goals. The party's priority is the Food Security Bill - which could pass in some form because no party has the guts to oppose bad ideas in an election year. The Congress' political aims are simple: either get the bill passed or prove that it failed to pass because of the BJP. If its luck holds, the party will also try and pass the Land Acquisition Bill.
Between them, the Food and Land Bills constitute a scorched-earth policy for the Congress. If they lose, the winner inherits an economic mess that will scald it. If the Congress hangs on to power, the party would be happy to chug along - as it has for the last four years. It will hope for good luck to rescue it before the next election.
Together, the Food and Land Bills will leave an enduring legacy of a high-cost and increasingly uncompetitive economy. The Food Bill will embed inflation more permanently in the economy, while the Land Bill will make a key factor of production so expensive as to dent manufacturing competitiveness. It will slow down the growth of the most vibrant and vital sectors of the economy - infrastructure and construction.
One may ask: but isn't the wholesale price index falling? Yes, it is, but this is a sign of a slowing economy, not of inflation coming under control. The real signal on inflation comes from the rupee - which is below 58 to the dollar, and looking downwards. The markets are telling us that the rupee was (or is) overvalued - which is another way of saying that relative inflation is high. When you need more rupees to buy the dollar, it means in relative terms your inflation is higher. A weakening rupee means higher imported inflation.
That has one wondering: where does that leave Chidambaram and his "Ferrari" of reforms?
The fact is, Chidambaram is there to ensure only one thing: that the economy does not collapse before the government does, or before the elections.
The reason why Chidambaram claims the direct support of Sonia Gandhi for reforms is simple: she knows that as things stand, the economic fundamentals can only deteriorate, especially given her spending plans. She needs Chidambaram in the finance ministry to dazzle the markets with fancy footwork so that the markets rule high and the rupee's fall is kept to the minimum.
The only reason why Chidambaram got away with high budget cuts last year was because the deal is that this year - in the run-up to elections - the spending tap will be opened up like crazy.
The script is not quite working, for marketmen cannot be fooled all the time. In any case, the markets are currently dancing to Ben Bernanke's tunes. Its direction will be determined by whether the US Fed continues with its quantitative easing, or starts withdrawing the stimulus a bit at a time.
Of all the "reforms" attributed to Chidambaram and the UPA, only the diesel price increase - that too, only between election seasons - counts as some kind of reform. FDI in retail is stuck despite risking the government. Gold imports tell us that our people's confidence in the economy is low. And Chidambaram has been erecting barriers to gold imports - an anti-reform measure clearly.
The rest of the reforms are really about keeping the FIIs happy - lower withholding taxes, no GAAR, no close look at their Mauritius links. In short, they are intended to keep capital inflows high so that the rupee is propped up.
The initiative on direct cash transfers to subsidy beneficiaries is taking a back seat to the Food Bill precisely because it is a reform measure. If implemented well, direct cash transfers will knock out duplicate names and unintended beneficiaries. This is not something the Congress wants before an election. The Food Bill, for example, could have been focused on the really poor - but this does not help buy votes. With the use of the Aadhaar card, even the Food Bill could have been made more reasonable. But this would mean focusing on 20-30 percent of the population who are really deserving of food support, and not the 66 percent who will now get super-subsidised food.
Over the next few days, one should expect Chidambaram to announce a slew of reform measures to dazzle the markets and prevent a rupee crash, but one should not expect real implementation or forward movement.
Reform is not on the agenda anymore. Chidambaram, of all people, should know that. The Ferrari of reform is a car with a great front grill and an autorickshaw engine behind it.
More From R Jagannathan.