Indian Express, 8th August 2012
The UPA government has brought back P. Chidambaram as the finance minister. He is expected to be a hands-on, competent minister, one who would manage the economy and push reforms. But the problems with the Indian economy and the government's policies are much wider. It seems the finance minister is expected to play a much bigger role than just framing policies for the financial sector. This cannot be done without the wholehearted support of his party and government. Cutting fiscal deficits, reducing inflation, bringing back investor confidence, raising the investment and savings rate and putting India back on a high growth path will need much more than what lies within the finance minister's domain.
When the economic situation worsened - even before Pranab Mukherjee's retrograde tax proposals in the budget of 2012 - it seemed no one in the government was monitoring the investment slowdown. No one seemed to be in charge of solving the problems related to the functioning of various ministries that were damaging the business environment, and creating bottlenecks for investment and growth. Businessmen who met the finance minister were often disappointed with the lack of follow-up on their late-night meetings with him.
In addition, another important function of the ministry, as the champion of market-friendly reforms, was no longer being performed. Earlier, even when no fundamental reforms were taking place in other spheres of the economy, a dedicated team at the finance ministry kept pushing India's financial sector towards liberalisation and globalisation. This stream of initiatives, both on solving obstacles to investment, and in liberalising financial markets, played an important role in keeping optimism about India high. Even after the world economy and financial markets plunged into disarray after the global financial crisis, the finance ministry's initiatives helped prevent a bigger crisis in India. But the slow reversal to the old philosophy of socialism and control in the ministry of finance under Pranab Mukherjee undermined the confidence that the government was committed to making India a liberal and open-market economy. The tax proposals in the Union budget of this year provoked even the most loyal to protest.
From the 1950s to the 1980s, India was pushed down from a high-potential developing country into growing at 3.5 per cent. Regardless of where a minister of finance stood on competence or ideology, the only dimension in which he was judged was the political one. Did he comply with the political goals of the top leadership? Nothing else was expected from him.
While growth accelerated soon after the Janata Party took power in 1977, the turning point for the ministry of finance came in 1991, when Manmohan Singh was appointed finance minister. For the first time in India's history, a qualified technical team was built in the ministry of finance. This team had continuity in later years, as Chidambaram, Yashwant Sinha and Jaswant Singh held the portfolio. There was a certain professionalism about the finance ministry that inspired confidence among domestic and international investors.
All across the emerging markets, once a country rises into middle income, and connects with financial globalisation, the demands on economic policy capability go up. A new kind of technical competence is required in thinking about fiscal, financial and monetary policy. Through the 1990s and the 2000s, the ministry of finance was an oasis when compared with the socialism, incompetence and corruption that prevailed in conventional departments of government. The continuity of ideas and individuals, across elections and across new ministers of finance, was an impressive sign of maturing institutional capabilities in India.
After 2009, the finance ministry again became a conventional department of the Indian government. This was a disappointment for all those who thought that India was on a long-term, stable growth trajectory rooted in sound institutions. It suggested a new level of political risk for India: things were fine as long as the political system recruited the right finance minister, but one never knew when this would break down. Fundamentally, there had been no deep institutional change.
A slowdown in GDP growth and high inflation are not new for India. But this time certain things are different. India has more big private companies, and large financial markets. The slowdown in profits of large private companies, and the fall in stock markets, where people have lost wealth, mean the common people are as adversely affected as the rich and the powerful. It is not so easy for politicians to ignore them as it was in the many decades before liberalisation.
Finance Minister Chidambaram faces many challenges. The global recession and uncertainty in the world have been adversely impacting emerging economies. India's domestic issues, corruption scandals, entitlement programmes, difficulties of coalition politics and the indecisiveness of the political leadership have added to the problems of the Indian economy. At the same time, the skilled, experienced and competent team Chidambaram left MoF with has been largely disbanded. The economy is no longer at 10 per cent growth and 5 per cent inflation, but the other way around. Public and private investment growth has fallen sharply. The savings rate has fallen. The current account deficit has risen.
The government's failure in taking important policy decisions has played a key role in undermining the confidence in the economy. Bringing back business confidence, raising animal spirits and restoring faith in the India growth story is much more challenging now, than three years ago. Investors are wary of false promises from Delhi. They will wait for action before becoming optimistic again. The finance minister will need the full support of his party, the prime minister and the cabinet if he has to fulfil the expectations. Giving Chidambaram the responsibility of putting India back on a high-growth path is not enough, the Congress leadership now has to give him the necessary support to fulfil that task.