Cong, BJP and Third Front are in a lose-lose-lose game

The UPA government's decision to notify foreign direct investment in retail and aviation and stay the course on diesel and cooking gas is good for the country. However, is it good enough?

The answer is a clear no - for any reform will need at least two to three years to work, and the government does not have even half that time, and even that's pushing it a bit. All the so-called reforms announced so far are fleabites, and barely scratch the surface of the economy's deep wounds. The diesel hike will not save the oil companies from bankruptcy (they will still need nearly Rs 1,60,000 crore as government subsidies), nor will FDI in aviation make a difference to anybody but a few airline entrepreneurs,. As for FDI in retail, the benefits will take years to accrue.

This doesn't mean the decisions were wrong, but they are simply not going to work in the timeframe of popular expectations.

The problem is, of course, the politics. The UPA cannot count on the whole-hearted support of any of its remaining allies - whether it the Samajwadi Party (SP) or the Bahujan Samaj Party (BSP) or even the DMK - in the remaining year-and-a-half of tenure it has left, assuming there is no political accident cutting its life shorter.

Can they save the India growth story? Reuters

But allies are only problem No 2. Problem No 1 in the Congress party's own shortened timespan for fiscal rectitude. The government cannot count on its own party to back the hard decisions still needed to rescue the economy from financial disaster. By 28 February 2013, the Congress will be baying for giveaways to the electorate, thus undoing all the good that may be achieved by the Manmohan Singh-P Chidambaram duo this month and the next.

After the November Gujarat and Himachal elections, all bets are off.

As for the BJP - which is actually the party closest to the Congress in terms of economic philosophy - cooperation is almost impossible given the climate of political distrust and the skewed incentive structure for such cooperation even in the national interest. Barring a war with Pakistan, the Congress and the BJP simply cannot cooperate, even though that is what is required now.

A few pink papers and newspaper editorials have been busy pleading with the opposition parties to back the government's reforms, but this is simply nave and takes no note of the adversarial relationship between the Big Two of national politics. The argument used is that if the BJP does plan to come to power later, it will face the same problems, so it has an incentive to cooperate with the Congress.

No editorial commentator has bothered to ask himself or herself: why would the BJP cooperate when the benefits of such cooperation will go solely to the Congress? Backing the Congress on reforms like increasing diesel prices will mean courting unpopularity equally, but if the fiscal situation improves, the benefits will accrue solely to the Congress.

In other words, the Big Two can cooperate only if the ground rules on what can be claimed politically can be agreed in advance. For example, support can theoretically be given if the Congress does not use the money saved to woo the electorate in 2013-14. But can the Congress give such assurances? If the two parties are anyway going to slug it out in the next elections, how can they work together for the good of the country?

The interests of the Congress, BJP and regional parties are currently not aligned to the national interest.

Even from the Congress point of view, asking the BJP for support does not make sense - for it has built its entire case on the aam aadmi plank (which it cannot share with BJP), and the claim that it is more secular than thou. Working openly with the BJP will mean that the opposition space will be entirely taken up by the Left and regional parties, and both parties could lose in the process.

The only theoretical possibility for the two to work together is by both making sacrifices - the Congress will have to dump dynasty, and the BJP the Sangh Parivar, both improbable scenarios. The other way is to form a national government - which again will not be seen as realistic in the current scenario where the sense of crisis is far from acute in the electorate.

So the battle to save the economy will be purely that of the Congress, but the dice are loaded against it. The next few months are crucial for reducing the fiscal deficit, and pushing through some kind of reforms to improve the market and investor optics.

The reforms and fiscal consolidation (a euphemism for cutting subsidies) are intended to woo two constituencies: one is the dollar constituency, and the other the rupee one. The Congress has to woo the foreign investor, whose dollars are vital to keep the rupee stable, the markets buoyant and imported inflation (through oil prices) in check. The other is local business confidence, which will encourage India Inc to invest and allow the government to raise resources through disinvestment and sale of spectrum.

Bringing in dollars is vital to finance the current account deficit (CAD, which could be an unsustainable 3.5-4 percent this year), and selling public sector unit shares and spectrum will reduce the fiscal deficit (which could be an unsustainable 6-7 percent in 2012-13). Without addressing the two constituencies, India's sovereign rating could be reduced to junk status by Standard and Poor's, which will compound the twin deficits of current account and fiscal deficit.

The key to achieving some measure of control on the twin deficits depends on politics. How parties will behave in the next few months before we are fully into general election mode will depend on a rudimentary understanding of game theory rather than rational expectations.

The Congress will try and keep the SP and BSP in good humour, so that it can address the twin deficits for the next few months and hope there is some cash in the till to finance the costly food security bill and universal health insurance in the February budget.

But will SP and BSP play ball? If SP is assumed to want early elections (which need not be assumed), it will try to trip the UPA early on some populist cause or seek lots of funding for Uttar Pradesh as bribe money. But the Centre does not have the resources to give freebies to any one state without angering the rest. Mayawati surely would not want Mulayam Singh to benefit at her expense. So Mayawati will try to stymie Mulayam's quest.

On the other hand, Mayawati is not keen on an early election, and so has no reason to bring the UPA down. But surely she has some demands of her own? Will it be quotas in promotions, or something else? If the Congress bends on the former, Mulayam Singh could make it a cause clbre. Mulayam Singh will try and trip the Congress-BSP understanding.

But the UPA would still survive. However, the scenario could change after the Gujarat elections, when everyone will know how Narendra Modi has fared. The political pulse will quicken after that. And next year, the BJP will be trying to retain its governments in Madhya Pradesh and Chhattisgarh and try to wrest Rajasthan from the Congress - which will make the Congress again reluctant to push any kind of reforms beyond the next couple of months.

Taking all these factors into account, this is the politico-economic prognosis.

One, the economic reforms - especially fiscal consolidation required by cutting subsidies - will simply not be enough. The economy is headed for a further slowdown unless the Congress is willing to sacrifice its government for the economy's well-being. This is, of course, out of the question, since the Congress has been doing nothing but wrecking the economy for the last four years.

Two, assuming the global economy helps by pushing oil prices down and gives the government some breathing space, the money will be wasted. The extra savings on subsidies will be blown up elsewhere by the Congress in an election year. The next government will have to begin fiscal consolidation all over again - again in difficult political circumstances.

Three, since state governments will also be in a profligate mood this year and the next, the economy is headed for a right royal mess even after the reforms on Big Bang Friday and what's ahead over the next two months.

Four, whoever wins in 2014 will get a scorched earth - whether it is Congress, BJP, or a Third Front.

It's lose-lose-lose situation for all political fronts. The biggest casualty, of course, will the India Story.