Irrational exuberance comes naturally to markets and to cheerleaders. Towards the end of last week, when Pranab Mukherjee had barely packed his bags from the Finance Ministry to go canvassing votes for his Presidential election campaign, just the mere hint of a "rollback" of some of his regressive taxation policies was enough for commentators to gush about the "third coming of Manmohan Singh". With Manmohan Singh taking charge as Finance Minister and saying all the right things about what needed to be done, the narrative went, the economy would be retrieved from the doldrums. On Friday, the stock market index, a barometer of investor expectations, vroomed high on hope.
But hope, as was famously said on another occasion, is not a policy. If Manmohan Singh wanted to signal resolve in fixing the fundamental failings of the economy and overcoming political opposition to some long-delayed initiatives to address structural deformities, he may have already fallen at the first hurdle.
Witness what happened on Monday: within hours of unveiling a Negative List of services for imposition of service tax, the Finance Ministry, under pressure from the Trinamool Congress (which holds the Railways portfolio), issued a second notification exempting the Railways from service tax on AC-class passenger fares and freight charges for three months (until 30 September). The notification claimed that the exemption was bring provided "in the public interest".
The "rollback" represents the latest in a long line of instances of political capitulation by the UPA government to the whimsical demands of the Trinamool Congress. That found dramatic expression soon after the Railway budget earlier this year, when Mamata Banerjee arm-twisted Manmohan Singh to drop Dinesh Trivedi - for his having had the effrontery to raise rail passenger fares for the first time in nearly a decade.
Trivedi's successor as Railways Minister, Mukul Roy, had written to the Prime Minister on Friday indicating that the the railways would not abide by the new service tax regime from 1 July. Yet, the Finance Ministry's announcement of a Negative List earlier on Monday did not list the Railways as being exempt from service tax. That notification of exemption came hours later. It offered yet more proof, if proof was needed, that the TMC tail is effectively wagging the UPA dog.
The 12 per cent service tax on passenger fares (in AC classes and first class) would have resulted in a fare hike of a mere 3.6 per cent. But the Trinamool Congress reasons that the additional revenue from a service tax imposition would accrue not to the Railway Ministry but to the Finance Ministry; on the other hand, it is the Railway Ministry - and the (Trinamool Congress) Minister - who will bear the political burden of the fare hike. That's a trade-off that Mamata Banerjee was unwilling to make. And, as has been established, she was able to prevail upon the Manmohan Singh government to back off and swallow its pride.
And to think that after her recent failed exertions to spike Pranab Mukherjee's candidature for the presidency, Mamata Banerjee was believed to have been politically humbled, thereby earning a bit of elbow room for the Congress to implement economic policy without having her veto its every proposal!
This episode is merely symptomatic of a larger failing of the UPA government: for all its bluster about "biting the bullet" on the tough measures that need to be taken, it lacks the political will to see things through, and backs off at the faintest hint of opposition from its allies - or, on occasion, even within the Congress.
Manmohan Singh's challenge - in fixing the economy - is all the greater because it isn't even clear that he has the support of his party and his patron-in-chief Sonia Gandhi in undertaking the kind of policy initiatives that are needed to address the structural deficiencies, from the subsidy to the fiscal deficit to the current account deficit. And if you're constantly bracing for backstabbing, in the way that Manmohan Singh is, it's difficult to focus on the road ahead.
Manmohan Singh is already under pressure from the party to appoint a "political Finance Minister" - which is a code word for someone who can be populist to the point of being fiscally reckless. As this columnist observes, "What matters is building up voter goodwill for the next parliamentary elections. Thus Sonia Gandhi wants to spend the remainder of her political capital during the UPA-2’s final two years, through a finance minister with an obedience that is Pavlovian."
Which means that many of the "tough measures" that Manmohan Singh has flagged as critical to restoring the macro-fundamentals in the economy - taming subsidies by raising fuel and fertilizer prices, for instance - stand no earthly chance of being implemented. If a government cannot even raise AC train fares by 3 per cent without being tripped up by allies, the odds of it contemplating far more unpopular decisions like a diesel price hike are extremely low.
Markets and commentators who are expecting a dramatic revival of policy reforms are, in effect, setting themselves up for a huge disappointment.