The 'Singham' roars! Manmohan gets cracking on economy

Barely days after Prime Minister Manmohan Singh gave his bureaucrats a good talking-to on the compelling need to revive the “animal spirits” in the economy, he has taken the battle to the heart of the beast he needed to tame : the Congress party.

And with all the artistry of a circus trainer, Manmohan ‘Singham’ appears to have revived his own ‘animal spirits’ - and is reading the riot act to the party, which has for long dragged its feet and held back some of the urgent policy measures that the government needed to undertake to restore fiscal rectitude.

And the whip that the Prime Minister is wielding is the warning of a sovereign rating downgrade of India, which the rating agency Standard & Poor’s held out last month and which would reduce India to ‘junk’ status, with incalculable consequences for the economy.

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Business Standard reports, citing sources familiar with the proceedings, that Manmohan Singh did some “tough talking” at a recent meeting of the party’s core committee, specifically outlining for them the grim consequences of a rating downgrade - and the steps that needed to be taken to avert it.

Typically, Standard & Poor’s gives about 90 days’ notice of a sovereign rating downgrade, to give governments some leeway to undertake policy actions that can avert that eventuality. In India’s case, one month has flown by since S&P’s issued its warning, with nothing for the government to show beyond repeated iterations of its readiness to take the bold steps needed to restore growth and bring down deficits to manageable limits.

[caption id=“attachment_375583” align=“alignleft” width=“380”]  The PM sees Chidambaram as offering him the “biggest comfort” in government since both of them “instinctively think alike.” Reuters[/caption]

Singh evidently told his party leaders that unless corrective action is taken, and a rating downgrade is averted, India could witness a flight of capital as foreign investors - who are barred from investing in a country with ‘junk’ status - would be compelled to take their money and run.

One of those steps needed to rein in the fiscal deficit is the rather painful one of having to raise diesel prices to cut back on the subsidy, which is feeding distortions in end-use to perverse limits where, for instance, high-end diesel SUV owners are being subsidised by two-wheeler owners.

Singh’s response to the real risk of a rating downgrade is in sharp contrast to the dismissive exertions of the then Finance Minister Pranab Mukherjee, who "rejected" the S&P report - whatever that means; other Congress lackeys too weighed in to rubbish the report, particularly its observation that the power-imbalance between Manmohan Singh and Congress president Sonia Gandhi was at the heart of the policy paralysis that afflicted the government. ( More on that here .)

More insidiously, a whisper campaign was also initiated to paint S&P’s report as a “political hit-job”: this bizarre conspiracy theory held that the primary S&P credit analyst who authored the report, Joydeep Mukherji, is a relative of a BJP leader from Paschim Banga. And that the candid comments in the report about the dysfunctional nature of the relationship between Manmohan Singh and Sonia Gandhi point to the political nature of the report.

Other rating agencies and their analytical divisions too have in recent times weighed in ( here and here ) with their critical observations on the UPA government’s mismanagement of the economy. But at every stage,the Congress’ instinctive response was to shoot the messenger who came bearing bad tidings.

Far too many commentators, within the Congress and elsewhere, have pointed to the rating agencies’ many failures ahead of the 2008 financial crisis as proof of their fallibility and as reason to dismiss their warnings of a rating downgrade of India. This is an utterly self-defeating argument.

Yes, the rating agencies have much to account for about their having given AAA ratings to the worthless bit of derivative products that laid the foundation for the sub-prime housing crisis in the US, which when it blew up led to a financial meltdown on Wall Street and elsewhere.

It’s also true that rating agencies have since then found religion and have been too quick to pull the trigger on economies that have run up big deficits.

But to this day, institutional investors have perforce to abide by the ratings assigned by these agencies; it is their benchmark that determines whether FIIs can invest in India or not. As Manmohan Singh points out, there is a serious risk of flight of foreign investors’ capital in the event of a rating downgrade. That in itself may not be a bad thing, if we had developed and deepened our capital markets by channelling domestic investments more effectively. But in the absence of that, foreign institutional investors continue to exert disproportionate influence on our markets.

For now, at any rate, Manmohan Singh is right to put the fear of rating agencies into our babus and his feckless Congress party.

The questions then arise: How has Manmohan ‘Singham’ suddenly found his voice? How has he secured his ‘functional autonomy’ from Sonia Gandhi, when he was all along unwilling or unable to do the right thing?

As we had noted earlier ( here ), Manmohan Singh had a very small window of opportunity - of about six to eight weeks - to sort out the economic mess before the compulsions of politics and populist instincts take over the Congress again. It is the self-preservation instinct - of having to do the right thing out of compulsion even if not out of choice - that is driving Manmohan Singh to crack the whip.

There are also suggestions that he plans to enlist the services of P Chidambaram as Finance Minister - and, more importantly, to back him on all the unpopular decisions that are required to be taken. Business Standard reports, citing one of Manmohan Singh’s colleagues, that the Prime Minister sees Chidambaram as offering him the “biggest comfort” in government since both of them “instinctively think alike.” Perhaps Manmohan Singh is overstating things: his first preference for Finance Minister would have been Montek Singh Ahluwalia, but the latter is unacceptable to Sonia Gandhi, who wants a “political” leader in the Finance Ministry - someone who will be sensitive to her keenness to implement populist policies as well ahead of the general elections.

Manmohan Singh’s comments on the intellectual resonance he shares with Chidambaram stands in stark contrast to the wholesale breakdown of communication between Manmohan Singh and Pranab Mukherjee when the latter was Finance Minister. That breakdown may account for why Pranab Mukherjee was allowed to run his Ministry like a fiefdom, playing havoc with regressive taxation proposals that Manmohan Singh is desperately trying to roll back now.

Manmohan Singh may have conducted himself for far too long like an economic mouse . But today, for the moment at least, he appears to have found his voice. The roar that you hear resonate through the corridors of power is that of Manmohan ‘Singham’’.