High rates, low growth: Why 'reformer' Chidu is having to eat crow again

Economic crises do not wait for political timetables before deciding to come a-visiting. Of course, you can get good fortune without deserving one just before election-time (as the UPA did in 2008-09), but equally you may get bad luck that is undeserved (as the more reformist NDA did in 2004). Right now, though, the UPA is getting its entire nine years’ quota of well-deserved bad luck just before 2014.

It is entirely appropriate that this is happening during the watch of P Chidambaram. Reason: despite claiming to be a reformer (which I buy) he has been acting like a bad advocate for disastrous policies dictated by his boss’s political timetable. Chidambaram may believe that good politics delivers good economics, but if you leave out luck UPA has delivered none of the good economics he wants.

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What Chidambaram needs to know is this: in good times, good politics can sometimes deliver good economics, but in bad times it is good economics alone that lays the groundwork for medium-term good politics. Right now is the time for good economics, not bad politics.

The economy is delivering a well-deserved kick to the UPA at the wrong time precisely because Chidambaram, like his other boss (Manmohan Singh), is speaking with a forked tongue. He is a reformer in day-time, and a back-tracker at other times.

Consider what’s left of his credibility. After advocating lower interest rates, he has no option but to put up with the Reserve Bank’s efforts to raise short-term rates by tightening liquidity to shore up the rupee. This has had the nasty side-effect of pushing up bond yields all along the yield curve, making government borrowings costlier. Since his whole theory is that you need cheaper rates to revive growth - a flawed theory at best, since investors look at profitability, not rates, to take investment decisions - he can now junk the idea.

Now, we will have both higher interest rates and lower growth.

Soon after he took over, Chidambaram backed policies to lure foreign investment - both portfolio and direct - by offering higher equity stakes, lower taxes (deferment of GAAR, etc), and options to invest in high-yielding government debt.

Now, we have both long-term and short-term investors deserting in droves. Posco, Arcelor Mittal and even Warren Buffett - the longest of long-term investors - have left India. Walmart is still wiping its feet on the mat, but wondering if it should enter India or wait for the welcome mat to be dusted up and cleaned before entering. As for short-term investors in debt, they just fled in June.

Late last year, Chidambaram announced what sounded like a politically workable, and yet economically sensible, effort to shift subsidies to direct cash transfers. The UPA government even announced an accelerated plan to cover the whole of India with direct cash transfers by June-July 2013 on the assumption that it would be a vote-winner.

However, Chidambaram forgot two things: he wanted the scheme to save on subsidies, but Sonia Gandhi wanted it to make voters feel richer before the polls. But the system was completely ungeared for the scheme. Business Standard reports that barring cooking gas, all the other cash-for-subsidies schemes are “just plodding along because of systemic problems.” Sonia now knows that cash transfers are not going to deliver the votes in 2014.

Did Chidambaram not know this when he and Jairam Ramesh grandiosely announced their game-changer “Aapka paisa, aapke haath” slogan? His credibility has again gone for a toss.

Nothing, however, hurts Chidambaram’s credibility more than the food security bill. Even Amartya Sen now disclaims paternity of the Bill . But he has no stake beyond a reputation. Chidambaram’s career depends on it. His government is currently claiming that it has brought poverty down to 21.9 percent , but a few weeks ago he defended the food bill in no uncertain terms. It is common sense that just when poverty is coming down to 21.9 percent, you don’t need to cover three times that number with cheap rice, wheat and cereals that will bust the bank. Chidambaram has no explanation.

UPA-1 and UPA-2 demolished Manmohan Singh’s credentials as a reformer. We know he is only a fair-weather reformer.

The last days of UPA-2 will seriously dent, if not demolish, Chidambaram’s claims too. Reformers cannot claim the title on the basis of talk, and contradictory actions. Reformers have to walk the talk. Right now, Chidambaram’s walk is a zig-zag line between reform and non-reform.