It's the economy stupid: Why UPA-3 can't be ruled out

The political economy signals are now becoming more favourable for a turnaround in Congress fortunes, and one cannot any more write off the possibility of a UPA-3 in 2014.

Luck more than policy pluck has played a part, and the two important signs we received this week validate the above statement: the growing hiatus between Nitish Kumar and the BJP can only benefit the Congress politically; the smoke signals on inflation are getting whiter.

Of the two, it is the economic signals that are material. After all, when people feel better about the economy, they tend not to want to upset existing political arrangements.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

Before we get to analysing the current situation, it is worth harking back to 2008-09 - another election year. We know the result: the Congress not only won, but obtained a huge improvement in mandate. That it squandered the mandate is another story, but there is no doubt it won handsomely.

The credit for that win is given to Manmohan Singh’s nuclear deal and Sonia Gandhi’s huge social spends - and the two together brought in both the urban vote and the rural vote.

[caption id=“attachment_703186” align=“alignleft” width=“380”] Slowing growth is a problem, but fiscal savings created by falling oil subsidies can now be used to spend on all kinds of social sector schemes - food security, right to healthcare, homesteads, whatever.[/caption]

But this is at best a half-truth. People didn’t vote Congress because one man staked his reputation on the nuclear deal, a deal which did not directly benefit anyone in particular.

What people actually voted for in 2009 was five years of high growth from 2003-08. The growth began in the last year of the NDA, and continued for four more years. The global financial crisis crashed growth in 2008-09, but this is where conventional wisdom deserts us. That crash was a nightmare for the west, but for the Congress it brought a bonanza. Here’s how:

In 2008, inflation was heading for 13 percent. The post-Lehman global turmoil brought all commodity prices down, and by next year Indian inflation was turning negative - just around the time people were about to cast their votes.

In 2009, everybody had fresh memories of five years of growth, which they credited the Congress with, and then there was good short-term news on inflation due to sheer luck on global commodity prices. As a net importer of oil, a global crash is always good for India’s external deficit and inflation in the short run.

Moreover, let’s not forget that first P Chidambaram, and then Pranab Mukherjee, unleashed tremendous fiscal stimuli (farm loan waivers, duty cuts, etc) that sent waves of good feeling in both urban and rural areas. That this benevolence was to create problems later in UPA-2 (high inflation, slowing growth) did not matter to politics in 2009.

In short, 2009 was won due to sheer economic luck and huge spending that the government could not afford. LK Advani got the blame for the BJP’s second successive defeat and Manmohan Singh for the unexpectedly huge Congress victory.

But it was really the economy, stupid.

Will 2014 be the same as 2009? No two elections are ever the same - not least because at least some factors are significantly already altered.

One, the BJP, under the new leadership of Rajnath Singh and Narendra Modi, is looking more like a fighting force.

Two, the Congress faces anti-incumbency, having ruled for 10 years. The sheer number of scams tumbling out of Manmohan Singh’s closet - we can’t blame anyone else for ultimate responsibility, since 2G, CWG, and Coalgate have happened under his watch - will make it tough for the Congress to pretend everything is hunky-dory.

Three, the economic mismanagement of the last five years has taken a toll, but as we head towards 2014, some of the signals are turning positive. The Wholesale Price Inflation for March, for example, has fallen below 6 percent. Gold, crude and global commodities are in decline - which is good news for an economy which just reported a current account deficit of 6.7 percent in the December 2012 quarter. If the trend continues, by election time the Congress can claim anti-inflation success and blame past failures on global events - as it does usually. The electorate does not know the difference anyway.

To be sure, the fall in inflation is largely the result of tumbling growth, which too is a Congress legacy, but this won’t matter if the Congress now inflates the economy with freebies and fresh social spending.

This is exactly what happened in 2008-09, and though the government has less money to throw around this time, there’s enough to make and song and dance of it.

Now, this is where the Congress can start changing the script in its favour. Here’s the scenario that could unfold.

#1: As growth tumbles, the government will force the Reserve Bank to cut rates faster. Remember, the present RBI Governor retires in September, well before the next elections. D Subbarao anyway will start cutting rates from May again, now the inflation is looking more benign.

#2: A few months before the elections, the Congress can unleash huge stocks of rice and wheat into the market, and artificially depress market prices of food items. It will also put money in bank accounts by transferring cooking gas subsidies before the election. That’s a promise of Rs 4,000 per household for nine subsidised cylinders.

#3: Slowing growth is a problem, but fiscal savings created by falling oil subsidies can now be used to spend on all kinds of social sector schemes - food security, right to healthcare, homesteads, whatever.

Not all of this will get Congress the kind of victory it got in 2009, but it could be enough to leave it at least in a UPA-1 kind of situation.

Failure to keep correcting the fiscal deficit will lead to problems after 2014, but if the idea is to win an election first, who cares about tomorrow. The Congress certainly didn’t bother about minor things like fiscal deficit in 2009.

Of course, nobody can predict the course of the economy or politics so far ahead, but one thing is clear: we cannot write off UPA-3.