Rupee at 68: Sorry Chidu, you are as responsible as Pranab

It is never a good idea to spit against the wind. And yet, P Chidambaram tries to do precisely that. He has been repeatedly telling us that the rupee is undervalued at a time when the global winds are blowing against us. He is being proved wrong on a daily basis.

On Wednesday (28 August), as the rupee breached 68 to the US dollar in the face of global uncertainties, including the building confrontation with Syria, Chidambaram was again quoted in the media as saying the rupee is undervalued. The fact is currencies have a price based on demand and supply. The only relevant value for any currency is the one you get when you want to buy or sell it.

[caption id=“attachment_106596” align=“alignright” width=“380”]  Is the economic whirlwind we are reaping today the result of the negative winds sowed by Pranab Mukherjee alone?[/caption]

And right now there are more sellers for the rupee and buyers for the dollar than Chidambaram would like. The rupee will correct when the sentiment reverses, and till that time Chidambaram must focus on doing what is right for the economy and not give daily opinions on the right price for the rupee. There is no correct price.

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_The Economic Times_ carries Chidambaram’s opinions not only on the rupee’s undervaluation, but who’s to blame for it all. His finger seems to be pointing in the direction of his predecessor, Pranab Mukherjee, admittedly a less credible reformer than Chidambaram himself.

Speaking to calm the markets on Tuesday when the rupee and stock indices were going down in flames, Chidambaram clearly admitted that our problems are partly homegrown. He said: “There are not just external factors, there are also domestic factors. We recognise that there are domestic factors.”

So far, so good. An admission that we did things wrong is the first step towards correcting them.

But what he said in the next sentence is reason enough to withhold the pat on the back. Chidambaram said: “One of the domestic factors is that we allowed the fiscal deficit to be breached and we allowed current account deficit (CAD) to swell because of certain decisions that we took during the period 2009 to 2011.”

Pardon? Is the economic whirlwind we are reaping today the result of the negative winds sowed by Pranab Mukherjee alone?

Absolutely not, and here are the facts.

The fiscal profligacy of the UPA began well before Mukherjee entered the picture. It started right under Chidambaram, when, in 2008, the Congress party announced huge increases in minimum support prices (MSPs) for foodgrain (whopping 30-75 percent increases), huge farm loan waivers (Rs 72,000 crore) and and large increases in pre-election NREGA spending.

As V Kumaraswamy wrote in Business Standard, “In just one year - 2008-09 - MSPs of most foodgrains have been increased by 30 percent to 75 percent. The steep increase in 2008-09 could only be the result of political arithmetic with ensuing elections. This genie is not the handiwork of market forces where either demand grows faster, leading to supply shortfalls, or cost inflation in key inputs (which) create price spirals: it is solely the by-product of administrative action.”

So while Mukherjee can be blamed for excessive fiscal stimulus and not tapering it quickly enough, the real rot started under Chidambaram. While Mukherjee can at least claim that he was trying to counter the post-Lehman decline in business confidence with his extended stimulus, it was Chidambaram’s unwarranted pre-Lehman stimulus that provided the backdrop for the inflation to come.

Chidambaram is to blame not only for starting the fire, but feeding it. Today, he is being seen as the man drawing red lines around the fiscal deficit and CAD, but who was the finance minister who actually started the whole business of breaching the Fiscal Responsibility and Budget Management Act (FRBM)? Chidambaram himself. And he did it not once but twice.

In 2004, in the first budget of UPA-1, Chidambaram said: “Under the FRBM Act, I am obliged to wipe out the revenue deficit by 2007-08. However, the NCMP (National Common Minimum Programme of UPA-1) has proposed that we do so by 2008-09. In my view, 2008-09 is a more credible terminal year; it will also coincide with the term of this government. Hence, I propose to move an amendment to this effect through the Finance Bill. I am committed to implementing the FRBM Act. The elimination of revenue deficit will open up fiscal space up to 3 percent of GDP for enhanced public investment without undermining fiscal prudence.”

Let’s assume that new governments need some leeway to make good on their promises to the electorate. But did Chidambaram keep his promise to parliament that he made in 2004 to eliminate the revenue deficit by 2008-09, the last year of UPA-1? (The revenue deficit is the budget deficit excluding capital receipts and expenses).

Not quite. This is what he said in his 2008-09 budget speech: “In the case of revenue deficit, I will meet the target of annual reduction of 0.5 percent. However, because of the conscious shift in expenditure in favour of health, education and the social sector, we may need one more year to eliminate the revenue deficit. In my view, this is an entirely acceptable deferment.”

Why is this “entirely acceptable deferment?” And entirely acceptable to whom? Sonia Gandhi or the nation?

Not only that, it is worth cutting some slack for Mukherjee, too. He deserves credit for at least bringing out the fiscal mess to public view when he decided that oil subsidies should not be hidden under the carpet. He made Chidambaram’s implicit, and hidden, oil subsidies, explicit. While Chidambaram understated his fiscal deficit by issuing government bonds as compensation for the losses made by the oil marketing companies, Mukherjee brought the subsidy directly to the budget. That’s how we knew how bad the situation was.

Coming back to the rupee, it is obvious that the country has a finance minister who understands what the real problems are. But he should not be pretending he did not contribute to the rot. That is the best way to lose credibility. If he has any doubt, he should ask Manmohan Singh, who is no longer seen as even a good economist, never mind his reformist credentials.

Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, wrote in The Times of India today in an article titled, Breakout to Breakdown Nation: “Prime Minister Manmohan Singh, an economist, has been consistently wrong on the economy. He has assumed strong investment and savings rates would keep growth above 8 percent, and dismissed inflation as the natural price of prosperity and crony capitalism as a normal symptom of early-stage growth, rather than recognising it as the cancer it is that leads to a backlash against wealth creation.”

If Chidambaram wants to retain his reputation and lose it like his boss, he should focus on what needs to be done, and not on who is responsible for the mess. He too is responsible for bringing on the crisis. He has to share the blame along with Mukherjee.