So the rupee's crashed, the markets have wilted, bonds are down, and gold is back as an investment class - at least back home. But no one is willing to name the elephant in the room that's caused all this ruin.
Everybody is keen to mention the proximate causes for the collapse of confidence in the Indian economy - the panic measures announced by Manmohan Singh, P Chidambaram and RBI Governor D Subbarao, among them - but not the real reason for it all: Sonianomics and the resultant Rahul-flation (inflation fuelled by mindless government spending that boost inflation).
Confidence in an economy does not collapse due to bad economics alone; it is usually the result of wrong choices made by politicians over a prolonged period of time. A combo of disastrous political economy choices is the reason why India is staring down an abyss and the root cause is Sonia Gandhi. It is not the PM or the FM, for everyone knows they are not their own masters. The only thing one can blame them for is doing things they don't really believe in.
Yesterday's twin crashes of the rupee and the markets were the result of the market's final realisation that Sonianomics will dominate economic thinking over the next nine months before the next government is born. No sensible investor will wait till then to figure out whether we are going to get a bonny baby or Quasimodo after this incubation of political suspense. Foreign investors can head for the exits, but Indians can show their displeasure only by buying gold. That's why gold breached Rs 31,000 per 10 gm, when it is ruling weak all over the world.
Let's be clear about what Sonianomics is all about and what it is not. Sonianomics is not about the poor. It is about the non-poor and the not-so-poor. It is not about inclusiveness, as I will prove later. It is not even anti-reform. It is merely about keeping the family in power and buying sufficient votes by using taxpayers resources for it.
The rupee is heading south because everyone now knows this. What is good for Sonia is bad for the economy.
Here's how Sonianomics has been driving bad economics all through and hence dangerous for the Indian economy.
Let's start with the rupee and the present. Is the crash of the currency bad for an economy that has been running a high current account deficit for several years running? Not at all. A weak rupee allows the Indian economy to adjust fiscally and become competitive again. As TN Ninan points out in his incisive column in Business Standard today, in both the times when the rupee was seriously devalued in history (1966 and 1991), the economy roared back and corrected itself.
Sonianomics is about not allowing this correction to happen naturally.
Ninan writes: "In the 15 years to 1965-66, Indian exports had grown by a modest 20 percent, while imports (despite being artificially compressed through controls) had shot up by 131.3 percent. Balanced trade flows in 1950-51 had given way to a massive trade deficit. After the devaluation, the story changed direction. Exports rose faster than before, while imports actually shrank. By 1970-71, therefore, the trade deficit had collapsed to barely a tenth of what it had been just five years earlier."
The 1991 story is better. Ninan writes: "Better known is the history of the devaluation of the early 1990s: from Rs 19.64 to the dollar in March 1991 to Rs 31.23 a year later (a drop of 59 percent). The consequence was that, by 1993-94, the trade deficit had shrivelled to barely one-sixth of its size three years earlier. And the non-oil trade balance had moved from a deficit to a massive surplus."
If this is something that both Manmohan Singh and Chidambaram know, how is it that they are acting completely contrary to their economic instincts and trying to shore up the rupee through dubious means? The answer is Sonia Gandhi and her election time-table. What is good for the economy is not good for her in two ways: letting the rupee fall means higher oil prices and higher current account and fiscal deficits, which means an even lower rupee and higher inflation. And higher deficits will make her food security bill unviable and drive inflation again.
The need to get a mandate and place Rahul Gandhi in the PM's gaddi has only resulted in inflation - hence Rahul-flation.
Sonia Gandhi's band of drawing room supporters will use emotional blackmail to tell us otherwise. They will thus argue that when children are dying and growing stunted due to hunger and malnutrition, only callous people will talk about current account deficits, fiscal deficits, and the rupee.
They need to be disabused of the idea that Sonia Gandhi is all for the poor. In fact, all the political decisions of UPA-1 and UPA-2 indicate that her policies are about buying votes by offering freebies to the non-poor.
Hypothesis 1: Sonianomics is not about the poor. It's about wooing the non-poor
#1: The Food Security Bill is exhibit A. It seeks to cover 67 percent of the population when only 22 percent of the people are below the poverty line, according to the government's own calculations. By adding 45 percent of the non-poor to the 22 percent poor (who anyway get subsidised grain from the public distribution system even now), Sonia is effectively seeking to buy the votes of the non-poor. In fact, as Narendra Modi pointed out, by reducing the entitlements from 35 kg per household for below poverty line (BPL) cases to 25 kg, the scheme now moves from being pro-poor to pro-non-poor.
#2: By far the biggest element of vote buying over UPA-1 and UPA-2 has come through the fuel subsidies on diesel, petrol, kerosene and LPG. My back-of-the-envelope calculations show that during the last nine years, and going upto 2014, the UPA would have dished out more than Rs 7,50,000 crore in petroleum subsidies either directly or by subsidies routed through ONGC, Oil India and Gail. That's like a cash payment to every man, woman and child in India of over Rs 6,000 during UPA-1 and UPA-2. Even if we assume one third of the subsidies went to the poor, the rest of the subsidy - Rs 5,00,000 crore - was given to the non-poor. Still think Sonia Gandhi is about the poor? And we are not even talking about food and fertiliser subsidies to the non-poor.
Hypothesis 2: Sonianomics is not even about inclusiveness. If the poor benefit, it is incidental.
What we do know is that massive amounts of money have been spent through doles and transfers to rural areas during UPA-1 and UPA-1. This is why poverty has reduced from over 37 percent to 22 percent of the population during its tenure.
This might indicate, on the surface, that Sonia is pro-poor, but a closer look at the numbers show why this is likely to be wrong. The decline in poverty may be reversible.
#1: The first sign of inclusiveness is financial inclusion, about which everyone in UPA has been talking about. But despite massive cash transfers, farm loan waivers, and high minimum support prices (MSPs) for food procurement, what do we notice? The share of rural bank branches has fallen from 57 percent in 1994 and 50 percent during the NDA period in 2000 to just 37 percent in 2011. If so much money is going to the poor, shouldn't there be more banks to do this? Or is most of the money being siphoned off? Then you don't need banks.
Credit to the rural sector has just about doubled from 2006 (mid-point of UPA-1) to 2012, from Rs 1,99,423 crore to Rs 3,80,518 crore. Credit to urban and metropolitan areas has, meanwhile, tripled and quadrupled respectively.
Now, why would an inclusive government oversee the expansion of wealth and credit to urban areas during its years in power after talking about the rural areas and the poor? Clearly, the UPA's real focus is the non-poor. And most of the money intended for the rural poor may be going elsewhere.
#2: Next, look at jobs. If the truest measure of inclusiveness is enabling people to stand on their own feet rather than on crutches, the measure ought to be net job creation. Here the evidence is clearly that the UPA tenures created far less jobs than the NDA period. (Read here, and here, and here, and here). The UPA reduced rural poverty with doles and make-work schemes, which are clearly not sustainable indefinitely, and certainly when the economy is doing so badly.
The poverty ratio has been brought down by spending Rs 7,50,000 crore on fuel subsidies mostly to the non-poor, which ultimately trickles down to the poor as well; Rs 2,00,000 crore of NREGA money; Rs 72,000 crore of farm loan waivers; huge increases in MSPs during 2008 and later; and massive doses of fertiliser and food subsidies.
The UPA is bringing down poverty by continuously feeding a man his daily fish, not by teaching him to fish. This is simply unsustainable - as the crash of the economy right now is proving.
The UPA is clearly not about inclusiveness; it is about feudal doles.
Hypothesis 3: Sonia is not pro- or anti-reform. She is for reform only if it fetches votes, not otherwise.
#1: Only one bit of evidence is needed to prove this. In 2012, the Congress party enthusiastically embraced subsidy reforms in the form of direct cash transfers to the poor. This is why Chidambaram and Jairam Ramesh even coined the slogan "Aapka paisa, aapke haath" in a joint press conference.
However, direct cash transfers using UID numbers carry an inherent political risk: if it weeds out potential beneficiaries, it will also bring voter angst.
This is why the scheme is being soft-pedalled and Sonia has opted for the Food Security Bill that will cover the non-poor. Wooing the voters means not differentiating between the poor and non-poor.
#2: The 2G and Coalgate scams - one by the DMK's A Raja and the other under the sleepy eyes of Manmohan Singh himself - are further indicative of Sonia not being pro- or anti-reform. She is motivated purely by her political interests, You can see the gifting of spectrum and coal blocks as pro- or anti-reform, depending on whether you are for growth or against growth. However, not having a proper process to give these things away free is indicative of a feudal mindset - where concessions are given for political reasons and not economic ones. Neither of these scams could have happened without Sonia knowing about it. Her political secretary Ahmed Patel is not so dumb as to not have briefed her about it. So how can she avoid blame for it?
Put all these factors together, and you should know why Sonianomics is not about the poor, why it is not about inclusiveness, and why it is only about electoral math.
The rupee is falling because everyone now knows this. The penny has dropped with investors; which is why the markets crashed on Friday.
In the short run, thus, Sonianomics is bad for India.
Updated Date: Dec 20, 2014 21:44:01 IST