 "UPA's confidence trick won't win over rupee, Sensex")
The rupee is not listening to Finance Minister P Chidambaram. Neither is the Sensex. The minister’s call for calm on ‘Bloody Friday’ has only led to further bleeding on ‘Ominous Monday’ as the currency hit a new record low and the Sensex tumbled the moment markets opened. The tanking economy must hurt Chidambaram. After all, his immense confidence in his own abilities has long been a subject of Lutyens Delhi folklore. He has spent the last few weeks firefighting, reaffirming the government’s commitment to reform, announcing measures to contain the rupee’s slide, but nothing seems to work.
The reality is this. The UPA government continues to be in office (despite its blundering ways) because it has the confidence of a majority in Parliament. Unfortunately for the UPA, the arithmetic of politics no longer matters to the drivers of the economy. The forces of the market have lost all confidence in the UPA. The UPA is in office, but it is unable to wield power over the mighty market.
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The rupee is not listening to Finance Minister P Chidambaram. Reuters[/caption]
Unlike confidence in Parliament, investor confidence is an intangible, impossible to capture in a simple statistic. Maybe that’s why the Finance Ministry, so adept at peddling statistics, is unable to grasp the intangible. Each time Finance Minister Chidambaram reiterates that the decline of the rupee is all because US Federal Reserve chairman Ben Bernanke ‘hinted’ at the withdrawal of monetary stimulus (QE3), he dents the already damaged confidence of investors. By not sufficiently acknowledging domestic factors, the government is perceived to be in denial. The effect of this on investors cannot be measured, yet is immeasurably high.
How does the government intend to shore up confidence when its legislative priority for the remainder of its term is the Food Security Bill, which will send the fiscal deficit out of control, the root cause of many of the imbalances the economy is suffering from? The negative signal from this single legislation is nullifying any positive measures that the government is announcing. Chidambaram can announce five ‘reformist’ measures today but the prospect of one retrograde Bill would cancel out the five. In the confidence game, the numbers don’t always add up.
For another, more credible, government, the capital controls measures announced by the RBI last week - however backward looking - may have worked to stem the slide. But for the UPA, they have only made things worse as they have been read, correctly, as a sign of panic. In the circumstances, they have weakened confidence further.
When the government becomes so distrusted, it is almost impossible for it to even pull off a confidence trick on investors. One year ago, the UPA did just that when it re-appointed P Chidambaram as Finance Minister. For a short while, the arrival of the once-reformist Chidambaram injected some belief into investors. They were effectively conned into believing that reform and change was around the corner. One year later, it is clear that the reformists don’t call the shots in the UPA.
The appointment of Raghuram Rajan as RBI Governor earlier this month was another attempted confidence trick on investors. But the talented Rajan cannot bring radical change while the political establishment is moribund. Markets know this. The trick won’t work because a successful con requires the confidence of the afflicted party. The forces of the market cannot be fooled repeatedly. Policy will now acquire credibility only once a new government has taken office. In that sense, we are back to 1991, when a Government with a fresh mandate enabled radical reform. It’s time for the UPA to seek a vote of confidence from the people of India.