India: Will PM Press Ahead With His Economic Decisions? – Analysis

The three important economic decisions taken by the Government of Prime Minister Dr. Manmohan Singh on September 13 and 14, 2012, are not going to herald an economic miracle for tomorrow.

These decisions relate to a significant increase in the price of diesel and permitting foreign direct investment in the civil aviation and retail sectors. The decision on civil aviation was expected by the political class as whole, but that relating to the retail sector was not. The Government’s earlier attempt some months ago to permit FDI in the retail sector had to be given up due to strong opposition from some constituents of the ruling coalition as well as from the opposition BJP.

Despite the persisting slide-down in the economy, the Government of Dr. Manmohan Singh was avoiding taking these important decisions till now due to fears of adverse political consequences. Such adverse consequences might have been in the form of a break-up of the ruling coalition and consequent mid-term polls.

Another reason for the earlier hesitation of Dr. Manmohan Singh was the lack of enthusiasm for the proposal to permit FDI in the retail sector and to increase the diesel price from Shri A. K. Antony, the Defence Minister, who is perceived to be close to Mrs. Sonia Gandhi and enjoys her total political support despite his lack-lustre performance as the Defence Minister. The strong backing reportedly enjoyed by him from Mrs. Sonia Gandhi came in the way of the Prime Minister overruling him.

Shri Pranab Mukherjee, former Finance Minister, had little access to Mrs. Sonia Gandhi and did not enjoy her confidence. He was, therefore, not in a position to impart strength to Dr. Manmohn Singh in overcoming Shri Antony’s foot-dragging on important issues of economic reforms.

The induction of Sri P. Chidambaram, who is believed to enjoy the confidence of Mrs. Sonia Gandhi to the same extent as Shri Antony, has given new confidence to the Prime Minister that he might be able to push ahead with at least some of the economic reforms because Shri Chidambaram shares the Prime Minister’s views on the urgent need for some economic decisions, even if they be controversial, and his views will carry conviction to Mrs. Sonia Gandhi.

The immediate significance of the three economic decisions taken are more political than economic. Firstly, the negative drag that Shri Antony used to exercise with the backing of Mrs.Sonia Gandhi has now been neutralised by Shri Chidambaram.

Secondly, the Government and the Congress have realised that the impression of policy and governmental paralysis was not only adding to the negative drag on the economy, but was also creating a very poor image of the Government and the party in India and abroad. The “Washington Post’s” negative projection of a worse-than-Hamlet Prime Minister has given a healthy shake-up to the Government.

The Government can afford to ignore the negative assessment of the “Time” magazine which is often prejudiced against India. Moreover, “Time” does not enjoy the same attention and respect in international financial circles as the WP does. The WP’s assessment cannot be dismissed lightly as of no consequence.

Thirdly, as a result of the shake-up, the Government and the Congress decided to re-launch the stalling economic reforms even if there are negative political consequences. The Government has decided that the fear of a mid-term poll should not be allowed to stand in the way of important policy decisions relating to the economy.

Taking the important decisions is only the first step. Going ahead with their implementation despite the demand for a roll-back from coalition allies will be a more important second step. Even in the past, the Government had announced bold decisions, but subsequently abandoned or diluted them because of the threats and demands from the coalition partners. When there is a surge of such threats and demands, the Congress party tries to exercise pressure on the Government to roll back. When faced with mounting pressure from the party, Mrs. Sonia Gandhi had in the past shown a tendency to succumb to it. If she and her Party do it again and pressure the Government to roll back, the resulting loss of face for the Government and the Party could have incalculable consequences for the economy and for the political fortunes of the Congress.

There is a lot of unwarranted euphoria on the likely economic impact of the decisions, particularly those relating to the FDI. It will take at least five years or more for the beneficial economic impact to be felt. There is unlikely to be any poll dividends for the Congress as a result of these decisions.

These decisions are required to reverse the economic slide-down in the medium and long-terms. The Government should show a determination to implement them in the national interest even if the political consequences for the Congress may not be beneficial.