Prime Minister Manmohan Singh has become finance minister too. His first spell as finance minister (1991-96) was a heady period of economic reform, converting India from an international beggar into a potential superpower. Will his second spell as finance minister produce another courageous set of major reforms?
Not a chance. Singh has been pretty powerless for eight years as Prime Minister. That will not change one whit after he becomes finance minister, because all real power is wielded by Sonia Gandhi.
She is not much interested in economic reform- her emphasis has always been on welfare and subsidies. Her National Advisory Council has made sundry NGOs more important than the Prime Minister in deciding policy directions. She believes elections are won not by economic growth but by welfare schemes (like NREGA), giveaways (like the 2008 farm loan waiver) and job reservations. She thinks this strategy won her re-election in 2009, and finds little reason to change it.
She and her advisors-collectively called 10 Janpath-take all the key decisions. Singh can propose, but Sonia disposes. The Congress is a Gandhi fiefdom, so members carefully downplay Singh\’s importance. They see him as a mere transitional official, preparing the ground for Rahul, the Gandhi princeling, to sit on the throne.
Singh is happy to play this low-key role. Seen in this light, he is better called a regent than a Prime Minister. Those who don\’t understand this are unhappy with his lack of assertiveness as Prime Minister. But a non-assertive regent is exactly what Sonia wants. This explains why he has lasted so long.
Analysts ask, will Singh enact reforms aggressively, now that he is both Prime Minister and finance minister? Absolutely not. Insiders in the PMO will tell you that Singh has tried hard to push reforms in the last eight years, but has been persistently overruled by 10 Janpath. The problem has never been his lack of conviction or enthusiasm, but a lack of political power.
Things were very different when he was finance minister in 1991-96. Prime Minister Narasimha Rao personally chose Singh, a non-political bureaucrat, to be finance minister, and backed him whenever required. Rao also held the industry portfolio, and in this capacity he virtually abolished industrial licencing and monopolies clearance. These were the two most dramatic economic reforms of 1991, not Singh\’s devaluation or import duty cuts.
Rao was a liberalizer, albeit a cautious one who talked of the middle path. But Sonia is unenthusiastic about liberalization. That is the overwhelming reason why Singh was effective then, but not now.
The overall economic situation is different too. In 1991, India had run out of foreign exchange and had to mortgage its gold reserves. The Soviet Union, which inspired India\’s socialist planning, was collapsing, and so economic reforms looked imperative. Singh himself says that he had far more space for action when the country was in crisis in 1991, and lost that space when the economy improved.
Today there is no crisis. True, India\’s growth has decelerated to 6.5% from 8.4% in each of the two preceding years, but this remains among the highest growth rates in the world. Foreign exchange reserves are a healthy $ 280 billion.
Manufacturing growth has slowed dramatically and the rupee has crashed. This has hit some sections of the economy badly. Foreign investors are disgruntled at the lack of progress on foreign investment rules, and on retrospective taxation after the Vodafone affair. Yet both foreign direct investment and portfolio inflows have been substantial in 2012.
There are many problems, but no crisis. And in the absence of a crisis, politics always trumps economics.
Some minor reform is possible. Many chief ministers favour FDI in multibrand retail, so it might happen. But nothing major, like decontrolling urea or petroleum products, looks possible.
The Congress has taken a beating in elections in UP, Tamil Nadu, Bihar, Punjab and elsewhere. It has been thrashed in by-elections in Andhra Pradesh by a new regional party. It fears being toppled by unreliable allies before its term ends in 2014.
So, Sonia and 10 Janpath are focused on survival, not reform. Given the chance of an early election, they do not want to risk reforms that produce winners in the long run but alienate even a few losers in the short run, since elections are won and lost on swings of 1-2% of the popular vote. Doing nothing is seen as less risky than purposive reform.
So, the economic policy paralysis that critics castigate is no aberration: it is political policy. Singh\’s assumption of the finance portfolio will not change that.