Why Congress should ditch desperate populism before 2014 elections

Having been smashed in the recent state elections, how will the Congress try to recover ground before the general election in May 2014?

Fixers within the party may argue for new populist giveaways. Why not have another farm loan waiver, of the sort that helped win the 2009 election? Why not steal some ideas used already by chief ministers, such as free pilgrimages for people of all religions? What about free medicines? Or free energy-efficient CFL bulbs, in the name of green inclusiveness? Even better, why not offer free gold mangalsutras for all couples getting married?

Some fixers will argue that such small sops will not be enough. They may point to Tamil Nadu’s scheme of giving 20 kg of rice free for poor families. Why not adopt this as a national programme? The Food Security Act has failed to become a votewinner because many states have offered cereals at lower rates than the Centre. Why not beat them in this race to the bottom?

There will of course be fiscal consequences. But you can fiddle with the budget figures to hide the real impact. For instance, actual payments for the spending spree can be postponed beyond March 31, shifting the fiscal consequences to the next financial year.

This will not fool economists or big foreign investors. But so what? Any fiscal problems that arise will be somebody else’s problem after the general election. Why not go for broke, and announce a raft of populist schemes with a flourish? After all, desperate situations warrant desperate measures.

However, Congressmen like Prime Minister Manmohan Singh and finance minister Palaniappan Chidambaram will oppose this tooth and nail. They will almost certainly win the argument because they will make sense in terms of sheer realpolitik, not just economic prudence.

A last-minute populist spree will probably bring in rather few votes. Ashok Gehlot, the Congress chief minister of Rajasthan, went on a populist spree in Rajasthan, yet lost resoundingly. He was a reasonably honest and good administrator. His main fault, say party colleagues, was that he left these populist measures so late that voters saw them as clumsy efforts to buy votes, not as a true concern for the people. The same argument would apply in spades to any attempt by Sonia Gandhi to buy votes at this late stage.

While the gains of a spending spree would be dubious, the risks would be huge. Chidambaram has reassured foreign investors time and again that he will hold the fiscal deficit at 4.8% of GDP. This helped tame the outflow of dollars in the August crisis. If he is now seen backtracking, he (and India) will lose credibility swiftly. Global rating agencies may well downgrade India’s credit rating to junk.

That will spur a huge outflow of dollars again. Many foreign investors are obliged by their own rules to invest only in investmentgrade securities, and will have to pull out if India’s rating falls below investment grade.

Any outflow of dollars will send the rupee crashing again. This will be inflationary—the price of all imported goods will go up. Now, high inflation is one of the biggest reasons for public anger against the Congress. Nothing can be worse for Congress election prospects if a spending spree induces another crash of the rupee and another bout of rising prices.

The rupee crisis last August was caused by indications that quantitative easing (money printing) by the US Fed would soon taper and then end. That caused a flood of money to exit from all emerging markets in search of higher US interest rates. The Fed at the time held off from tapering, and the crisis ended. But the latest data show a clear US economic recovery with falling unemployment. So, the Fed will probably begin tapering this month itself, with additional tapering in the months up to May 2014. With every taper, US interest rates will rise, inducing a flow of dollars out of all emerging markets (including India) in search of higher US yields. This puts India in dangerous territory. It would be very rash to risk populist measures in such circumstances.

So, realpolitik suggests that a spending spree in India will be a very bad idea. Its cost-benefit ratio looks very adverse.

Instead, the best Congress strategy will be to accept defeat this time and prepare to win the next election, which could come as soon as 2015 or 2016. The next government could be a ramshackle coalition that makes a mess and collapses quickly. Waiting for that opportunity will be better strategy than desperate populism in the next few months.