Chidambaram plays Sonia's Shikhandi, but it won't save Re

R Jagannathan
Firstpost.com

The term "Shikhandi" aptly describes the role being played by P Chidambaram in this UPA dispensation. In the Mahabharata, Arjuna fights Bhishma using Shikhandi as his shield in the full knowledge that Bhishma will not fight Shikhandi, who, in an earlier birth, was a woman. She was Princess Amba, who had vowed revenge against Bhishma for scorning her love, and was reborn as Shikhandi.
To protect itself against the charge that it is anti-reform and will do only things to damage the economy, the UPA has put Chidambaram in front to play Shikhandi and ward off attacks from the markets and rating agencies.
Unfortunately for the UPA, the market is not Bhishma. And Chidambaram has compromised himself so badly in the service of the UPA that the market does not believe him too much. Trying to pretend to be both reformer and social spender with the milk of human kindness inside him, Chidambaram is a split personality.
No less a person Jagdish Bhagwati caught Chidambaram out on this in the context of his clash with Amartya Sen over the food security bill. Chidambaram claimed he liked Bhagwati's growth focus and Sen’s compassion for the poor, but Bhagwati punctured him.  "Surprisingly, the Finance Minister, Mr Chidambaram, who is a brilliant man…has fallen victim to this fallacy. He is seduced by his (own) clever phrasing, saying that Bhagwati has a passion for growth whereas Sen has compassion for the poor. But that is precisely where he goes wrong and where we must focus to put Mr Sen in his place, which is certainly not on a pedestal. Since the 1960s, when I worked on poverty eradication in the Planning Commission when Mr Sen was hardly active in this cause, I was for growth,  not per se, but because I have compassion for the poor. Growth was a strategy; poverty eradication was the objective," Bhagwati wrote in Business Standard.
What Chidambaram said yesterday in parliament shows that all his resolute actions are really palliatives.
He began with a half-truth. "Last year, at this time, the foremost challenge to the Indian economy was the growing fiscal deficit." Is this so? The fiscal deficit has been deteriorating for more than four years now, so the problem did not date back to last year when he took over.
Then came more red herrings. "Since the world economy is challenged, India’s economy also faces challenges."
Is this so? Granted, the world isn't doing too well on growth, but India ought to have been an island of growth and attracting business. But what is really happening? Kumar Mangalam Birla wants to invest in the US, not much in India. Apollo Tyres wants to invest in Europe, not India. Cipla's boss Yusuf Hamied even went to the extent of saying earlier this year that "the time has now come for us to say goodbye to India."
If the world is in greater trouble, should Indian business be heading there or staying back for growth? This is what Kumar Birla had to say: "We are in 36 countries around the world. We haven't seen such uncertainty and lack of transparency in policy anywhere," he told Bloomberg TV earlier this year. The world economy may be challenged, but the Indian economy has been even more challenged, thanks to sheer economic mismanagement over several years.
In fact, in a rare moment of candour in an interview to Business Standard last week, Chidambaram indirectly admitted that the fault lay as much with his government. He said: "We have delayed taking decisions. We've paid a price for it.” Then why is he blaming the world for his troubles?
Next, consider what Chidambaram considers his crowning achievement of last year: containment of the fiscal deficit. He said: "In August 6, 2012, I made a statement on the path of fiscal consolidation that we intended to take…we promised to contain the fiscal deficit at 5.3 percent of GDP for 2012-13…Actual numbers are even better, and the fiscal deficit for 2012-13 stood at 4.9 percent."
But how did he achieve this? By stamping on productive spending, not unproductive subsidies, thus worsening the economic slowdown. And were even these numbers genuine? The final fiscal deficit figure was lower in part because Chidambaram rolled over oil subsidy payments of over Rs 45,000 crore due in 2012-13 to this year, thanks to the government's failure to adopt an accrual-based system of accounting. If he had done so, the deficit numbers would not have been so flattering.
Listen to what he thinks is his real achievement on the CAD front. He said in his speech yesterday: In 2011-12, while financing the CAD, we had to draw upon reserves to the extent of USD 12.8 billion. Last year, we had a larger CAD at USD 88.2 billion.  Nevertheless, we were able to fully and safely finance the CAD, and do even better. We added USD 3.8 billion to the reserves.  We contained the CAD at 4.8 percent of the GDP."
The subtext is simple: blame Pranab Mukherjee for the CAD, not me. As for his "achievement" of financing the CAD and even increasing reserves by USD 3.8 billion, this is laughable. These reserves are not really reserves, but money raised from borrowing abroad. Anyone can raise reserves by borrowing money. It’s like borrowing money from the bank and putting it in a fixed deposit at a lower interest rate. This money came in by liberalising external commercial borrowings, allowing foreigners to invest in Indian debt, and increasing interest rates for NRI deposits. The country's external debt is now topping USD 400 billion, against reserves of USD 277 billion (including gold), down nearly USD 15 billion since March 2013. The country's reserves are just about two-thirds of its debts abroad-not exactly a brilliant achievement. The real reason why the rupee has been crashing is the rapid exit of such hot money flows-invited by Chidambaram and his predecessor-after the US Fed indicated a gradual tapering down of its quantitative easing programme.
And then, consider how he plans to deal with the problem of CAD and bring it down to 3.7 percent of GDP this year. The steps announced include import compression (gold and silver – USD 4 billion), raising oil prices (USD 1.5 billion) and raising duties on certain non-essential goods. USD 5.5 billion in all.
This piddly saving is, of course, not enough, so how is he going to raise more dollars? USD 11 billion will come in by allowing public sector companies, including oil companies, to raise quasi-sovereign dollar bonds, and easing external commercial borrowings and liberalising NRI deposit schemes. Is the remedy for excessive foreign debt even more foreign debt?
Now, we come to the Shikhandi part. The real giveaway in Chidambaram’s statement was not only about CAD, but about his efforts to rein in the falling rupee. He said: "However, we believe that we have to do more to contain the CAD, to reduce volatility in the currency market and to stabilise the rupee."
Most free-market economists will question the wisdom of trying to target the rupee. In fact, by letting the rupee fall, exports have begun to revive and imports are starting to come down -which is the right way to bring down the CAD, naturally. In July, exports surged by nearly 12 percent and imports fell 6 percent- which is testimony to the fact that allowing the rupee to find its own level is good for the economy and the CAD.
So why does Chidambaram want to "stabilise the rupee" and where does he want the rupee to stabilise?
The answer can only be guessed. A sharp fall in the rupee does not suit the UPA precisely because it forces the government to raise oil prices or let the subsidies rip. The subsidies are going to rip anyway because of Sonia Gandhi's food security bill, and so Chidambaram does not want another item on the import menu to add to his woes.
He is playing Shikhandi to Sonia who wants to worsen the economic crisis for the sake of short-term electoral gains.
Chidambaram is merely trying to postpone the economy's day of reckoning by pretending to be reformist while really enabling Sonia Gandhi to play ducks and drakes with the budget. The writer is editor-in-chief, digital and publishing, Network18 Group