Hopelessly hopeful

There is an impression that once Pranab Mukherjee moves from the most spacious room in North Block to the even more spacious Rashtrapati Bhavan, there will be a sudden flurry of so-called economic-reform initiatives that were being held back because of the Bengali babu’s adherence to the Congress Party’s past socialist rhetoric.

This is, however, a rather naïve perception of the impending reality. There is indeed a section within the Indian corporate sector that is keen to see the back of the current finance minister. But the President-to-be is far from a die-hard socialist. If anything, he has always been a conservative and cautious centrist who has preferred to walk the tightrope between the Left and the Right factions in the Congress Party.
Thus, those who may be expecting the “second generation” of economic reforms to be expeditiously initiated under the new finance minister (who could well be the Prime Minister himself) may well be disappointed. Corporate captains and their loyalists who hold forth on the pages of pink dailies or espouse their views on television channels that have ticker tapes perpetually rolling at the bottom of the screen could be expecting more than what will actually happen. These are the same individuals who were expecting the Reserve Bank of India to pare interest rates on Monday, June 18, and were, consequently, deeply disappointed when Mint Street failed to oblige, throwing the stock markets into a state of sulk.
Just as it was unrealistic to expect the country’s Central bank and apex monetary authority to cut interest rates at this juncture, when double-digit inflation seems to have become the norm and not the exception, it is equally foolhardy to think that with Mr Mukherjee’s elevation as the country’s First Citizen, the UPA-2 government will be able to implement economic policy changes that have been hanging fire because of the absence of political consensus. These include allowing foreign direct investment (FDI) in multi-brand retail, allowing private players (including foreign firms) to enter India’s pension sector and increasing the FDI cap on insurance companies.
What were the arguments cited in favour of an interest rate? It had been contended that high interest rates had not been able to control inflationary expectations. Instead, it was argued, the high rates had effectively throttled investments. But RBI governor D. Subbarao countered this perception.
“Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures,” the RBI stated, adding, “Notwithstanding the moderation in core inflation, the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation expectations… It is relevant to assess as to what extent high interest rates are affecting economic growth. Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.” To many, the RBI cocked a snook at the finance minister.
There are some who sincerely believe that Mr Mukherjee is a relic of the socialist past of the Congress and that he reverted to the licence-control raj in his March 16 Union Budget by, among other things, deciding to levy capital tax with retrospective effective with Vodafone in mind, curb the flow of foreign investments through tax havens like Mauritius and Singapore and also implement the internationally-accepted General Anti-Avoidance Rules (GAAR) on taxes. Such individuals expect that these moves will now be reversed. But this may not happen.
The finance ministry has already acknowledged that the “burden of proof” will not be weighed against the assessee in favour of the tax authorities as far as following the GAAR is concerned. Whereas the Central Board of Direct Taxes may place in cold storage its fresh demand for capital gains tax from Vodafone, the “clarificatory amendment” to the Income Tax Act with effect from 1962, the year the law came into force, is unlikely to be reversed, thereby making it difficult for Vodafone-like offshore transactions to take place in tax havens in the future. Moreover, whoever replaces Mr Mukherjee or assumes his responsibilities as finance minister (including the PM) will not be able to justify the continuance of the current situation in which over half the foreign investments that enter India come through two small nation-states, Mauritius and Singapore.
The problems associated with adopting the Pension Fund Regulatory and Development Authority Bill, which will open this sector to private and foreign investment, and increasing the FDI cap on insurance firms have little to do with the Congress receiving the support of the Bharatiya Janata Party for such legislative changes. Nor is the opposition of the Left now a constraint on the government. As in the case of FDI in multi-brand retail, the real opposition is within the Congress itself. No new law has to be enacted to bring in the likes of Walmart to India. The move (to enforce an executive decision already taken by the Cabinet) has not proceeded smoothly because the “Left” within the Congress is not fully convinced that FDI in multi-brand retail will be good for the farmer as well as the consumer, as is claimed. They apprehend loss of jobs instead.
Pranab babu was never a Leftist. He follows a convenient middle-of-the-road ideology that means different things to different people at different points in time. But he understands realpolitik better than most in the Congress. He knows where there is political consensus, and when there is none. Manmohan Singh unlearnt his socialism after he advised Indira Gandhi during her garibi hatao days in the early 1970s. A decade down the line, as RBI governor, Dr Singh technically served “under” Mr Mukherjee who was the then finance minister. The roles got reversed from 2004 onwards.
It is difficult to believe that Mr Mukherjee was so “autonomous” that he did what he did as finance minister without the full knowledge, consent and approval of Dr Singh. Hence, contrary to expectations, his departure may not make that much of a difference to the overall trajectory of the government’s economic policies in the months ahead.