Somewhat surprisingly, both in UPA-I and UPA-II, economic policies were left under the direction of the ultra-populist chairperson of the Congress party, Ms Sonia Gandhi. She was in political control, and, it seems, dictated economic policies as well. Else, how do you explain the bulge in wasted subsidies, large loan waivers, sharp increase in procurement prices for the voting farmers, and the sharpest increase, and five-year level, of inflation in India in the last 20 years Add to this the truly retrograde Budget 2012-13 and you have an economy, and policy, totally out of control.
Coincident to the day from when Mr Pranab Mukherjee was elevated to being President of India, things began to improve. The PM took over the finance ministry temporarily and when Mr Chidambarams name was being mentioned as possible FM, Mr Singh is rumoured to have said that Chidambaram and I have similar instincts towards reforms.
And things began to changefinally. While final approval still remained with Ms Gandhi, the political losses and the slowed economy meant that she had transferred the keys to economic policy from the anti-reform duo consisting of herself and Mr Mukherjee to the pro-reform duo of Mr Singh and Mr Chidambaram.
Consider the reaction to the blitz of reforms announced by UPA-II in the last one month. At each step, with each reform, the naysayers, the doubters, the pessimists, the BJP and CPM doubled up. These reactions were in three stages. The first was disbelief, the second was denial, and the third stage was disagreement. And disagreement against the very policies espoused, cultivated, and promoted by the BJP a decade earlier. Strange is a politician, stranger still are his consistent flip-flopsflip when you are in power, flop when you are in the opposition.
The first reform: after constant prodding, and much reflection by UPA-II of its navel, diesel prices were raised by R5 on September 12. This amounted to close to a large 30% reduction in the diesel subsidy. What did the experts say This was inflationary and would add close to 1 percentage point to the inflation rate.
But just yesterday we had argued that the diesel subsidy went to the middle class, so how will the poor get hurt by the removal of this subsidy Indeed, the poor will get helped by the diesel reform because the fiscal deficit will come down, and with it, possibly inflation.
But never mind. The next day, September 13, the opening up of the retail sector was announced. This was very clever on the part of UPA for the opposition was stumped, googlied, and bowled all at the same time. The diesel price increase, and all the consternation of the poor (who do not consume diesel) was forgotten, and the opposition said that the entry of multi-brand retail in India was a bad idea, would cost jobs, and other such blabber. Suddenly, talk of mid-term polls was in the air and the governments firm stand was the first indication that something had changed in the UPA. They were no longer stupid and/or pushoversthat baton had successfully been passed to the opposition.
As it happened, the government did not fall, but Mamata did. While she entered the history books as a street-fighter who still fought for streets well after the streets were paved and trees planted, the UPA economic team, now firmly and possibly for the first time led by the Prime Minister, entered the present and the future. The first two reforms were the absolute minimum necessary for the economy to emerge from the doldrums, but definitely not sufficient. So the naysayers had a field daytokenism, too little, too late, and the BJP thought it smelled blood and victory in equal proportions.
But the opposition was on a sticky, and losing, wicket. GAAR has been postponed and the retrospective tax proposals are now part of history. Just yesterday, the UPA could not muster courage to increase the cap on FDI in insurance (26-49%), nor could it conceive of the approval of the Pensions Bill, nor could it clear its throat on the Competition Act. All these need Parliament approval, but the hurdle was always much more within the Congress party, and that has been overcome. The realignment of urea prices has begun, just as is the case of diesel prices. No one today thinks that diesel and urea subsidies will increase; most think these subsidies will decline. That is reform.
And there is more. There is a National Investment Board, which might finally be able to cut down corruption, and wasted time waiting for Godot-type approvalsor as we say in India: apply, apply, no reply. There is believable talk of cash transfers replacing the plethora of subsidies meant for the poor. This is a double-whammy long overdue reform. The poor will get more, and the subsidy will be less. And if press reports are to be believed, the proposal is to have a zero per cent increase in the procurement price of wheat. If this happens, India will finally be on the road to a lower inflation rate. And if RBI cuts interest rates, as it should, then India will finally be on the road to an economic recovery. Indias potential GDP growth is above 8%; 2013 might just witness that destiny.
Meanwhile, the argumentative Indian remains such; actually, she is worse. She has a penchant for those old memorable phrasesdont confuse me with facts, my ideological mind was made up long before.
Surjit S Bhalla is chairman of Oxus Investments, an emerging market advisory firm. Please visit thirdpartyofindia.wordpress.com for an open forum on Indias politics