Chidambaram's cleverness may not save economy

When it comes to glib talking, Finance Minister Chidambaram is no pushover. Suave and articulate, he is unfailingly unfazed in facing difficult questions about the performance and management of the economy, even if it faces difficulty. And it will be another truism to point out that he is a diehard neo-liberal. It is these twin qualities which make him such a trusted team member of the current mandarins of the economic establishment of the country. And it is on the strength of this credential that he was the chosen one for spearheading the charge for the recovery of the economy. But unlike what his past record would otherwise suggest, he appears uncharacteristically off- colour.

In the disturbing state of the Indian economy, the imperative of trying to unravel the Finance Minister's mood swing gains urgency. What is really putting him off? When he took over the reins of the finance ministry from the present incumbent of Rashtrapati Bhavan, the state of the economy was far from healthy as all major indicators of macro economy were showing clear signs of decline; GDP, industrial production, employment, inflation underlined a downhill journey.

On the eve of Pranab Mukherjee's exit, there was a skirmish over two major issues: recovery of a huge tax amount which Vodafone declined to pay on the count of capital gains tax. Buoyed by the Supreme Court order, Vodafone checkmated efforts of the taxman. Frustrated, Mukherjee proposed an amendment to General Anti-tax Avoidance Regulations (GARR) rules which would seemingly plug the loopholes which was exploited by the crack team of lawyers put together by Vodafone. This was blasphemous in a neo-liberal regime!

But this is not to suggest that Mukherjee was opposed to a neo-liberal paradigm. Mukherjee's circumspection earned him the ire of the more aggressive exponents of the establishment. Therefore, the rumour mills in the capital interpreted Mukherjee's anointment as titular head of the nation as an instance of 'being kicked upstairs'. With their exuberance, neo-liberal enthusiasts wanted to wish away the structural nature of the economy's plight. They contended that the bleak landscape was essentially Mukherjee's personal doing; Vodafone and amendment to GARR were cited as instances which shooed away investors.

Courting investment was sine qua non for helping Indian economy back to its health. And Chidambaram, in his second avatar as Finance Minister, committed himself with gusto to this past and continuing neo-liberal dogma. Since coming to power in 2004, the UPA has aggressively pursued a right-wing pro-market and pro-foreign investor agenda, slashing taxes for big business and pressing forward with public sector unit disinvestment.

At the same time, it has sharply increased the burdens on workers and the rural poor by repeatedly hiking the price of petrol, diesel and cooking gas. Last September, facing what it thought was an imminent threat of a credit rating downgrade, the Congress-led UPA introduced a package of "big bang reforms," including opening up of the multibrand retail sector to foreign giants like Wal-Mart and Carrefour. While international capital warmly applauded the "big bang reforms," their impact on financial markets and investment inflows proved short-lived. Therefore, Chidambaram's hopes, which were underlined in his last budget, stand clearly belied. He had calculated that by giving huge concessions in taxes foregone and sharply reducing direct taxes, while opening up lucrative sectors of the Indian market, he would be able to induce investment and that hot money flow would continue to finance the CAD (Current Account Deficit) as in the past.

What he failed to recognize, though, was that under financial liberalization inflows are not necessarily influenced by what economies on the periphery put on offer for cosmopolitan centres, but on what countries perceive as their own level of comfort.

And, more often than not, the tendency of these countries at the centre of global economy is to draw back within their comforting shell of home economy. So inherent in Chidambaram's strategy was the seed for provoking a bigger crisis on CAD front. India's CAD�which is the difference between imports and exports of goods and services and all monetary transactions, such as interest earned on investments and deposits, reached a record high of 4.8 per cent of GDP in the fiscal year ending March. CAD has increased because India's exports have been hard-hit by the world economic crisis, especially the recession in Europe. India imports 80 percent of its petroleum requirement, machinery and high-end consumer goods, while exporting IT services, jewellery, textiles and iron ore.

Attracting the foreign currency�mainly dollars�needed to finance the CAD has become a preoccupation of the Indian elite. In a desperate attempt to attract foreign funds, the UPA government has undertaken several reckless measures, such as dismantling regulations which restricted the inflow of "hot money," i.e. short-term speculative funds that can be pulled out as easily as they enter. Even the RBI, in its latest semi-annual "Financial Stability" report, expressed unease over both the size of the inflows needed to bridge the CAD and India's increasing dependence on such "hot money". "In addition to the magnitude of flows needed to finance the CAD, the composition of flows, particularly dependence on portfolio and short-term debt flows, represent an added source of concern."

The concern is now accentuated by the sharp depreciation of the rupee. Since April it has depreciated to the tune of 10%. Despite the brave face it is putting up for public consumption, within the government there are increasing fears that the rupee's plummet could cascade into a current account crisis.

In May, a commentator in the Business Standard, noting that India's current account deficit is now the highest it has been since 1991, said that if Prime Minister Manmohan Singh "left office tomorrow, he might be remembered less for his response to the crisis of 1991 than causing the crisis of 2013."

Acting with alacrity, Chidambaram and the government have decided to open up telecom, defense and insurance sectors. But given the recent experience this also does not appear to be producing desired results. Therefore, there are no signs of the challenge of CAD relenting. Coupled with sharp depreciation of the rupee, the apprehension of intensifying inflation putting the common man to further discomfort is real. After all, with his dogma, Chidambaram is clearly proving to be too smart by half.