The PC option

India's finance ministry is a den of vindictive incompetence. It needs a tough, unforgiving, sharp, no-nonsense & thick-skinned leader, and you'll find these features on Chidambaram's CV.

File photo of P. Chidambaram | Manvender Vashist | PTI

P. Chidambaram is not exactly the most widely acknowledged Mr Congeniality in our politics. The BJP, egged on by the RSS, now paranoid about the arm of Abhinav Bharat-type terror being traced back to its core, hates him. It has, in fact, been steadfast in not even letting him speak in Parliament. He has the honour of being at the top of Subramanian Swamy’s hit list. The UPA establishment’s civil society hates his guts. Nor is he so particularly loved in his party. Digvijaya Singh was straightforward enough to call him arrogant, in print. Others whisper similar adjectives: dry, clinical, too matter-of-fact, technocrat-ish, impatient, irreverent, lacking in tact and charm and so on. But you will not find anybody, not even his enemies, calling him incompetent, inefficient or even unintelligent.

Truth to tell, India’s finance ministry is now not a place for mere nice guys. It is a den of vindictive incompetence and lack of imagination as never before since 1991. It needs a tough, unforgiving, sharp, no-nonsense and thick-skinned leader. You will find these features on Chidambaram’s CV. He takes over the finance ministry in a situation pretty much similar to the one in which he was moved to home in 2008. The only difference being that the home ministry then was merely somnolent and incompetent. Finance today is worse.

It is also a den of conspiracies and extortion rackets: this paper’s Friday morning front-page expose of the Directorate of Revenue Intelligence snooping on the phone of the CBEC chairman’s sister is a chilling instance of just what kind of anarchy has taken root in the ministry. Sections of the tax department have turned into rogue cabals that answer to no one. This at a time when all virtuous statistics have been negative.

It is nobody’s case that Pranab Mukherjee was not up to the task. It is just that he was too stretched, saddled with dozens of EGoMs/GoMs, political management, even the West Bengal Congress and, lately, the campaign to first win his party’s nomination, and then the election to Rashtrapati Bhavan. But he did an important thing shortly before he plunged full-time into the campaign. He wrote a three-page note on April 18 to his key aides and Chidambaram might want it fished out. It was based on a particularly significant meeting on the state of the economy that he had had with a very worried prime minister the previous week and gave their assessment of the situation. It was so grave that if it had leaked it would have spooked the markets even further. It predicted the current account deficit rising to 4.8 per cent, net oil imports going to $115 billion (total imports of $191 billion) and presumed an average Indian crude price of $121per barrel. His assessment was also that gold and silver imports at $55 billion will remain pretty much constant ($57 billion for 2011-12). He had then listed a series of steps that needed to be taken urgently, from drastic expenditure cuts to FDI in retail. Of course, it remained just a note to his key officers as his focus soon shifted. In retrospect now, that assessment would look a bit alarmist, as oil and precious commodities have begun to moderate already. Even so, the economic challenge of 2012 is as big as that at the home ministry in 2008.

Further, unlike the economic crisis of 1991, the current mess has serious political implications. Despite its doctrinaire, unthinking rural” fixation, the Congress party now acknowledges the mortal threat of a furious middle class. The anger over the economic downturn radiates outwards and also spreads to villages and it is today as bad as it was over the seemingly impotent response to terrorism in 2008. That is why the party had no choice but to bring in Chidambaram, howsoever risky it was politically with a Parliament session about to begin and the cloud of 2G still looming. And that is why not being Mr Nice Guy is actually Chidambaram’s big advantage. He knows how to say no, and can afford to do so now. He also has a political/electoral agenda: to calm the middle class that viciously hates the same government it had elected so optimistically in 2009.

What does this middle class want? It would not just be obvious, pink-paper things like the retrospective taxation and GAAR issues, undoing the FDI knots, etc. The wage-earning and self-employed middle classes, and particularly those at the lowest end, have been reeling from the triple whammy of rising prices, increasing EMIs, falling rupee and petrol price increases. Sounds complicated? Think of a very low middle class Indian, like your driver, an army jawan, or a lower division clerk in your office. In the downturn of 2008, you exhorted him to buy, buy and buy to kick-start the economy. You incentivised him with really low interest rates and tax breaks. So he bought, say, a motorbike or even a tiny home. Then inflation returned and you responded with the only trick you know: 13 successive increases in interest rates.

The person who borrowed in December 2008 at 8 per cent is now repaying at 14. There is no point getting into an argument with almighty monetarists. They, of course, are geniuses and they know what is best always. But try explaining it to your driver who took a two-wheeler loan payable in 36 months and will continue repaying over twice as many and that is if you do not increase rates further. Rate increases to cut inflation is a good textbook idea. But why would you punish me for responding to your stimulus and borrowing in the past?

The same voter is then hit by food inflation and rise in the price of the fuel most relevant to him: petrol. If you want to see how bad politics combines with equally stupid economics to create a disaster, then examine your oil prices. Diesel is subsidised and petrol isn’t, on the presumption that the former is used by the poor farmer and the latter by the rich car owner. Look at a recent study in the petroleum ministry where a Nielsen survey turns this conventional logic on its head. As much as 71 per cent of petrol is consumed by two- and three-wheelers, the really lower middle class aam-aadmi types and only 26 per cent by car owners. On the other hand, only 19 per cent of our diesel is consumed by the farm sector. This means you and I can ride SUVs and run gensets in our homes powered by subsidised diesel while our drivers buy petrol at full price to come to work.

The mismanagement of India’s finances now is of the same scale as that of its political economy. The big, macro targets apart, four political targets now stare Chidambaram in the face: bring interest rates down by at least 200 basis points, inflation to 6 per cent, dollar to 50 rupees, growth back to the feel-good level of 7.5 per cent and Sensex to 19, 000 (the exact equivalent of Dow Jones at today’s levels since we must at least match global indices, if not do better like most emerging markets). This may still not fully retrieve your lost political ground for 2014, but it will bring some of the optimism back. We certainly do not need The Economist to remind us that India’s mood is waiting to be lifted.