Can Manmohan Singh Rebuild India's Economy?

After months of stumbling economic policy, the decision last week by Prime Minister Manmohan Singh to take over the finance ministry post himself is recognition that drastic reforms are necessary to right the economic ship.

The prime minister has long been praised as the architect of the country’s 1991 rejection of the so-called license raj and its move toward a relative free market economy, which caused the economy to go into overdrive.

Pushing the previous finance minister, the ineffective Pranab Mukherjee, to a likely role as the country’s figurehead president and bringing back Montek Singh Ahluwala and Chakravarthy Rangarajan, the co-architects of the 1991 reforms as his aides, is interpreted by the markets as a signal that realistic policies might be introduced again, but don’t count on it.

The government has long talked a good story but hasn’t walked it. India has watched from behind protectionist walls as a stampede of foreign investors contributed billions to China’s economic resurgence. Nothing tells India’s tale better than a May decision in which the government abandoned plans to increase the ceiling on foreign investment in the insurance sector from 26 percent to 49 percent, bending to domestic protectionists although the country needs the sophisticated risk management and deeper pockets for insurance companies that the locals can’t provide. Reform rhetoric is in good supply but as with the insurance sector, the government has lacked the courage to move forward.

Given investment constraints, many cash-rich domestic entities today find it more fruitful to invest their money overseas than within the country. The economy is in dire need of a boost. Changes are needed in sectors that span not just insurance but pension funds, retail, mining, excessive fuel subsidies and more. Infrastructure such as in roads, transport and power needs a major push. Government delivery of social services such as education and health continues to be very poor.

A day after taking charge as finance minister, Singh urged ministry officials to ‘revive the animal spirit in the country’s economy’ and ‘reverse the climate of pessimism.’ Is this more rhetoric, or is there going to be substance behind it? Singh, who turns 80 in September, has so far not been able to deliver, at least partly because he is hemmed in by intractable political allies.

Some of the policy paralysis is courtesy of difficult coalition partners such as the mercurial Mamata Banerjee who heads the Trinamul Congress. Due to rational, perhaps irrational or even narrow political gains, Banerjee has been Singh’s principal bete noir, shooting down every proposal of change, while stopping short of withdrawing support.

The Singh government thus finds itself in the peculiar position of neither being alive or dead. It has turned comatose. Singh had shown some resolve, including threatening to resign, while pushing the Indo-US nuclear deal in his first tenure as PM from 2004-2009. At that time the obstreperous left parties, on whose support the Congress government survived, were blamed for the lack of big ticket economic reforms to set up the next decade of growth.

But Singh took on the rabidly anti-American left on the nuclear issue and prevailed. He turned hero, especially in the eyes of the middle classes that played a big part in Congress retaining power in 2009. Unfortunately today, three years into his second tenure, Singh has not much achievement to show, even as the economy dips. The government is also under severe attack due to charges of corruption chiefly orchestrated by a former minister again belonging to another coalition partner.

Over the past couple of years Singh has been described as effete, weak and too timid to stand up to the likes of Mamata. Although his personal integrity and honesty have not been questioned, the overwhelming view is that inaction cannot be excused. All of this has played a part in the repeated defeat of the Congress party in the state level elections, including big states Uttar Pradesh, Punjab and more recently Andhra Pradesh.

These defeats have has stunted the political career of Rahul Gandhi, whose prospects as a future prime ministerial candidate have taken a beating, even as others such as Narender Modi and Nitish Kumar have been flexing their credentials in more than subtle ways in the recent past.

With the finance ministry now under his charge, the big question is whether Singh will be able to display some steel in doing what he has been good at – managing the economy.

Can he turn it around for the Congress party in 2014 when general elections are due in the country? In 1991, Singh’s reform moves were backed by then Prime Minister PV Narasimha Rao. With India on the verge of a debt trap, New Delhi was forced to implement macroeconomic reform measures and trade liberalization dictated by institutions such as the IMF.

Today, Singh needs the backing of the all-powerful Congress President Sonia Gandhi to manage the political side of matters. Over the years Gandhi has gained some political experience. It was on ample display when she deftly outmaneuvered Mamata by having her way in the appointment of Pranab as the Presidential candidate whose victory is almost certain now.

However, Gandhi’s politics, influenced by her late mother-in-law Indira Gandhi, revolve around keeping the aam admi -- the common man -- happy, with the state playing the role of the chief benefactor.

So far, Gandhi has not strongly backed economic reforms (or taken on Mamata) that create an immediate constituency that resists such change while the diffused positive impacts take time to reflect. Instead, she has had her way in channeling billions rupees into grandiose social welfare schemes essentially seen as wasteful and unproductive expenditure. As numerous studies, show most of this taxpayer money is siphoned away by corrupt middle men and agents, never reaching the intended poor beneficiaries.

Again, Singh has been a silent witness to the fiscal drain, although he has been outspoken in the past about deficit-causing schemes that have an adverse impact on the government’s financial health and resulting inflation, which ultimately hurts the poor the most. Perhaps such profligacy might have been ignored had India continued on its path of growth. Paradoxically, state revenues have only burgeoned as new high-growth service taxpaying sectors have emerged, such as software, telecom, hospitality and outsourcing.

Will Singh be able to prevail upon Gandhi? Up to now now, economic matters were handled by Mukherjee, seen as old-world in his economic thinking. Singh too has preferred not to cross Mukherjee, his senior in past Congress governments. Fate has again presented an opportunity to Singh to redeem his own legacy, reverse the Congress party’s diminishing political fortunes and win back the increasingly disillusioned middle class. The next few months are going to be crucial.

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com