Was it Chidu Who Messed Up the Economy?

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The next FM, be it the PM himself or a non-politician economist, central banker or a bureaucrat, is receiving an economy that Pranab has been trying to set right. The FM will not have a difficult time as Pranab has already laid ground to formulate right policies which will help the economy to come back to even keel. Reducing fiscal and current account deficits, cutting down subsidies, keeping down inflation, improving governance and giving enough leeway to the RBI to act independently, are some of the policies taken up. Regrettably, Chidambaram failed to adopt the right policies, leading to India going back into time rather than going forward.

The policies taken up by Chidambaram were not reformist, rather they were pro-market. He made way for capital flow at a time when the entire economy was swamped under leveraged liquidity emanate from a mortgage bubble in the U.S. ever since Chidambaram took office in 2004, India received over $10 billion every year. This drove up the equities and sensex raised five fold and drove up rupee that gained over 15 percent during 2004-08.

Chidambaram took up policies like floating of oil bonds to absorb oil subsidies that were rising as elevated global oil prices were not being passed through to consumers. Then there was announcement of farm loan waiver of around 70, 000 crore, followed by sixth pay commission implementation costing around 30, 000 crore to the exchequer. Chidambaram struggled with then RBI Governor YV Reddy on capital controls as the governor could foresee the bubble forming. The lack of governance lead to the huge telecom 2G scam and the countless land scams. No tax reforms were implemented to increase the tax-GDP ratio. It was thumbs up by corporate India for Chidambaram’s policies that again failed to see a bubble leading to the accumulation of debt both in rupees and U.S. dollars. Pranab took over as FM when the situation had reached its saturation point and the credit bubble burst. He inherited an economy that was riding on a bubble. The first thing expected from him was to provide stimulus to the economy that floundered to below 7 percent growth in 2008-09. However, that stimulus cost the government 1, 80,000 crore. He took up the fiscal deficit by 350 bps (3.5 percent) in 2008-09 to flood the country with borrowed money. He was urged by corporate India to provide stimulus as they saw a threat to their profits due to an economic bubble bursting.

Inflation that has been trending at over 9 percent for almost past two years is the result of these entire fiscal stimuli. While bidding good bye to his position as the Finance Minister, Pranab must be thinking, had he received a economy that was built to withstand bubbles, he may not have come in for such criticism from the same corporate India that urged the government to push capital flows and provide stimulus. To conclude, Chidambaram’s actions may have been provoked partly by pressures from the party’s populist chief, but then the same holds for Pranab as well. It is no more doubtful that the rot began in Chidu’s watch.