Nostalgia, not economics, was the theme of Pranab Mukherjee's last day in office as finance minister on June 25. He thanked his bureaucrats in private and the media in public before driving out of North Block for the final time in his four-and-a-half-decade-long political career. If he had any views on the precariously perched economy he was leaving behind, he did not express them to anyone. A day earlier, his farewell effort to the sinking rupee turned out to be a damp squib. An astute politician, he understood that the immediate verdict on his performance would be orchestrated by those wanting his job. Union Commerce and Industry Minister Anand Sharma and Rural Development Minister Jairam Ramesh have already declared their candidature with very public suggestions for change in the direction of economic policy. Their open lobbying reflected more ambition than credibility. The Prime Minister took temporary charge of the finance ministry. The emphasis was on change.The sliding rupee is the most potent symbol of an economy lurching into a deep crisis of low growth and high inflation-stagflation. Mukherjee can only be partly blamed. It is a thoroughly indecisive, incompetent and badly split Government that is the real culprit. Those factors will also hobble Prime Minister Manmohan Singh as he takes charge of finance for the first time since 1996. A risk-averse Manmohan may not want to keep the portfolio for longer than a few weeks.
Mukherjee was let down badly by incompetent officials and an unfriendly Reserve Bank of India (RBI). The markets genuinely believed that Mukherjee would be generous in departure?both the rupee and the Sensex climbed impressively in the hours before the much-awaited announcement on June 25. And both tumbled the moment the token "reform" measures were announced by RBI?of lifting the foreign investment limit in government bonds from $15 billion (Rs 82,500 crore) to $20 billion (Rs 1.1 lakh crore) and allowing Indian firms to borrow an additional $10 billion (Rs 55,000 crore) from overseas. The mandarins of North Block and RBI had misread the concerns of the market, either in ignorance or by indifference
According to a senior policy official, it was a case of "knowledge" disconnect. Mukherjee's senior bureaucrats believed that these token measures would be enough to shore up the rupee, ignoring the obvious reality that foreign investors were more concerned about the fiscal deficit, GAAR (General Anti Avoidance Rules which would arm-twist foreign institutional investors into the tax net), and policy paralysis than a cap on investment in government bonds. As one business executive wryly put it, "It's like I want to withdraw Rs 100 and you are giving me the chance to put in Rs 200."
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TARGET PRACTICE? The PM's top advisers overstated growth in 2011-12 C. Rangarajan Chairman, Prime Minister's Economic Advisory Council August 2011 8.2% October 2011 7.5-8% January 2012 7-7.25% May 2012 6.9% Montek Singh Ahluwalia Deputy Chairman, Planning Commission April 2011 Around 9% June 2011 8.25-8.5% November 2011 7-7.5% January 2012 Around 7% Kaushik Basu Chief Economic Adviser, Ministry of Finance April 2011 9% October 2011 Around 7.5% January 2012 7-7.5% Actual growth in 2011-12 6.5 per cent |
Mukherjee's officials had already given him one piece of bad advice in March when they told him to go ahead with the retrospective tax amendment on Vodafone, the one serious blot on his time in office as finance minister. For just Rs 11,000 crore in tax revenue, the Government had destroyed the confidence of foreign investors.
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