Wednesday, Feb 01, 2023

Credibility crunch

How a risk-averse UPA lost the confidence of markets and investors.

How a risk-averse UPA lost the confidence of markets and investors.

Like war,economics is more an art than a science. If wars were won by superior technology alone,the United States would not have been vanquished in Vietnam or waylaid in Afghanistan. If economic crises could be dealt with by the power of knowledge and money alone,the European Union would not be in the mess in which it wallows. If economics was just another mathematical science,the Manmohan Singh government would have been on top of the situation,given the quality of economics brainpower at its disposal. Battles,on the military and the economic front,are first lost in the minds of the strategists for want of ideas before they are lost on the battleground for want of armoury.

The second United Progressive Alliance government has already lost the battle to prevent an economic crisis. But it has lost this not because India does not have the policy brains or the foreign exchange reserves needed to defend the rupee,but because the market and the community of investors,at home and around the world,have lost confidence in the government’s ability to deal with a difficult situation. At the heart of the current economic crisis lies UPA 2’s crisis of credibility.

The roots of the extant crisis lie in the hubris of 2009. Five years of an unprecedented near 9 per cent growth,a secular rise in the gross savings and investment rates,a robust response to the trans-Atlantic financial crisis and the global economic slowdown and,on top of it all,a handsome victory in the general elections of 2009 made the Sonia Gandhi Congress intoxicated with over-confidence. Five years earlier,the same Congress had chastised the Atal Bihari Vajpayee government for its “India Shining” campaign,but by 2009,the Sonia Gandhi Congress began to believe the rhetoric. India had arrived. The world would genuflect.

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Both on the economic policy front and the foreign policy front,hubris replaced the careful calculations of strategic policy that had defined UPA 1. Many imagined the world was salivating at India’s door and would enter the lucrative Indian market,be it for manufactured goods,insurance products or nuclear reactors,on India’s terms. The growing risk aversion in developed economies because of their own problems was under-estimated,as was the growing competition for capital from other emerging economies.

The decision to appoint a very 1980s-style Congress leader like Pranab Mukherjee as finance minister was an invitation to a very 1980s-style economic policy. Many analysts understood this and raised an alarm. Look at the comments on the budgets of that period. The neglect of all those warnings resulted in the wounding blows of the March 2012 budget that sowed the seeds of the current crisis.

The liberal fiscal spending of the 2004-08 period was made possible both by rising government revenues and national income growth,and by relative comfort on the external side. After 2009,these pillars of growth began to wobble. By 2012,they were shaking. To add to this mess,a new group of over-confident second rung leaders in the Congress party,mouthing new mantras of “inclusive growth”,began defining new principles of economic policymaking,creating further dissonance within government.


Fully cognisant of the deteriorating economic environment,Prime Minister Manmohan Singh toyed with the idea of retaining the finance portfolio in July 2012,an idea he had first entertained in May 2004,hoping to take charge and turn the economy around. Many around him encouraged him to do this,imagining that he would be able to recover his damaged reputation by taking charge of the economy. But by then,too many cooks were beginning to stir the policy pot. The cacophony of policy advice,with every policymaker offering hope around the corner when it was clear the economy was walking into a cul de sac,further hurt the government’s credibility. Moreover,the prime minister’s office had neither the kind of firepower needed to make the PM the fulcrum of policymaking,nor the credibility to assure markets and investors that it would be able to undo the damage inflicted by years of old Congress style politics.

Against this background,Prime Minister Singh took one wise decision: to bring P. Chidambaram back to North Block. Chidambaram returned to finance fully aware of the mess he was required to clean up. Just before saying “yes”,he wondered whether his own party would make him the scapegoat,blaming him for the mess when he had,in fact,moved away from economic policymaking when the economy was still chugging along in the winter of 2008. But PC Mark-3 was neither as enterprising as PC Mark-1 (1996-98) nor as confident as PC Mark-2 (2004-08). Now placed firmly in a potential line of succession to the top and with his hands constrained by the party’s need to prevent any political mishap before an election,PC Mark-3 has proved to be more risk averse.

Indeed,UPA 2’s entire economic policy leadership has become risk averse. Worse,it has lost the confidence of the market and the investor class. Cash rich investors have been on an “investment strike” and the fear that this could snowball into a major bout of capital flight set off alarm bells in Delhi. Rather than calm the nerves of the market and investors,some of the government’s recent actions,including the decision to send up an academic economist with little understanding of the complex Indian economic and political reality as governor of the central bank,have added fuel to a simmering fire.


As on a battlefield,so in the marketplace — a war to defend the economy is not won by the deployment of superior armoury but by the cleverness and credibility of one’s strategy and tactics. In a crisis,economic policymakers are like generals in war time. Their reputation is won not by the superiority of the firepower at their disposal,but by their display of wisdom and cunning and,above all,their credibility among their own troops,and not just the enemy.

The generals who won the battles of 1991 did so because of their credibility at that time. Today,they have fully drawn on that reservoir of reputation. The government’s inability to win the confidence of investors and consumers is because its credibility is in tatters. The government is caught in a chicken-and-egg conundrum. To regain its policymaking credibility,it has to regain the market’s confidence. To regain the economy’s confidence,it has to regain its lost credibility.

The writer is director for geo-economics and strategy,International Institute for Strategic Studies and honorary senior fellow,Centre for Policy Research,Delhi

First published on: 20-08-2013 at 00:03 IST
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