Pranab's elevation, Mamata's diminution offers hope
Given how so many reforms like the pension bill, the land acquisition bill, hiking of FDI limits in the insurance sector and allowing foreign airlines to buy into Indian airlines were all put off due to opposition from Mamata Banerjee—she even got the Prime Minister to sack her party’s railway minister for daring to hike rail fare by a mere 10%—it’s safe to expect a fresh burst of reforms now that the mercurial Mamata, having overplayed her hand once too often, has been effectively neutralised in the UPA. At least for now. While the government may well use this new window of opportunity it has got to push forward reforms in these areas, FDI in retail may be sacrificed as the price for getting Mulayam Singh Yadav to ditch Mamata Banerjee in her opposition to elevating finance minister Pranab Mukherjee to the President of India’s post—it could, though, just go through if the government is able to convince Mulayam the central bill is just an enabling provision, leaving the final decision to individual states. As an aside, at least for the immediate term, Mamata’s chances of getting an additional financial package for her state look dim and should make her think long and hard about her future strategy.
Whether Pranab Mukherjee’s elevation will result in a complete renewal, of course, remains to be seen. Even those who feel the taxman had got too aggressive under his watch—and this includes the retrospective tax amendments—agree that Pranab Mukherjee was merely following orders. If the taxman was being too aggressive—disputed income tax cases doubled between December 2010 and December 2011, to R4.37 lakh crore—it was because Mukherjee set an ambitious target of a 22% hike in revenues in a year where economic growth has fallen dramatically and corporate profits have dropped even more. And the reason why the tax targets were so ambitious was because neither UPA chairperson Sonia Gandhi nor Prime Minister Manmohan Singh did much to rein in runaway expenditure on social schemes and subsidies—indeed, under Sonia Gandhi, the National Advisory Council (NAC) has come up with one money-spending scheme after another and it is to Mukherjee’s credit that he has, till now, kept the NAC’s ambitious Food Security Bill at bay. Cutting subsidies by making direct cash transfers through Aadhar was announced in the Budget as a pilot project in 50 districts—whether this can be extended further is not a decision a finance minister can take without both Sonia Gandhi and Manmohan Singh agreeing to it. A decision on cutting diesel subsidies or those on foodgrains, similarly, are not in the hands of the finance minister though he often gets blamed for it. The plethora of legal challenges filed against the government by firms whose telecom licences were cancelled, similarly, has given the government a bad name in the investor community, but these are outside the purview of the finance minister. Bringing in a new finance minister gives the UPA a chance to backpedal on some of the aggression of the taxman.
Sonia Gandhi’s choice of the new finance minister, of course, is the critical question now. While India Inc, and foreign investors, are enthused by the possibility of Planning Commission deputy chairman Montek Singh Ahluwalia getting the job, it is not certain a Congress party preparing for the polls wants someone as unabashedly pro-reform as Ahluwalia. But if the Prime Minister takes direct charge of the ministry himself, it would do wonders for the investor mood. More so since this will give a larger policy role to both PMEAC chairman C Rangarajan and Ahluwalia, even if through the PMO. In which case, a bout of sensible policymaking can be expected.
Though it wasn’t strictly part of his job as the finance minister, Pranab Mukherjee doubled up as the government’s Mr Fixit and headed 13 Group of Ministers and 12 Empowered Group of Ministers which included, if you please, ones on honour killings and putting an end to paid news. The more substantive ones, of course, were those on pricing of natural gas that has got producers like RIL and BP up in arms, on the aviation sector, on cutting fertiliser and food subsidies and on allowing the entry of private sector players in the coal mining sector. Pranab also chaired an EGoM on dealing with the issue of allowing Sterlite to exercise the call option it had for buying the government’s residual shares in Balco during the NDA years. Finding a replacement for Pranab Mukherjee in these important bodies is critical, though the success of the new incumbent will, once again, depend on Sonia Gandhi and Manmohan Singh.
Apart from the near impossible task of sticking to the fiscal targets by reining in expenditure and collecting more taxes in a slowing economy, Mukherjee’s successor will have to steer vital bills like the GST and the Direct Taxes Code, and also start afresh on pushing for higher FDI proposals for pensions and insurance. But since there’s just that much anyone can do, more so in what is clearly going to be a year of preparation for the next election and in which the economy is in terrible shape, it is important to move fast in a few areas—FDI in retail, aviation, insurance and pension have, rightly or wrongly, become the touchstones on which the government’s commitment to reforms is judged. Once quick action on this lifts the mood, that’s half the new FM’s job.