dna special: Economy down, Who's the culprit? Pranab Mukherjee or P Chidambaram

Finance minister P Chidambaram more than raised eyebrows last week when he blamed the policies of his predecessor president Pranab Mukherjee for the country’s economic woes.

Experts agree that Chidambaram inherited an economy which was yet to see the worst consequences of Mukherjee’s decisions.

Chidambaram was asked to explain in Parliament why the rupee had been in a free fall (the Indian currency tumbled from Rs61.44 on August 14 to Rs68.80 on August 28 against the US dollar), why the current account deficit had been widening (CAD is likely to overshoot the estimated $70 billion this fiscal) and why markets were sinking (Sensex lost 1,371 points from August 14-29). To add to this, ratings agency Standard and Poor’s said this week there is a 33% chance that it would downgrade India’s sovereign rating to junk status in the next three years.

“There are not just external factors, there are also domestic factors,” Chidambaram told the Rajya Sabha last week. “One of the domestic factors is that we allowed fiscal deficit to be breached and we allowed current account deficit to swell because of certain decisions that we took during the period 2009 to 2011.”

Chidambaram, who had seen better days as finance minister in 2008, was referring to the three stimulus packages announced by then finance minister Mukherjee between December 2008 and January 2009. The stimulus, in the wake of the global economic recession to safeguard the Indian economy, came in the form of reduction in duties and higher spending in end-2008 to encourage industries reeling under liquidity crunch to carry on with their investments.

Financial experts say the problem was not just in the manner in which the stimulus was given, but also on the policy front.

“The stimulus was lopsided towards consumption expenditure and did not have any capital expenditure, which would have given a lease of life to industries,” former finance minister and BJP leader Yashwant Sinha told dna. “As a result, there was no return from the investments. We saw inflation of 10% in the subsequent years and a huge impact on the country’s fiscal deficit.”

The country’s fiscal deficit — the difference between total revenue and expenditure — swelled to 6.5% of GDP in 2009-10 compared to 2.5% two years ago in 2007-08, when Chidambaram was the finance minister. In effect, the requirement of restricting the country’s fiscal deficit at 2.5% of the GDP, as stated in the Fiscal Responsibility and Budgetary Management Act, was breached during Mukherjee’s reign (November 2008-July 2012) as the finance minister.

The fiscal deficit shot to 5.9% of GDP in 2011-12, against Mukherjee’s set target of 4.6%. Growth for the year was down to 6.21% from 9% levels of the previous year. Essentially, this was what Chidambaram got from his predecessor.

On the policy front too, Mukherjee’s moves fail to find favour. “When you look at the policy that Mukherjee enacted, his reign as finance minister has been among the worst that India has seen, marred by shaky fiscal situation, revenues and most importantly, retrograde taxation on Vodafone,” said Surjit S Bhalla, chairman, Oxus Investments, an emerging markets advisory firm. “Chidambaram, meanwhile, has improved matters in the budget.”

Sinha does not rate Chidambaram high for deftly handling the economy. “All he (Chidambaram) is doing is simply cutting productive expenditure to reduce fiscal deficit. If you keep cutting expenses without giving a fillip to investments, it will result in low growth,” warned Sinha.

Economic analyst Bibek Debroy too puts forth a similar view. “There is no difference between the way Pranab handled the fiscal situation and in the manner in which Chidambaram is handling it. I do not think that Pranab made things any worse,” said Debroy. “Fiscal deterioration had started even in time of Chidambaram with the farm loan waiver scheme in 2004. When Chidambaram returned to finance in 2012, the situation was close to blowing up into a crisis.”