UPA may end up doing an Obama

So President Barack Obama pulled off a bit of a surprise by managing to get himself re-elected for another four years. Since this was fairly unexpected, particularly after a less than impressive opening debate with his rival Mitt Romney, Obama may also pull off another unexpected feat and prevent the US economy from falling off the ‘fiscal cliff’ towards which it is headed at the moment.

The US Presidential elections are of great interest to people in many nations outside of the United States of America for many reasons, the least of which is that the US is the world’s only superpower, and winning US Presidents are apt to quite often follow through on threats to bomb this country or the other back into the Stone Age!

No doubt, the elections were closely followed in Lutyens’ Delhi, the serene, green, low-rise and largely taxpayer-funded oasis in the midst of the bustle of the National Capital Region, which is home to India’s most powerful people, up to and including billionaire tycoons.

UPA ENCOURAGED

Particularly in the bungalows in and around Race Course Road, one can be fairly certain that Obama’s victory would have been seen as an encouraging sign by the inmates of those stately residences.

Not just because an Obama White House would be friendlier or more welcoming of India than a Romney White House (Obama was at best lukewarm about India in his first innings), but because, as fellow politicians, they would have drawn heart from the fact that he managed to win, despite the economy.

Compared to India, they would have told themselves, the US was in much worse shape. We still have positive growth (even though the current fiscal may see the lowest growth in a decade), our unemployment figures are not rising at anything like the pace seen in the US (particularly since our employment numbers are patchy, error-filled and often years out of date), near double digit inflation has become the new normal as far as the public is concerned, and we still have control of our lower House (especially after sharing breakfast with Mayawati and her ilk). Given this, the thinking might run in UPA circles, our return a year or so from now is practically a shoo-in.

That might well turn out to be actually true. The Congress and its allies might have left no stone unturned in their efforts to shoot themselves in the foot electorally with scam after scam, but the principal Opposition party, the BJP, has been equally industriously trying to commit harakiri , from letting their political agenda be hijacked by fasting Gandhians and feisty whistleblowers, to their own share of scams, scandals and the washing of mutually destructive dirty linen in public.

OUR ‘FISCAL CLIFF’

So UPA II might well end up doing an Obama, too. But that is not the only Obama-esque thing they will be doing. They too are hurtling, and might well fall off their very own fiscal cliff. Which prospect is causing worry lines to appear on the foreheads of credit rating specialists, bankers (including banking’s capo, the RBI Governor), businessmen, economists, analysts and even Joe Q Public.

But not, clearly, on the metaphorical foreheads of the Government. Nothing else will explain the almost serene indifference with which warning after warning to get the fiscal house in order has been ignored. Credit rating agencies are threatening to downgrade India? Worry not, they shall be ‘managed.’

The Reserve Bank is refusing to cut rates, because both inflation and the Government’s deficit are rising unabated? Forget it, we shall “walk alone.”

Businesses whining about not getting adequate credit, or credit at affordable enough rates? Take external commercial borrowings, and never mind the cost of hedging foreign currency risk on an ever weakening rupee, or the fact that the credit rating, and by implication the borrowing costs, of even the best rated Indian corporate will be derived from the underlying country rating, which stands more than a good chance of getting downgraded to junk status…for every problem, we have a glib answer, even if we do not have any actual solution.

Take the looming fiscal cliff. The fiscal deficit of the Government of India for the current financial year ending March 2013 was targeted at Rs 5,13,590 crore or 5.1 per cent of GDP. Even a Government appointed panel charitably estimated that the actual deficit might end up at 6.1 per cent of GDP.

Of course, that prediction, by the Kelkar Committee on Fiscal Consolidation, came with a caveat: the figure could be around 6.1 per cent, it said, unless the Government came up with some corrective action. Last month, Finance Minister P Chidambaram announced a series of dramatic measures, including cutting subsidies on diesel and LPG, opening up more sectors of the economy to foreign investment and promising to push ahead with pension and insurance reforms.

The markets cheered the news, but only briefly. A Reuters’ poll of analysts and professional forecasters last week found the majority convinced that the Government will miss the fiscal deficit target by a margin. That’s the new target we are talking about here, since the FM had already upped the target from a “challenging” 5.1 per cent to a “doable” (his words) 5.3 per cent of GDP. The RBI didn’t buy it though, prompting a tantrum from the minister and a vow to “walk alone” on the growth path.

TOUGH DECISIONS

Clearly, professional forecasters and analysts, who put actual money behind their predictions, are not buying this either. The reason is not surprising – when it comes to taking tough decisions on the fiscal front, the Government has always chickened out.

Take the LPG subsidy cut, for instance – the decision was put on hold within 24 hours of being announced. The diesel subsidy cut is actually pretty modest, and the fertiliser subsidy cut is actually rerouting. As for the reforms – well, the doors have been thrown open for retail, and so far, there is no queue outside the door.

One might say that a percentage point slip in fiscal deficit is not such a bad thing. After all, 1 per cent is not such a large number. Well, it is, when you look at the actual money. A one per cent slip in deficit means the Government has roughly spent about one lakh crore rupees more – of money it doesn’t have in the first place!

Now that is an impressive number. The question is, where has it been spent? Can somebody actually point to people whose lives have been made better as a result of this spree?

Can we actually look, touch or feel physical assets and infrastructure which has been created by this money?

Nope.

That is why it is time we had a presidential debate of our own on issues such as subsidies, fiscal responsibility and the fiduciary responsibilities of Government, the kind of responsibilities which go above and beyond that of ensuring that the same set of individuals or people of similar colour are returned to power for another term.

Otherwise, we will be going off that cliff pretty soon — without a parachute.

(Responses to >Raghavan.s@thehindu.co.in and > blfeedback@thehindu.co.in )

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