By removing Palaniappan Chidambaram from the post of Finance Minister and making him Home Minister, Prime Minister Manmohan Singh sought to kill two birds with one stone - though he will never publicly admit to such a strategy. The former FM had become unpopular not only within the Congress but also among the party's allies in the UPA for his inability to control inflation. Chidambaram was also perceived to be arrogant and stand-offish - curiously, it is this trait that imparts a certain toughness in his demeanour and makes him appear more suitable to hold the position of Home Minister, quite unlike Shivraj Patil who was seen as ineffective.
Having decided to hold on to the Finance portfolio himself, the PM is using the services of two of his trusted advisers - Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and Rajya Sabha MP Chakravarthi Rangarajan - to steer the economy through a rather difficult patch. The different bail-out packages of the government are essentially aimed at cushioning the fall and preventing a drastic downslide.
An important element of the new set of policy changes is the complete reversal of the tight money policy that had been followed by the RBI till August - the country's central bank has pumped in a lot of liquidity into the system and interest rates have shown signs of easing. The rate of inflation as measured by the official wholesale price index has come down to around 8 per cent at the time of writing in mid-December from the 13 per cent peak touched in August, assisted to a considerable extent by the sudden fall in international prices of crude oil from a high of $ 147 a barrel to $ 45 a barrel between July and December.
The problem for the government is simple: a lowering of the rate of inflation does not necessarily mean a lowering of prices. What it means is that the speed at which prices had been rising has decelerated. This aspect of reality is clearly understood by the proverbial person on the street whatever politicians may claim. And this is why there is resentment against the government in general and the PM and the former FM in particular for their alleged failure to bring down the prices of articles of mass consumption, notably food products. No amount of blame on the adverse international economic environment will help politicians in power counter anti-incumbency sentiments brought on by food inflation.
The outcome of the assembly elections - especially in Chhattisgarh - has also conclusively demonstrated that there is no substitute for schemes aimed at helping the poor, even if the elite dismisses these as 'populist'. Raman Singh's decision to provide rice at Rs 3 per kg to those living below the poverty line and his firm efforts to strengthen (and reduce corruption in) the working of the public distribution system in his state has yielded him rich political dividends and enabled him to buck anti-incumbency sentiments that are strong in most parts of the country.
An important lesson that politicians are learning is that it is not enough to announce a populist, pro-poor scheme; it is more important to ensure that the scheme is properly implemented. Equally important is the other lesson that voters in the country are getting increasingly intelligent with each passing election. Emotive issues such as terrorism, religion and caste seem to matter less than issues relating to good governance and development.
The economy is unlikely to grow very much above 6 per cent in the coming year. Difficult economic conditions lie ahead in the run-up to the general elections. Voters may not appreciate the fact that we in this country are better placed than most other countries, certainly far better than the economies of the US, Europe and Japan that are shrinking. That's bad news for the ruling dispensation.
This article was originally published on January 20, 2009.
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