Pranab Mukherjee has resigned as Union Finance Minister of India on Tuesday, in his own words, “to embark on a new journey”, implying his move towards Raisina Hill as the President of India. Congress party will sorely miss Pranab Mukherjee in the government who has been the lynchpin of UPA government, troubleshooting the problems faced by Congress party with the coalition partners to make this UPAII work stably without any hiccups. But one section that will not miss the presence of Pranab Mukherjee from finance ministry is the Industry lobby.
Let’s take a look at the journey of Pranab Mukherjee as the finance minister of India from 2009-2012. Pranab Mukherjee was anointed as finance minister in the background of gruesome 26/11 attacks on Indian financial hub Mumbai in 2008 that necessitated the transposition of the then finance minister P Chidambaram to home ministry. He took office in early 2009 when world economy was reeling under recession while Indian economy was showing signs of resilience with a healthy GDP growth rate. He inherited an economy that was not in prime form but was in good condition with sound economic fundamentals.
He presented his first budget as finance minister on July 6, 2009, in which he did not announce any new policy decisions or economic reforms but showed his socialist tendencies by increasing the funding of subsidies and leaking socialist policies like Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA). The budget was so short on expectations that the BSE stock exchange Sensex has tanked 900 points (5.8%) on a budget day, which was unprecedented in the history of budget presentation day.
The effect of continuing socialist policies like MNREGA was apparent on the inflation rates in the consequent years. From 2008, the year in which MNREGA was introduced, the inflation shot up to 8% from 6% in 2007 and remained at high levels till now. Sample this; the inflation rates from 2008-2011 are 8.32%, 10.83%, 12.11%, 8.97% and 7.94% respectively that are perhaps highest among growing economies like India. The stock answer that would come from Pranab Mukherjee when questioned on these high inflation rates is “external factors” like Eurozone crisis or world economic recession. He goes a step further and says that it is unfair to blame government for the high inflation rates. One can be sympathetic to Pranab Mukherjee’s comment if it was for an odd year but how can one believe him if the inflation persists at high rates pinching the aam-aadmi’s income. On this front, Pranab has failed miserably to contain the high prices of essential commodities.
The Indian GDP grew at healthy rates of 9.1% and 8.4% in 2009 and 2010 not because of government’s polices (or the lack of) but because of sound growth fundamentals of the country driven by the Indian service and manufacturing industry. But the GDP growth took a toll in 2011 recording 6.5% and this will further suffer in 2012 and according to estimates it will be under 6% and anywhere around 5.8%. Much of this lack of growth can be ascribed to lack of reforms, policy paralysis, misgovernance, blatant corruption and license raj attitude. Much of the economic reforms are stalled due to lack of political will, competence and governance from the finance ministry and the government. Pension reforms bill, FDI in retail, FDI in aviation, insurance bill, banking sector reforms, deregulation of oil prices etc are all hanging in the balance bereft of any movement on the part of finance ministry. Pranab Mukherjee squarely blames coalition politics and opposition for not bringing in reforms. Principal opposition party BJP retorts that it gave its full support to pension reforms bill and other bills but due to incompetence of the government that finance minister is not able to bring these reforms forward. Analysts are warning that India would be the first fallen angel of the BRICS countries.
Another recent factor that contributed to the dire economy situation we are facing now is the license raj era attitude of government getting back at the industry due to its own inefficiencies. Sample this case; Vodafone did not pay a tax for buying the Hutchinson Company claiming that India has no jurisdiction over the transaction that happened out of the country between two companies that are not incorporated in India. Supreme Court of India gave a favorable decision towards Vodafone based on the existing laws of the land. But the government thought otherwise and went on to amend the tax laws in a retrospective manner going back to 50 years to get the taxes from Vodafone. This has scared the foreign investors and led to flight of investment. The retrospective tax amendment projected a sorry image of India as an investment destination by giving a perception that the laws of India are suspect and can be amended easily at whims and fancies of the government to go after the companies that doesn’t fall in line.
Another issue that’s affecting foreign investment sentiment is introduction of general anti-avoidance rules (GAAR), which will give immense powers to taxmen to deny tax benefit if a transaction has been carried out as the sole intention of tax avoidance. The immense power gives discretionary powers to taxmen to harass the innocent entities. This will cause stemming of foreign investment from tax havens like Mauritius and Cayman Islands.
Current account deficit (CAD – imports exceeds exports) is another factor that is causing immense pressure on our economy due to balance of payment and import bill issues. The current CAD is lingering around 4% that is far worse than 3.3% during 1991 and leading to a steep depreciation of rupee vis-a-vis dollar (23% depreciation of rupee happened from its August 2011 peek) and causing burden on our economy. This CAD crisis is due to power deficit (causing higher consumption of diesel for power generation and higher crude import bill), lack of price rise of diesel, flight of investment due to lack of foreign investment sentiment and decrease capital inflows. Much of these can be squarely blamed on finance ministry’s and government’s comatose governance and policy paralysis. Unless investor sentiment is improved, the capital inflows will further decrease causing more CAD and balance of payment problems.
The ballooning wasteful expenditure on welfare schemes and subsidies and low income tax due to lack of growth are causing a high fiscal deficit among key emerging markets. Currently India is reeling under a 5.1% fiscal deficit worrying the policy makers and the industry alike. Much of this fiscal deficit going towards consumption rather than building much needed infrastructure as a result of which its causing higher inflationary pressures.
Lack of growth, manufacturing decline, lack on investments, current account deficit, fiscal deficit, wasteful expenditure, high inflation, high interest rates, lack of governance, corruption, policy paralysis are all causing a domino effect on economy and it is not far that Indian economy will reel under much dreaded “Stagflation” – stagnant growth accompanied by high inflation. Much of the policy indecision that led to this situation on Shri Pranab Mukherjee who as a finance minister didn’t do his duty to push through reforms, improve investor sentiment or reign fiscal deficit instead did quite the opposite of scaring away investors with retrospective tax amendments and GAAR, increase the wasteful expenditure on welfare and subsidies and not bring any economic reforms triggering increased fiscal and current account deficit.
Pranab Mukherjee tried to deflect the criticism of his handling of Indian finances by blaming Eurozone crisis and western economy recession but it didn’t cut ice with any one as it is a consensus among the industry bigwigs and economy analysts that much has to do with domestic economic policies than do with external factors. Narayan Murthy, Kiran Mazumdar Shaw, Azim Premji, Lakshmi Mittal and other leading industrialists expressed agony and disappointment at the current economic conditions that Pranab Mukherjee has fostered as a finance minister.
Pranab Mukherjee is a finance minister who ran the 2010s economy with 1980s mindset nurturing socialist policies and license raj era attitude towards the industry and the economy by trashing the free market principles to the dustbin that the current PM Man Mohan Singh ushered under the guidance of the then PM PV Narsimha Rao in 1991. Pranab Mukherjee with some help from the comatose government has single handedly drove the Indian economy into the ground. Even during his last days he boasted of slew of new policy announcements before he resigns as a finance minister, but all the market got was a damp squib proving one more time that he is all talk no real measures. Our economy has regressed by almost 2-3 years due to the harebrained policies of the Pranab Mukherjee as a Finance Minster. It is really sad that a seasoned veteran politician and parliamentarian of 40 years leave the politics on such a bad note and left behind a legacy that he will be cursed for in the coming years. Good riddance to Pranab Mukherjee as far as Indian economy is concerned.