ECONOMY & BUSINESS
Breaking the Coalition Logjam, Finally
The FDI triumph in Parliament was a reprieve for the UPA II in a year marked by inertia, political slugfest and disruptions in the House. It was policy paralysis in the first half to reforms rush in the second half
Nirmal Sandhu

IT was a year that saw India's economic growth plunge to a decade low of 5.3 per cent, pushed by high inflation, tight monetary policy, two bad budgets, a deficient monsoon, debt troubles in Europe and an anaemic recovery in the US.

Though each of these factors contributed to the slowdown, government inertia and political slugfest stand out.

After three and a half years of drift, UPA-II swung from policy paralysis to a rush of reforms in the second half of the year even as the Opposition, amid much sound and fury over scandals, held up important legislation by disrupting Parliament. The government emerged stronger after its FDI victory in Parliament.

The year began on a note of hope. A spurt in foreign capital inflows lifted the investor mood in January and February until the Union Budget punctured it by proposing retrospective changes in tax laws.

The aim was to take away from British firm Vodafone the tax benefit handed over by the Supreme Court.

This was the single biggest blow to foreign investors. Scared of stiff penalties and arbitrary powers given to tax officials, they trooped out. The stock markets fell.

The rupee slumped against the dollar to a low of Rs 57, raising the cost of India's imports, including oil.

Coalition politics

A progressive rail budget was shelved due to coalition politics and the UPA gave the country another mediocre one. The UPA kept submitting to Mamata Banerjee's blackmail. She had insisted on keeping the Railway portfolio with her party after she became the West Bengal Chief Minister.

The worst moment of the coalition government was when she got Dinesh Trivedi sacked as the Railway Minister for presenting a reformative rail budget and replaced him with Mukul Roy, who reversed some of the positive initiatives and ran the Railway Ministry from Kolkata until their partnership ended abruptly and bitterly on the FDI issue. The Railways was handed over to Chandigarh MP Pawan Kumar Bansal.

If India's growth engine slowed in 2012, it was also because there was no consensus within the UPA over which way to go. One driver (Manmohan Singh) pressed the accelerator, another (Pranab Mukherjee) applied the brakes, and the one holding the steering wheel (Sonia Gandhi) was undecided and unsure of the road ahead.

Scaled down credit rating

Recurring dependence on regional parties catering to local issues like reservations in promotions for Dalit employees, has weakened the Centre. Political uncertainty kept investors guessing for a larger part of the year.

Global rating agency Standard and Poor's scaled down India's credit rating from stable to negative in June and threatened to downgrade it to junk status due to the widening fiscal deficit and political gridlock.

S&P made an interesting observation which was widely debated in the Indian media: "...paramount political power rests with the leader of the Congress, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected Prime Minister Manmohan Singh, who lacks a political base of his own".

Frequent scams and TV channels competing to tarnish reputations put government functionaries on the defensive and they stopped taking decisions.

"There is no coherence in government policy", complained Ratan Tata. Chidambaram's proposal to set up a National Investment Board, renamed as a Cabinet Committee on Investments, to fast-track large projects is an admission that certain ministers are delaying project clearances.

In the fast lane

In July Pranab Mukherjee moved into Rashtrapati Bhawan and Dr Manmohan Singh took charge of the Finance Ministry. The investor mood changed overnight. Decision-making picked up as another reformer, P. Chidambaram, left Home to back him.

Sonia Gandhi too threw her lot with the reformers, held a pro-FDI rally in Delhi and silenced reform critics in the Congress. Governance, after a long wait, was back.

The government surprised everyone with quick decisions and a sudden burst of reforms. The diesel price was raised by Rs 5 a litre. The number of subsidised gas cylinders per family was capped to cut the fuel subsidy.

Aviation, insurance and broadcasting were opened to foreign investment. Dr Manmohan Singh aptly summed up the party mood when he declared, rather uncharacteristically: "If we have to go down, we'll go down fighting".

The decision to allow 51 per cent foreign direct investment in multi-brand retail rattled the Opposition the most.

After initial resistance, the government agreed to a debate with a vote.

A deft management of the allies won the government the all-important vote but exposed it to the conflicting interests of the Samajwadi Party and the Bahujan Samaj Party.

The year 2012 will also be remembered for the launch of a major reform in the shape of Aadhar-based direct cash transfers, which may have initial resistance and hiccups, but in the long run will save India from much wastage and theft of government resources in the disbursement of subsidies and welfare money.

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