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UPA’s moment of reckoning

UPA’s moment of reckoning
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First Published: Mon, May 09 2011. 01 21 AM IST
Updated: Sat, Jul 02 2011. 02 35 PM IST
Later this week, on 13 May, the Election Commission will declare the outcome of assembly elections to the four key states of West Bengal, Tamil Nadu, Kerala and Assam. In all four states, the Congress has stakes, and in Kerala and Assam, it is, according to initial expectations, in a position to form the government.
A day earlier, the government will release inflation data for April. It is at present averaging 8.98%. And a day later, a special court of the Central Bureau of Investigation (CBI) overseeing the judicial investigation into the alleged demeanours in the allocation of the second generation, or 2G, telecom licences will rule on the bail application of K. Kanimozhi, daughter of incumbent Tamil Nadu chief minister K. Karunanidhi, who heads the Dravida Munnetra Kazhagam (DMK), a key member of the Congress-led United Progressive Alliance (UPA) administration in New Delhi.
All three events, though unrelated on the face of it, could easily leave a lasting influence on the remaining tenure of the UPA.
The election results, if they go the way of the Congress and its allies, DMK and Trinamool Congress (TMC), would mean some welcome political relief. Alternatively, the UPA should brace for a rough period ahead, especially with the monsoon session of Parliament due in two months. As of now, pundits are predicting a close fight in Assam and Tamil Nadu, while Kerala and West Bengal weigh in favour of the Congress and a TMC-led alliance, respectively. The Congress has already hinted at a second wind for the UPA after the election and that it would begin with a serious overhaul of cabinet portfolios—designed to reposition its image, battered by charges of corruption and mismanagement of the economy.
Similarly, any deceleration in the inflation rate would provide some macroeconomic succour and make it easier for the UPA to effect its long delayed (on account of these state elections) but inevitable increase in the prices of petroleum products. An acceleration in inflation on the other hand, especially into double-digit territory, would, besides making it difficult for the government to raise petroleum prices, provide yet another reminder about the UPA’s failure to manage a key macroeconomic problem for the last two years.
And, finally, if the CBI judge rules against Kanimozhi, it would be a political doosra, to borrow from the arsenal of the world record holder for highest number of test wickets, Muttiah Muralitharan. If the DMK wins the election, it will have to deal with the issue of alleged taint on the ruling family. Alternatively, considerably worse, it will politically arm an incoming All India Anna Dravida Munnetra Kazhagam (AIADMK) regime. At the same time, it will dramatically reduce the DMK’s clout within the UPA and could consequently alter the dynamics in the coalition.
From the UPA’s point of view, the imperatives underlying the electoral outcome in the four states is apparent. It is probably their last chance at redemption. Unfortunately, the economic circumstances—notwithstanding the slide in the last few weeks in international commodity prices—have only become more adverse. Unable to tamp down inflationary expectations through the so-called baby steps, the Reserve Bank of India (RBI) went for a big push, sending lending rates northward. Not only will it retard fresh investments by industry, it will, in all likelihood, put the brakes on real estate activity, which, in any case, has been on the low side for now—and have consequent impact on the growth trajectory of the economy.
RBI has already scaled down growth rate for the current fiscal to 8%, as opposed to the highly optimistic 9% projected by the finance ministry while presenting this year’s Union budget. While expenditure is inelastic, the buoyancy of revenue receipts depends crucially on the growth momentum—all the more since the structure of revenue receipts has undergone a revision recently with direct taxes (income and corporation tax) accounting for the dominant share. This could trigger a fiscal problem, unless the UPA is able to roll back expenditure programmes.
For the UPA, it is a double whammy then. Not only is the politics fluid, but the state of the economy also is a point of concern. Of course, a crisis is also an opportunity for a good politician (Barack Obama turned his presidency on a coin after boldly deciding to go after Osama bin Laden in what was clearly a very risky operation).
So far, the UPA in its second tenure has not inspired any confidence and has, at times, come across as a sore loser by arguing that the economy is just a victim of global circumstances—a claim that may be true, but reflects an inability to seize the initiative. Friday evening will, in all probability, provide the first signal of whether the UPA would reinvent itself, or just stick to business-as-usual.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com
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First Published: Mon, May 09 2011. 01 21 AM IST