Chidambaram Regains India Finance Job as Singh Seeks Revival
Palaniappan Chidambaram was named India’s finance minister for the third time as Prime Minister Manmohan Singh tries to revive an economy expanding at the weakest pace in almost a decade.
The 66-year-old stalwart of the ruling Congress party moves from the Home Ministry, according to a statement released by the president’s office in New Delhi yesterday. Singh retained the finance portfolio for an interim period after the resignation in June of Pranab Mukherjee, who became president on July 25.
Chidambaram faces the task of salvaging Singh’s development agenda as elevated inflation saps growth and the nation’s worst power crisis on record shows how gaps in infrastructure are hurting the economy. A slumping rupee, the threat of a credit- rating downgrade to junk status and a weak monsoon are immediate challenges for a politician who oversaw a record expansion as finance minister from 2004 to 2008.
“He definitely has the experience of handling the finance ministry earlier and was market-savvy,” said Rupa Rege Nitsure, an economist at state-owned Bank of Baroda (BOB) in Mumbai. “He has proved his mettle before, though the challenges this time are huge: the fiscal deficit, the slowdown and hastening reforms.”
A lawyer and Harvard Business School graduate from India’s southern state of Tamil Nadu, Chidambaram is one of the most prominent members of the Congress party. Growth averaged 8.9 percent a year when he last led the Finance Ministry, compared with 5.3 percent in the first quarter.
Chidambaram, married with one son, was moved to the home ministry in November 2008 to spearhead efforts to strengthen security after the terrorist attacks in Mumbai left 166 people dead. He also served as junior commerce minister in the 1980s in a political career spanning four decades.
“The prime minister has to have confidence in the person who handles the finance portfolio and Chidambaram is possibly the only person to enjoy that,” said Satish Misra, an analyst at the New Delhi-based Observer Research Foundation. “You have to pick people within the available human resources and the choices are limited.”
To revive Singh’s economic agenda, the new finance minister will have to contend with the political opposition that’s hampered proposals to allow foreign retailers to open supermarkets and lift overseas investment caps on the pensions and insurance industries.
In February this year, an Indian court dismissed a petition asking that Chidambaram be probed for corruption in a 2008 sale of mobile-phone licenses. The permits were scrapped after India’s biggest graft investigation, a scandal that weakened Singh’s government and stalled its legislative agenda.
“Chidambaram will have to face the opposition parties and their campaign, which might get shriller with his move to the Finance Ministry, but it is unlikely to affect his work as it is part of the political reality,” Misra said.
India’s growth slowdown, consumer-price inflation exceeding 10 percent and record borrowing to plug a budget gap have hurt investor confidence, prompting Fitch Ratings and Standard & Poor’s to warn India’s investment-grade credit rating is in jeopardy. S&P lowered the country’s credit outlook to negative from stable in April.
The rupee has tumbled 21 percent against the dollar in the past year, while the BSE India Sensitive Index is down more than 5 percent. The currency’s slide has fanned import costs, adding to price pressures that limit the Reserve Bank of India’s scope to cut interest rates to support Asia’s third-largest economy.
Indian stocks dropped for the first time in four days today after Goldman Sachs Group Inc. reduced the country’s growth forecast. The benchmark stock index fell 0.2 percent as of 11:52 a.m. in Mumbai.
“It is a very messy combination of things that’s going on in the economy,” said Robert Prior-Wandesforde, director of Asian economics at Credit Suisse Group AG in Singapore. Chidambaram must raise fuel prices to pare subsidies and contain the fiscal gap, he said.
The budget shortfall reached 5.8 percent of gross domestic product in the year ended March. While Mukherjee outlined a goal of narrowing it to 5.1 percent in 2012-2013 by capping a subsidy program ranging from diesel to fertilizers, the government still projects borrowing of 5.69 trillion rupees ($102 billion).
The Reserve Bank left its repurchase rate unchanged at 8 percent for a second meeting yesterday, saying inflation is well above its comfort zone. Government spending is “crowding out public investment at a time when reviving investment, both public and private, is a critical imperative,” it said in June.
India’s electricity grid collapsed for the second time in as many days yesterday, cutting off power to more than half the country’s 1.2 billion population and underlining the need for greater spending on roads, ports and power plants.
The Reserve Bank lowered its benchmark rate in April for the first time since 2009 from 8.5 percent. The weaker rupee, energy costs, the impact of deficient rain on crops and the fiscal deficit may limit room for further cuts.
Chidambaram also inherits a proposed clampdown on tax avoidance and a move to allow the retrospective taxation of deals where an Indian business is purchased by an overseas company. The measures, unveiled by Mukherjee in the annual budget in March, have stoked concern the climate for foreign investors is deteriorating.
Power Minister Sushil Kumar Shinde replaces Chidambaram in the Home Ministry, and Veerappa Moily, minister of corporate affairs, takes on the power portfolio, according to a separate government statement.
The timing of the changes “is a big mistake since the message it sends out is that you are not serious about the power crisis,” said Sanjay Kumar, a New Delhi-based analyst at the Centre for the Study of Developing Societies. “Even if the decision was taken a few days back, it could have been delayed.”
During Chidambaram’s second stint as finance minister, the fiscal deficit narrowed to 2.5 percent of GDP in the year ended March 2008, the least since at least 1971, according to data compiled by Bloomberg.
“He is a proven hand in running the ministry, so that is an advantage,” said Mumbai-based Prasanna Ananthasubramanian, chief economist at ICICI Securities Primary Dealership Ltd. “His management on taxation is far superior than any of the recent finance ministers. Those uncertainties on the tax side he will be able to better manage.”
Singh has pledged to revitalize Indian economic expansion, with Congress’ record set to be tested at a general election due in 2014. The prime minister has formed a panel to review the planned tax clampdown and outlined projects including new ports.
Singh has said he is confident the $1.8 trillion economy can grow as much as 9 percent a year again. The majority of Indians still live on less than $2 per day, according to the World Bank.
Achieving faster expansion may depend on meeting a target of limiting subsidies to less than 2 percent of GDP this fiscal year to narrow the budget deficit, as well as tackling a trade shortfall that swelled to a record $184.9 billion in 2011-2012.
The Reserve Bank of India has said the government is at risk of missing the deficit target unless it raises fertilizer and fuel prices to curb subsidies.
“The government of the day doesn’t have the room to carry out reforms,” said Dharmakirti Joshi, chief economist in Mumbai at Crisil Ltd., the local unit of Standard & Poor’s. “Its problems are increasing very fast.”
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