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September reforms: The doctor is in

Congress and government insiders reveal that the government's decisions on FDI and diesel price hike was no sudden move and the Prime Minister had been preparing the ground for months.

Sebastian PT | October 2, 2012 | Updated 20:08 IST

Days before his 80th birthday Prime Minister Dr Manmohan Singh showed he had lost none of his risk-taking appetite. His UPA government, weighed down by scams, had been doing little to arrest the country's economic downslide or to revive investment sentiment. The scams coming to light had also created a fear psychosis across the entire government machinery, leading to an apparent policy paralysis. Coalition constraints also existed. But Dr Singh felt some risks needed to be taken. Also, his reputation as an economic reformer was being questioned. In decisive moves on September 13 and 14, Dr Singh revived his reputation, and how.  

"It is better to go down fighting," was Singh's message to his Cabinet colleagues after announcing decisions to rationalise diesel prices and LPG subsidies and allow FDI in retail and aviation, among other steps. Many of the steps, everyone knew, would provoke a strong political backlash, but Singh was not deterred. "The strident criticisms by the western media recently is what made the Prime Minister suddenly go in for reforms," says his strong critic, former BJP Finance Minister Yashwant Sinha.

Congress and government insiders reveal it was no sudden move. Singh had been preparing the ground for months. He set the blueprint for change in the short period when he kept the Finance portfolio with himself immediately after Pranab Mukherjee quit as Finance Minister on June 26 to run for President. The day after he took over, Singh summoned senior Finance Ministry officials and set the ball rolling. "We need to work to get the economy going again and restart the India growth story," he told them. "In the short run, we need to revive investor sentiment, both domestic and international."

It is no secret that, while Mukherjee was Finance Minister, his stature ensured that his writ ran, both in the government and in the party. Mukherjee strongly supported such steps as the General Anti-Avoidance Rules (GAAR) and retrospect taxation-which had made some investors wary. Singh tactfully tried to reverse Mukherjee's steps by setting up a committee to look into both. Thus even before P Chidambaram was brought back to the Finance Ministry - Singh and Chidambaram see eye to eye on reforms - the template for change had already been set.

Next, most crucially, Singh set about convincing the party to take some risks. Government insiders reveal there were three occasions when Singh discussed- indeed, did some hard selling of - the reforms with Congress Party President Sonia Gandhi. The first was in end-July when they both flew to Assam to assess the flood situation there. They left at around 8am and returned at about 7.30 pm. "During the long flight, the two spent a lot of time discussing several issues, the reforms being prominent among them," says a government source.

It is not that Sonia Gandhi was opposed to reforms. The Congress, Gandhi included, did not have any reservations about foreign direct investment coming into the retail sector. The move had to be shelved last year because coalition allies, especially Mamata Banerjee, opposed it. However, the party had given a clear indication that it had not abandoned the idea when Congress scion Rahul Gandhi pitched vehemently for it during the Uttar Pradesh poll campaign last December. In his election speeches, he spoke of how the move would benefit farmers with better price for their produce, while doing away with middlemen. Still, the party thought the proposal had to be kept in suspension till the allies were brought around, as disrupting the coalition even before having completing half its term made no political sense.

The second meeting was after Singh's Tehran visit at the end of August to attend the Non Aligned countries meet, and the third soon after the washed out Monsoon Session of Parliament, which was stalled by the coal mines allocation scam. It was clear that bringing in reforms through legislation would be a difficult proposition with all political parties having got into the election mode. The FDI proposals were executive decisions and did not need Parliament's sanction. Singh is said to have emphasised that economic conditions worsen if something were not done immediately. The value of the rupee could fall further as well. Worse, there would be not enough money to fund the proposed landmark legislation, the Food Security Bill. On the other hand, there were only two major assembly elections slated for later this year-Gujarat and Himachal Pradesh. Thereafter, there would be a host of state elections culminating in the general election of 2014, making this the apt time to take "some risks". Now or never, was the message conveyed.

Congress sources indicate that Gandhi had no reservations about the reforms. However, she is said to have been reluctant to slash diesel and LPG subsidies. Gandhi knew this would invoke widespread resentment and even the allies would be up in arms. "Is it absolutely necessary?" she reportedly asked. While Sharad Pawar's NCP would be on board for all reforms, the most difficult ally would be Trinamool chief and West Bengal Chief Minister Mamata Banerjee.

Also, Samajwadi Party chief Mulayam Singh and Bahujan Samaj Party supremo Mayawati-both of whom lend "outside" support with 22 and 21 Lok Sabha MPs respectively -  needed to be won over too, or at least kept from withdrawing support. Nevertheless, a calculated risk needed to be taken. Though Mamata would be ready for early polls, the general perception was that most others did not want them. And, if it came to a trust vote-which was unlikely, it was felt the government could muster the numbers.

The pros and cons of taking hard economic decisions were discussed at the subsequent meetings of the Congress Core Committee (which consists of Sonia Gandhi, Manmohan Singh, Ahmed Patel, AK Antony, P Chidambaram and Sushil Kumar Shinde). A comprehensive package that included social sector reforms was also discussed and approved. This included the implementation of the Food Security Bill, continuing the financial support to Mahatma Gandhi NREGS, health sector reforms and so forth.

The party was finally brought around on diesel and LPG at a Congress core committee meeting-a few days before the announcements were made. Petroleum Minister Jaipal Reddy, who was a special invitee to the meeting, stressed that it would be difficult to manage the deficit faced by oil companies any further.

Sonia backed Singh completely.  So much so, on September 14, some of the Congress members frequently visible on TV were summoned to 10, Janpath (Sonia Gandhi's residence) and warned that the party should speak in one voice. Just as he had done over the Indo-US nuclear, the Prime Minister had taken an uncompromising stand and got away with it. Whether the government succeeds in pushing the reforms though will depend a lot on the political skills of Sonia Gandhi.

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