Moment of Truth in New Delhi

We’ll soon find out whether Prime Minister Singh can salvage something positive from his final two years in office

A previous post focused on the recent political crisis in Pakistan that resulted in Prime Minister Gilani’s removal and in the process further destabilizing the civilian government as well as complicating efforts to repair spiraling U.S.-Pakistan relations. As this drama was playing out, political intrigues were also afoot in New Delhi. Although it is too soon to know for sure, they might just prove cathartic and allow Prime Minister Manmohan Singh to shake off the policymaking torpor of the last three years.

Mr. Singh’s re-election in May 2009 – an unexpected political victory that he hailed as a “massive mandate” – sparked widespread hope that a spate of long-delayed economic reforms would finally be enacted. Indeed, the euphoria in the Indian business community was so great that frenzied trading at the Bombay Stock Exchange tripped the electronic breakers. But these high expectations have so far been misplaced. Just a few years ago, India was the darling of global investors and the country’s growth story was celebrated at the World Economic Forum in Davos. These days, however, foreign investment is fleeing the country at such a rapid clip that the rupee is now at record lows vis-à-vis the U.S. dollar.

The disillusionment is attributable, at least in part, to the fractiousness of Singh’s coalition government. As disappointments mounted about his record, he has sought to deflect responsibility by citing “coalition dharma.” A few months ago, Kaushik Basu, the finance ministry’s chief economic adviser, warned that coalition politics have so gummed up decision-making in New Delhi that serious movement on the reform agenda would have to wait until after parliamentary elections scheduled two years from now. He added that the best that can be hoped for until then is a sprinkling of minor initiatives.

Much of Singh’s travails can be traced to the Trinamool Congress, a political party based in West Bengal that is his most important coalition partner. Its head, Mamata Banerjee, has become what the Wall Street Journal calls “a one-woman wrecking crew of the national government’s policy initiatives.” The Economist terms her “a coalition member so truculent as to be a virtual member of the opposition.” A tribune of economic populism, she was instrumental late last year in forcing Singh’s ignominious retreat on opening up the huge retail sector to foreign companies, an act which would have had a transformative economic impact if it had been allowed to go forward. Indeed, she even reportedly snubbed the prime minister by refusing to take his phone call on the issue. She also has torpedoed a water-sharing treaty that was supposed to be the highlight of the prime minister’s landmark visit to Bangladesh last September as well as a proposal to create a national counter-terrorism center earlier this year.

Singh seemed resigned to the humiliations Banerjee regularly inflected on his reputation as an economic reformer, so much so that he seemed like a broken man to many observers. But events over the past two weeks suggest that Singh’s Congress Party has reached the limits of its patience with Banerjee’s intransigence. The showdown occurred over the selection of the country’s next president, who will be chosen July 19 by an electoral college composed of some 5,000 members of both houses of the national parliament and state legislative assemblies.

The presidency is the head-of-state post that is largely titular but also has significant discretionary authority in dealing with a hung parliament. Anticipating that no party will emerge from the 2014 elections with a clear parliamentary majority and that it may need inside help in forming a government, Congress nominated Pranab K. Mukherjee, a long-time party stalwart from West Bengal who has tons of ministerial experience and commands wide respect across the political spectrum. Banerjee rejected his candidacy, in part because she sees Mukherjee as a rival influence in the state’s politics, but also because she wants to create a national bloc of other regional parties that would run against Congress in the 2014 polls.

Opening defying her coalition partner, Banerjee put forth a list of her own presidential preferences, at the top of which was A.P.J. Abdul Kalam, a hero of India’s nuclear weapons program who earlier served a stint as president from 2002-2007. Mr. Singh’s name was also on the list, a backhanded honor indicating that she no longer had confidence in his abilities as prime minister. To make sure Congress took notice, she sought to enlist the backing of the Samajwadi Party, which governs Uttar Pradesh, the country’s most populous state, and provides outside parliamentary support to Singh’s government. But her plans dramatically collapsed when Kalam announced that he was not interested in the job and Samajwadi swung its support to Mukherjee.*

With Congress appearing to have lined up the requisite number of votes, Mukherjee is a shoo-in for the July 19th poll. But the skirmish with Banerjee has ramifications beyond the issue of who should next occupy the opulent presidential palace. With the TMC chief being outmaneuvered, Singh now has a freer hand within his Cabinet to reactivate the reform agenda. He has already started making noises about taking “tough decisions,” including moving ahead on retail liberalization. But he may soon run into an even more formidable roadblock, one that Banerjee’s obstructions helped camouflage: the ambivalence of his Congress Party colleagues.

Sonia Gandhi, the matriarch of the Nehru-Gandhi dynasty that controls the party, in particular does not share Singh’s reformist inclinations and is more given to market-distorting welfare spending that promises short-term electoral gains than productivity-enhancing measures whose effect will only be apparent over a longer frame. Her stance accounts for the huge budget deficits that Singh’s government is running but also the glaring silence in New Delhi last summer at the 20^th anniversary of the 1991 reforms that launched India into its current economic orbit as well as Narasimha Rao’s erasure from the party’s institutional memory. Ironically, the success of the transformations that Singh set in motion two decades ago as Rao’s acclaimed finance minister have only reinforced the party’s status-quo orientation.

We will find out in the coming weeks whether Singh’s government will continue drifting aimlessly or can salvage something positive for its last two years in office. Much is hanging in the balance. If the prime minister is indeed able to charge ahead with reviving “the animal spirits in the country’s economy” as he now says he intends to do, he will put to rest growing suspicions that India is destined to be a stillborn great power. Ditto for the increasing doubts in Washington about Delhi’s capacity for making the big decisions necessary to advance bilateral ties.

*It was not a good week for Banerjee. The Kolkata (formerly Calcutta) High Court also struck down a law she championed that would have forced Tata Motors to forfeit the land it acquired in a high-profile auto plant project that it later shelved. Banerjee’s election as West Bengal’s chief minister in May 2011 was largely due to her populist agitations that caused Tata to move the project to Gujarat state.

This commentary was originally posted on Chanakya’s Notebook.   I invite you to follow me on Twitter.