Palaniappan Chidambaram served as finance minister when the
Indian economy (
) reached its recent peak, from 2004-'08. Now Prime Minister
Manmohan Singh has brought him back to try and repeat the miracle,
or at least save India's debt from a downgrade to junk status.
[caption id="attachment_71760" align="alignright" width="300"
caption="India's new finance minister, P. Chidambaram"]
Singh redeployed trusted lieutenant Chidambaram to the Ministry
of Home Affairs after terrorists massacred guests at a Mumbai hotel
in 2008. His return to the Finance Ministry as of July 30 has sent
a shiver of optimism through an Indian elite that has felt wedged
between slowing growth and rising inflation that limits the
government's options for stimulating the Indian economy. The Bombay
Stock Exchange's Sensex index has dropped 15% from a peak in
"There is definitely some amount of hope that has come in after
P. Chidambaram assumed charge as Union finance
," Suresh Senapaty, chief financial officer of software powerhouse
Wipro Limited (
), told India's
Chidambaram has shown he means business by
recruiting renowned Indian-born economist Raghuram
as his top adviser on the Indian economy. A former chief economist
at the International Monetary Fund, Rajan is currently a prominent
free-market apostle at the University of Chicago.
The returning finance minister also set up a blue-ribbon panel
to attack India's budget deficit, which came in last year at 5.9%
of GDP and will probably repeat in that range for 2012 - ominous
for the Indian economy. The yawning gap elicited recent warnings
from Fitch and Standard & Poor's that New Delhi is on watch for
a downgrade in its rating, which already clings to the last rung of
But Chidambaram's quest for more-balanced books faces powerful
political headwinds. Key to deficit reduction would be an attack on
state subsidies for fuel, fertilizer and food, which have almost
tripled over the past decade and now eat up nearly 5% of GDP. Aid
for fertilizer and food is considered sacrosanct by Sonia Gandhi,
the Italian-born matriarch of India's foremost political dynasty.
(Gandhi heads the ruling United Progressive Alliance party,
although Singh serves as prime minister.) That leaves Chidambaram
the unattractive option of outraging drivers and industrialists by
raising the price of diesel fuel.
Without progress on the budget, Chidambaram will be treading on
thin ice if he implements his second major tool for boosting the
Indian economy: lower interest rates. The Reserve Bank of India's
prime rate currently is set at 8%. High rates
"inhibit the investor and are a burden on every class of
the finance minister railed lately. But the RBI has been rightly
reluctant to ease, with annual inflation running near 7%, above the
bank's "comfort zone" of 5%.
The 66-year-old Chidambaram, who boasts a Harvard MBA, will
return professionalism to India's Finance Ministry at a critical
time, after three or four lackluster years under career politician
Pranab Mukherjee (who was kicked upstairs to become president). But
that is only a start.