How Sonia Gandhi was persuaded to back economic reforms

It was a stunningly assertive speech from the normally temperate Gandhi. And yet few at the gathering were aware that just a week earlier she had performed an even more dramatic about-face,agreeing to a raft of economic reforms that would be unveiled on September 13 and 14. Gandhi has no official government post,but as Congress party president and torchbearer of India’s widely revered first family,she has the last word on big policy issues: and for her,social welfare has always come before liberalising the economy.

However,more than a dozen officials and party leaders close to the secretive inner circle of the Italian-born leader said that Gandhi was persuaded of the need for urgent action to avert a repeat of the crisis that took India to the brink of bankruptcy in 1991.

This time there was a very grim scenario,said Rashid Kidwai,a Sonia Gandhi biographer who was given an account of the arguments made over weeks by Prime Minister Manmohan Singh and his new Finance Minister behind the closed doors of colonial-era government bungalows in New Delhi and even on a plane journey.

It’s not that she wanted to go for all this,but it was made very clear to her that,if she didn’t,there would be far more dire consequences,Kidwai said.

Sources said the trigger for the reform campaign in Asia’s third-largest economy came with the return of P Chidambaram as Finance Minister on August 1.

An eloquent Harvard-educated technocrat with a track record as a reformer,he replaced Pranab Mukherjee,who had consistently warned Gandhi against radical reforms that could cost the party votes.

Pranab was from the old school of Indian politics,said a senior government official,who spoke on condition of anonymity. The Prime Minister and the Finance Minister had to persuade Gandhi that good economics was good politics.

Her acquiescence in the end led to this month’s big bang last Friday when,a day after taking an axe to costly subsidies on diesel,the government announced that the retail market would be opened to foreign supermarket chains and the bar on foreign investment in both airlines and broadcasters would be lifted.

In sum,these were the most sweeping reforms since Manmohan Singh took office in 2004 and in the space of 48 hours they dispelled the image of a Prime Minister who was losing his mojo as India’s high-trajectory growth faltered.

A RELUCTANT REFORMER

Insiders,however,say Gandhi remains instinctively wary of economic liberalisation and trimming the budget deficit. For months,she had held out against cutting fuel subsidies that are aimed at the poor and the country’s rural majority,fearing the impact on the Congress party’s fortunes.

She only agreed when Singh and Chidambaram spelled out that new growth generated by reforms and improved investor sentiment would have a trickle-down effect and provide funds for welfare spending in time for elections due by mid-2014.

They explained to Gandhi that social benefits for the poor will need deep pockets,said a Congress party source who declined to be named because the discussions were confidential.

The Reuters reviewed more than 30 letters written by Gandhi to the Prime minister and US diplomatic cables released by WikiLeaks that portray her as passionate about social issues,and attached to protecting the poor.

That means the sudden burst of reforms could be cut short if Gandhi who Forbes magazine ranks as the world’s sixth most powerful woman sees no benefits for the rural poor on whom her party relies for votes.

Indeed,party sources said she will now focus on passing a bill on universal food security in December,a populist plan that would cost billions of dollars at a time when her government is under intense pressure to rein in spending.

She just wants enough budgetary resources available to finance her welfare schemes,said Swapan Dasgupta,a political commentator,who leans towards the Opposition.

She has never spoken about reforms. What she has done is make Congress think of reforms as a low priority and a political liability she has ingrained that mindset in the party.

A request to interview Gandhi was declined.

A BENEVOLENT MATRIARCH

Gandhi gives little away about her thinking on economic policy,but dispatches from the US embassy in New Delhi during the early years of Singh’s tenure show she made repeated objections to proposed hikes in fuel prices,which are heavily subsidised to cushion the poor.

Key leaders (including Sonia Gandhi) have opposed the price hikes,criticised the way they have been handled,or urged Congress to capitulate to … demands for a ‘rollback’,and the party is finding it difficult to speak with one voice,one of the cables said.

Describing a leader who projects herself as a benevolent matriarch,the dispatches were scathing about one of her pet projects,a scheme guaranteeing 100 days of paid employment per year for rural citizens. At worst,the jobs plan is political patronage run amok and horrid economic policy,one said.

Gandhi also set up the National Advisory Council,a government-funded think tank that offers legislative guidance on social policy and the rights of disadvantaged groups.

A batch of letters Gandhi wrote as chairperson of the council,which were recently released under the Right to Information Act,illustrate where her priorities lie.

Writing to the PM and several ministers,she drew their attention to issues such as legal entitlement to subsidised foodgrains,child labour,housing for the poor and indiscriminate acquisition of agricultural land for private companies. In one letter,she closed by urging a minister: You may like to have the matter examined appropriately.

WARNINGS OF IMPENDING CRISIS

How was Gandhi persuaded that,as one government official put it,if you are not growing you are distributing poverty?

For one thing,the economy was in trouble. Growth had dropped to its lowest clip in three years,the fiscal deficit was blowing past official targets,and the government was under heavy fire for sitting on its hands as the crisis mounted.

With Mukherjee gone from the Finance Ministry,Singh and Chidambaram made their move,warning Gandhi of a possible slump in the rupee and even a repeat of 1991,sources said.

There were three meetings over about four weeks… to tell her that if we don’t do all this it will be bad politics,said the senior government official. Singh also tackled Gandhi at length on the issue in July during a flight from Delhi to the northeastern state of Assam. Adding his voice at a separate meeting,Commerce Minister Anand Sharma explained to Gandhi t hat opening up to global supermarkets like Wal-Mart Stores Inc could tame the corruption that plagues the state-run food distribution network – a compelling argument after two years of graft scandals that have damaged her government.

When Gandhi returned in September from a medical check-up abroad,the stage was set for ‘big bang Friday’. And although the reforms triggered the walkout of Trinamoll Congress,a key coalition partner from the government,reducing it to a minority,she has resisted calls for a U-turn and even plans to join a street march in favour of the retail sector reform.

Gandhi’s ambition in all this is to ensure that the Congress party returns to power in 2014,with her son Rahul at the helm of the government after eight years waiting in the wings.

What she is concentrating on is really the need to be re-elected,said M J Akbar,a former Congress party lawmaker and once a trusted Gandhi family insider. The only thing wrong about this reforms business though is … they left it too close to the election.