Pro-Market Chidambaram Returns as Finance Minister

(Reuters)

Palaniappan Chidambaram, who as finance minister oversaw India's strongest growth surge in the past two decades, returned to the post on Tuesday but faces a sharp economic slowdown, worsening public finances and falling exports this time around.

A Harvard-educated former lawyer who is regarded as a market-friendly reformer, took over a ministry that was run until recently by Pranab Mukherjee, now the country's president.

"I think we are in safe hands now, it could lead to a turn in sentiment as Chidambaram was involved with reforms, fiscal consolidation," said Abheek Barua, chief economist at HDFC Bankin New Delhi.

"So there will be a sense of ownership now of the reform agenda and that's critical as there was a sense of drift, a sense of no ownership. Nothing will happen magically overnight, but the market will have enough conviction on the reform process."

However, his intellectual prowess, perceived as arrogance in some quarters, has won the 66-year-old enemies within the ruling Congress party and on occasion alienated public opinion.

Prime Minister Manmohan Singh, who stood in as finance minister for a few weeks after Mukherjee's departure, has taken a risk by appointing Chidambaram, who is also battling legal cases.

The Supreme Court is hearing a petition seeking to make him a co-accused in a multi-billion-dollar telecoms scandal that has rocked the Congress-led coalition government, while a subordinate court is hearing another petition challenging his election to parliament in 2009.

Moving from the Home Ministry, Chidambaram becomes Finance Minister for a third time.

In his first stint, in the mid-1990s, Chidambaram carried forward the transformational reforms launched by Singh in 1991, scrapping controls and restrictions right across India's insular and state-stifled economy.

He curbed government spending and kept a huge deficit within limits imposed by a special law that he had piloted himself. In 1997, Chidambaram delighted economists with a budget that lowered import tariffs and slashed tax rates to boost revenues in a country where avoidance was the norm.

POLITICAL, ECONOMIC CHALLENGES

Later, he was hailed for his deft handling of the economy during the global financial crisis in 2008, and his four-year tenure from 2004 saw economic growth averaging about 9 percent.

Investors have been baying for reforms since Singh's coalition government was re-elected in 2009. Political dissension stymied Mukherjee's efforts to push major reforms during his three-year tenure and Chidambaram is likely to face the same roadblocks.

"The fact is the kind of constraints which this government has faced, it is a big question whether Chidambaram or any other person from the government would be able to solve it," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Chidambaram faces a raft of challenges in his new job.

The government's failure to implement structural reforms has resulted in a stubbornly high inflation, making it difficult for the central Reserve Bank of India to cut interest rates significantly despite ebbing economic growth.

Latest quarterly growth figures showed a nine-year low of 5.3 percent, and yet inflation has been running at above 7 percent for two years.

On Tuesday, the RBI predicted more economic pain, lowering its growth projection for financial 2012/13 (April-March) to 6.5 percent from 7.3 and raising its inflation forecast for March 2013 to 7 percent from 6.5.

Higher spending on subsidies coupled with sluggish tax receipts have bloated the fiscal deficit, putting India's investment-grade sovereign debt rating in peril. A record current account gap, policy flip-flops and waning global appetite for risk have also hammered the rupee this year.

To make matters worse, disappointing summer monsoon rains have raised the spectre of a drought, which could force higher public spending and aggravate the government's fiscal troubles.