CONGRESS PARTY WOES CONTINUE

UNCLAS SECTION 01 OF 03 NEW DELHI 001018

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR SCA/INS, DRL

E.O. 12958: N/A
TAGS: PGOV KDEM PREL PINR ECON PREF CH IN
SUBJECT: CONGRESS PARTY WOES CONTINUE

REF: A. NEW DELHI 239

B. 07 NEW DELHI 5392

C. 07 MUMBAI 722

D. KOLKATA 88

E. KOLKATA 81

F. CHENNAI 119


1. (SBU) Summary: With little political headway on the civil
nuclear initiative and election defeats in Gujarat, Himachal
Pradesh, and the Northeast (refs A,B,C,D,E),good news for
the Congress Party has been in short supply in recent months.
The latest piece of bad news: rising food prices, which
threaten to politically neutralize the United Progressive
Alliance's (UPA) recently announced, highly populist budget.
With the party taking hits on issue after issue from the
Bharatiya Janata Party (BJP) on the right and its Communist
"allies" on the left, Congress party leaders have become
extremely risk averse and are unlikely to take any bold
initiatives. A strong showing in the May state elections in
Karnataka could turn the tide somewhat. Regardless, a weak
Congress Party, fearful of facing the electorate, is likely
to hold off national polls until May 2009. End Summary.

Congress Party's Newest Nightmare
--------------


2. (SBU) As if things could not get worse, the Congress
Party is confronted today by a potential fatal development:
sharply rising prices of food staples. Due to India's
political culture of strong anti-incumbency voting, ruling
governments find reelection difficult even in the best of
times: witness the BJP-led coalition's humbling ouster in
2004 at the height of its India Shining era. Political
parties know that reelection is nearly impossible during
times of increasing food prices and Indian political history
is replete with examples of governments being turned out due
to rising food prices. The most famous case was the Delhi
state government losing an election in which the dominant
issue was the soaring price of onions.


3. (SBU) It is for this reason that the UPA government
convened an emergency meeting of the Cabinet Committee on
Prices on March 31 amidst a spate of media coverage during
the previous days that focused on rising prices. These
stories were kicked off by a report that inflation in March
reached a 13-month high of 6.68 percent, as measured by the
wholesale price index (WPI). (Comment: The Reserve Bank of
India's target rate is 5 percent. The GOI uses a WPI to
measure inflation, since its version of a consumer price
index (CPI) is - by its own admission - of limited use and
focuses on cost-of-living adjustments for non-manual service
sector workers. The GOI is working to correct these
statistical deficiencies by constructing a broad-based CPI
basket for urban and rural India, respectively. The spike in
the WPI has in fact been driven as much by increases in
industrial inputs, particularly metals and fuel, as it is by
high global agricultural prices. Regardless of the actual
composition of the inflation indices, the average Indian is
not happy that he or she has to pay more for a range of basic
necessities. End Comment.) After the late night huddle by
the Cabinet, the GOI announced a series of decisions to
combat the price increases: reduction or elimination of
customs duties on selected food items such as edible oils,
refined oils, and corn, prohibition of export of non-basmati
rice, setting of a minimum export price for basmati rice and
other administrative measures to control stocks and trading
in food commodities.


4. (SBU) As an indication of the pressure being felt by the
Congress Party on the price issue, it attempted to shift
blame for the food prices to others: its ally, Agriculture
Minister Sharad Power, for failing to implement "better
agricultural policies;" and Uttar Pradesh Chief Minister
Mayawati, for "failure of the state machinery" in that state.
Although there may be some small grain of truth to these

NEW DELHI 00001018 002 OF 003


charges, the voters will find this quite implausible and
remain inclined to lay the blame on the UPA and the Congress
Party.

UPA: A Favorite Communist Punching Bag
--------------


5. (U) The rising inflation reports provoked quick responses
from the almost every political party. The Communist Part of
India - Marxist (CPI-M),which particularly enjoys skewering
its ally, threatened to launch a countrywide campaign on
April 15 unless the UPA government took immediate steps to
check inflation. Accusing the government of a "neo-liberal"
approach, the CPI-M called on the UPA to strengthen the
public system for acquisition and subsidized distribution of
food, to expand the list of commodities covered by the public
distribution system, to reduce prices of oil and gas, and to
ban trading in commodity futures, among other measures. The
inflation news provided the CPI-M and its left partner the
Communist Party of India (CPI) a good excuse for some heavy
Congress-bashing as the two parties headed into their party
respective conferences in Coimbatore and Hyderabad this week.


BJP: Too Little, Too Late
--------------


6. (U) The BJP, too, used the inflation reports to launch
scathing attacks on the UPA. The BJP spokesman called the
UPA steps inadequate and not timely, stating that the
half-hearted measures announced by the government would do
nothing to check the price increases. He called on the UPA
government to take a "holistic" approach to the problem and
manage inflation by attending to both demand and supply. The
BJP further attacked the GOI for trying to shift the blame
for rising prices on international markets and accused the
GOI of mismanaging the country's grain stocks, not taking
action against hoarders, and "systematically destroying" the
public distribution system.

BJP: Blasts GOI on Tibet Policy
--------------


7. (SBU) The BJP, with momentum after posting resounding
wins in Gujarat and Himachal and getting its own house in
order, seeks out with relish any opportunity it can find to
attack the Congress Party. It continues to use its standard
quiver of campaign issues -- pandering to minorities, soft on
terrorism and national sovereignty, agricultural crisis, and
a weak and indecisive government -- but will also seize other
opportunities that present themselves. This week it is the
price shocks, which could persist for some time. Last week,
siding strongly with the Dalai Lama and the Tibetan people,
the BJP blasted the GOI on its Tibet policy. L.K. Advani,
Rajnath Singh and Jaswant Singh issued a joint statement
accusing the GOI of "blatant appeasement towards China" and
of having no regard for "national honor." They called the
UPA's Tibet policy "nationally humiliating." They referred
to ancient cultural and spiritual ties with Tibet, and warned
against India "disconnecting with this linkage." Former
National Democratic Alliance Defense Minister and current MP,
George Fernandes, recently issued a press release that
likened China to "a killing machine," and called upon the
"habitually weak UPA government to voice the objections of
the people of India" towards China's treatment of the Dalai
Lama. The BJP attack on the GOI's Tibet policy is doubly
effective because it also highlights the position of Indian
Communist parties, which have openly come out on the Chinese
side, stating that Tibet is an internal Chinese matter that
should not be a subject of comment in India.

All Eyes on Karnataka
--------------


8. (SBU) With the recent announcement that state assembly

NEW DELHI 00001018 003 OF 003


elections in Karnataka will take place in May (ref F),the
focus of the political classes will shift to that that state.
Like Gujarat, Karnataka will become a bellwether indicating
which way the political winds are blowing. Should the
Congress Party stumble once again in the Karnataka elections,
it will further enfeeble the party as it enters its last year
in office. We may see some of its UPA allies trying to
distance themselves from the party, much like the communist
parties have been trying to do in recent months. On the
other hand, should the Congress Party somehow manage to win
an absolute majority or fare better than expected in the
three-cornered race with the BJP and the Janata Dal (Secular)
in the fray, it will go a long way towards reenergizing the
party, lifting its spirits and wiping away some of the
despair that had set in after the recent losses in Gujarat
and other states.

Comment: Elections Closer to May 2009?
--------------


9. (SBU) Conventional political wisdom in India holds that
the weaker the Congress Party, the less likely it is to go
for national elections. A corollary is that the weaker the
Congress Party, the less likely it is to push for the
U.S.-India civil nuclear agreement because of its reluctance
to face an early election. The latest news on price
increases, therefore, increases the chances that elections
will be closer to the May 2009 deadline and does not augur
well for any risk-taking by Mrs. Gandhi for the civil nuclear
agreement.

Comment: Budget Boost Wiped Out
--------------


10. (SBU) The inflation surge is doubly troubling for the
Congress Party because not only does it pose a huge political
challenge in itself, it also wipes off any luster from the
unprecedented 15 billion dollar farm debt write-off that the
party had offered in its February 29 budget proposal. The
falling Indian stock market had already begun to affect a
slice of urban Indian voters. The price increases will
affect a great many more India voters and reverberate more
loudly and widely within the India political system. If the
inflation rate persists, we could see the Congress Party
resort to massive subsidies and/or price controls, which
would put pressure on the budget and economic growth, and
further distort the markets.
DEIKUN