Will Rajan do a Volcker before 2014 Lok Sabha elections?

 ARTS RAJANVivek Kaul
People who follow the Reserve Bank of India(RBI) governor Raghuram Rajan were expecting him to raise the repo rate by 25 basis points(one basis point is one hundredth of a percentage) in the mid quarter monetary policy review announced on December 18, 2013. Repo rate is the rate at which RBI lends to banks.
But that did not happen. This led one journalist attending the press conference after the policy announcement, to quip “We were expecting a Volcker, we got a Yellen.” To this, governor Rajan replied “Why a Volcker or a Yellen, how about a Rajan?” (As reported 
in the Business Standard).
Rajan took over as the 23
rd governor of the RBI on September 4, 2013. Since then he has often been compared to the former Federal Reserve chairman Paul Volcker.
Volcker took over as the chairman of the Federal Reserve of United States in August 1979. This was an era when the United States had double digit inflation.
Interestingly, when Arthur Burns retired as the Chairman of the Federal Reserve in 1978, the inflation was at 9%. Jimmy Carter, the President of the United States, chose G William Miller, a lawyer from Oklahoma, as the chairman of the Federal Reserve.
Miller had no background in economics. As Neil Irwin writes in 
The Alchemists – Inside the Secret World of Central Bankers “Most significantly, Miller, fearful of a recession, refused to tighten the money supply to fight inflation. By the summer of 1979, with inflation at 10 percent, Carter had had enough. He “promoted” Miller to treasury secretary as a part of the cabinet shake-up, a job with less concrete authority. That left him with a vacancy in the Fed chairmanship.”
Carter picked up Paul Volcker as Miller’s replacement. Volcker at that point of time was the President of the Federal Reserve Bank of New York. Volcker had been a civil servant under four American presidents. “In his meeting with the president before the appointment, Volcker told Carter he was inclined to tighten the money supply to fight inflation. That’s what Carter was looking for – but he almost certainly didn’t understand just what he was getting,” writes Irwin.
In the year that Volcker took over consumer prices rose by 13%. The only way out of this high inflation was to raise interest rates and raise them rapidly. The trouble was that Jimmy Carter was fighting for a re-election in November 1980.
As Irwin writes “On an air force jet en route to an International Monetary Fund conference in Belgrade, Volcker explained his plans to Carter’s economic advisers. They didn’t like them one bit. Sure, Carter wanted lower inflation. But higher interest rates affect the economy with a lag of many months. There was barely a year to go until the president would be running for reelection, which meant that just as their boss was asking voters for another term, unemployment would be sky-rocketing due to the new Volcker policy.”
Volcker was not going to sit around doing nothing and came out all guns blazing to kill inflation which by March 1980 had touched a high of 15%. He kept increasing increasing rates, till they had touched 20% by January 1981. This had an impact on inflation and it fell to below 10% in May and June 1981

The prime lending rate or the rate at which banks lend to their best customers, had been greater than 20% for most of 1981
. Increasing interest rates did have a negative impact on economic growth and led to a recession. In 1982, the unemployment rate crossed 10%, the highest it had been since 1940 and nearly 12 million Americans lost their jobs.
During the course of the same year, nearly 66,000 companies filed for bankruptcy, the highest since the Great Depression. And between 1981-83,, the economy lost $570 billion of output. While all this was happening, Jimmy Carter also lost the 1980 presidential elections to Ronald Reagan.
India and Rajan are in a similar situation right now. The consumer price inflation(CPI) for the
 month of November 2013 was at 11.24%. In comparison the number was at 10.17% in October 2013. At the same time Lok Sabha elections are due next year.
In this scenario will Rajan jack up the repo rate to control inflation? When a central bank raises the interest rate the idea is to make borrowing expensive for everyone. At higher interest rates people are likely to borrow less than they were in the past. Also, people are likely to save more money. This ensures that a lesser amount of money chases goods and services, and that in turn brings inflation down.
At higher interest rates, borrowing becomes expensive for the government as well. This might force the government to cut down on its expenses. When a government cuts down on its expenses, a lower amount of money enters the economy, and that also helps in controlling inflation. But that is just one part of the argument.
One school of thought goes that there is not much the RBI can do about inflation by increasing interest rates. Leading this school is finance minister P Chidambaram. As he said in late November “Consumer inflation in India is entrenched due to high food and fuel prices and monetary policy has little impact in curbing these prices…There are no quick fixes for inflation, will take some time to fix it,” he said.
This logic is borne out to some extent if one looks at the inflation numbers in a little more detail. The food inflation as per wholesale price index(WPI) was at 19.93% in November 2013. Within it, onion prices rose by 190.3% and vegetable prices rose by 95.3%. The food inflation as per the consumer price index(CPI) stood at 14.72% in November 2013. Within food inflation, vegetable prices rose by 61.6% and fruit prices rose by 15%, in comparison to November 2012.
Hence, a large part of inflation is being driven by food inflation. As the RBI said in the 
Mid-Quarter Monetary Policy Review: December 2013 statement released on December 18, 2013, “Retail inflation measured by the consumer price index (CPI) has risen unrelentingly through the year so far, pushed up by the unseasonal upturn in vegetable price.”
A major reason behind the Rajan led RBI not raising the repo rate was the fact that they expect vegetable prices to fall. “Vegetable prices seem to be adjusting downwards sharply in certain areas,” it said in the monetary policy review statement. Taimur Baig and Kaushik Das of Deutsche Bank Research in a note dated December 18, 2013, said “vegetable prices, key driver of inflation in recent months, have started falling in the last couple of weeks (daily prices of 10 food items tracked by us are down by about 7% month on month(mom) on an average in the first fortnight of December).”
If vegetable prices in particular and food prices in general do come down then both the consumer price and wholesale price inflation are likely to fall. If we look at the RBI’s decision to not raise the repo rate from this point of view, it looks perfectly fine.
But there is another important data point that one needs to take a look at. And that is core retail inflation. If one excludes food and fuel constituents that make up for around 60% of the consumer price index, the core retail inflation was at 8% in November 2013. This needs to be controlled to rein in inflationary expectations. As the monetary policy review statement of the RBI points out “High inflation…risks entrenching inflation expectations at unacceptably elevated levels, posing a threat to growth and financial stability.”
According to a recent survey of inflationary expectations carried out by the RBI, Indian households expect consumer prices to rise by 13% in 2014. Th rate of inflation that people(individuals, businesses, investors) think will prevail in the future is referred to as inflationary expectation. Inflationary expectations can be reined in to some extent by raising interest rates. As Baig and Das said in a note dated December 16, “RBI would still want to maintain a hawkish stance to ensure that inflation expectations (which is firmly in double digit territory as per recent surveys) do not rise further.”
The trouble here is that higher interest rates will dampen consumer expenditure further. At higher interest rates people are less likely to borrow and spend. The businesses are less likely to expand. This is reflected in the private final consumption expenditure(PFCE) number which is a part of the GDP number measured from the expenditure point of view. The PFCE for the period between July and September 2013 grew by just 2.2%(at 2004-2005 prices) from last year. Between July and September 2012 it had grown by 3.5%. The PFCE currently forms around 59.8% of the GDP when measured from the expenditure side.
The lack of consumer demand is also reflected in the index of industrial production(IIP), a measure of industrial activity. 
For October 2013, IIP fell by 1.8% in comparison to the same period last year. If people are not buying as many things as they used to, there is no point in businesses producing them. It is also reflected in manufactured products inflation, which forms around 65% of WPI. It stood at 2.64% in November 2013.
When the demand is not going up, businesses are not in a position to increase prices. And that is reflected in the manufacturing products inflation of just 2.64%. It was at 5.41% in November 2012.
Given this, if the Rajan led RBI were to keep raising the repo rate to bring down inflationary expectations, it would kill consumer demand further. The Congress led UPA government won’t want anything like this to happen in the months to come. They have already messed up with the economy enough.
Hence, Rajan and the RBI would have to make this tricky decision. If the keep raising the repo rate, chances are they might be able to rein in inflationary expectations and hence inflation, in the time to come. Nevertheless, if they keep doing that the chances of the Congress led UPA in the Lok Sabha elections will go down further.
To conclude, when Arthur Burns was appointed as the chairman of the Federal Reserve on January 30, 1970, president Richard Nixon had remarked,“I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed”. Burns had not disappointed Nixon and started running an easy money policy before the 1972 presidential election, which Nixon eventually won.
Raghuram Rajan needs to decide, whether he wants to go against the government of the day and do what Volcker did, or fall in line and help the government win the next election, like Burns did. Its a tricky choice.

 The article originally appeared on www.firstpost.com on December 20, 2013 
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why the Federal Reserve will be back to full money printing soon

helicash Vivek Kaul 
The Federal Reserve of United States led by Chairman Ben Bernanke has decided to start tapering or go slow on its money printing operations in the days to come.
Currently the Fed prints $85 billion every month. Of this $40 billion are used to buy mortgage backed securities and $45 billion are used to buy American government bonds. Come January and the Fed will ‘taper’ these purchases by $5 billion each. It will buy mortgage backed securities worth $35 billion and $40 billion worth American government bonds, every month. The American central bank hopes to end money printing to buy bonds by sometime late next year.
The Federal Reserve started its third round of money printing(technically referred to as Quantitative Easing(QE)- 3) in September 2012. The idea, as before, was to print money and pump it into the financial system, by buying bonds. This would ensure that there would be enough money going around in the financial system, thus keeping interest rates low and encouraging people to borrow and spend money.
This spending would help businesses and in turn lead to economic growth. With businesses doing well, they would recruit more and thus the job market would improve. Higher spending would also hopefully lead to some inflation. And some inflation would ensure that people buy things now rather than postpone their consumption.
Unlike the previous rounds of money printing, the Federal Reserve had kept QE 3 more open ended. As the Federal Open Market Comittee(FOMC) of the Fed had said in a statement issued on September 13, 2012 “ If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”
Now what did this mean in simple English? Neil Irwin translates the above statement in 
The Alchemists – Inside the Secret World of Central Bankers “We’ll keep pushing money into the system until the job market really starts to improve or inflation starts to become a problem. And we will act on whatever scale we need until we achieve that goal. We’re not going to take the foot off the gas, that is, until some time after the car has reached cruising speed. Markets had been eagerly speculating about the possibility of QE3. Instead, they got something bigger: QE infinity.”
In a statement issued on December 13, 2012, it further clarified that it was targeting an unemployment level of 6.5%, in a period of one to two years. And the hint was that once the level is achieved, the Federal Reserve would start going slow on money printing.
The unemployment rate for November 2013 came in at 7% as employers added nearly 203,000 workers during the course of the month. This is the lowest the unemployment level has been for a while, after achieving a high of 10% in October 2009. The Federal Reserve’s forecast for 2014 is that the rate of unemployment would be anywhere between 6.3 to 6.6%. Given this, it was about time that the Federal Reserve started to go slow on money printing.
History has shown us that continued money printing over a period of time inevitably leads to high inflation and the destruction of the financial system. Hence, going slow on money printing “seems” like a sensible thing to do. But there are several twists in the tail.
The unemployment rate of 7% in November 2013, does not take into account Americans who have dropped out of the workforce, because they could not find a job for a substantial period of time. It also does not take into account people who are working part time even though they have the education and experience to work full time.
Once these factors are taken into account the rate of unemployment shoots up to 13.2%. The labour participation ratio has been shrinking since the start of the finanical crisis. In 2007, 66% of Americans had a job or were looking for one. The number has since shrunk to around 63%. To cut a long story short, all is not well on the employment front.
What about inflation? The measure of inflation that the Federal Reserve likes to look at is the core personal consumption expenditure (CPE). The CPE has been constantly falling since the beginning of 2013. At the beginning of the year it stood at 2%. Since then the number has constantly been falling and for October 2013 stood at 1.11%, having fallen from 1.22% a month earlier. This is well below the Federal Reserve’s target level of 2%. In 2014, the Federal Reserve expects this to be around 1.4-1.6%. And only in 2015 does the Fed expect it touch the target of 2%.
The point is that the Federal Reserve hasn’t been able to create inflation even after all the money that it has printed over the last few years, to keep interest rates low. A possible explanation for this could be the fact that the disposable income has been falling leading to a section of people spending less, and hence, lower inflation. As Gary Dorsch, editor of Global Money Trends newsletter points out in his latest newsletter “For Middle America, real disposable income has declined. The Median household income fell to $51,404 in Feb ‘13, or -5.6% lower than in June ‘09, the month the recovery technically began. The average income of the poorest 20% of households fell -8% to levels last seen in the Reagan era.”
Given this, instead of the inflation going up, it has been falling. The benign inflation might very well be on its way to become a dangerous deflation, feels CLSA strategist Russell Napier.
Deflation is the opposite of inflation, a scenario where prices of goods and services start to fall. And since prices are falling, people postpone their consumption in the hope of getting a better deal at a lower price. This has a huge impact on businesses and hence, the broader economy, with economic growth slowing down.
Deflation also kills stock markets. As Napier wrote in a recent note “Inflation has fallen to 1.1% in the USA and 0.7% in the Eurozone and we are now perilously close to deflation…Investors are cheering the direct impact of QE on their equity valuations, but ignoring its failure to produce sufficient nominal-GDP growth to reduce debt…When US inflation fell below 1% in 1998, 2001-02 and 2008-09, equity investors saw major losses. If a similar deflation shock hits us now, those losses will be exacerbated, since the available monetary responses are much more limited than they were in the past…
We are on the eve of a deflationary shock which will likely reduce equity valuations from very high to very low levels.”
Albert Edwards of Societe Generale in a research note dated December 11, 2013, provides further information on why all is not well with the US economy. As he writes “So far, S&P 500 companies have issued negative guidance 103 times and positive guidance only 9 times. The resulting 11.4 negative to positive guidance ratio is the most negative on record by a wide marginThe highest N/P ratio prior to this quarter was Q1 2001, at 6.8…The margin cycle is turning down, profit forecasts over the next few weeks will be eviscerated. To me, this is consistent with recession.”
What these numbers tell us is that all is not well with the American economy. Over the last few years it has become very clear that the only tool that central banks have had to tackle low growth is to print more money.
Given this, it is more than likely that the Federal Reserve will go back to printing as much as it is currently doing or even more, in the days to come. The FOMC has kept this option open. As it said in a statement “However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchase.”
In simple English, what this means is that if the need be we will go back to doing what we were. As The Economist magazine puts it “It is entirely possible that the tapering decision will prove premature. The Fed terminated two previous rounds of QE, only to restart them when the economy faltered and deflation fears flared. The FOMC’s forecasts have repeatedly proved too optimistic. Two years ago it thought GDP would grow 3.2% in 2013; a year ago, that had dropped to 2.6%, and it now looks to come in around 2.2%..”
We haven’t seen the end of the era of easy money as yet. There is more to come.
The article originally appeared on www.firstpost.com on December 19, 2013.

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why inflation-fighter Raghuram Rajan did not raise the repo rate

ARTS RAJANVivek Kaul 
Raghuram Rajan, the governor of the Reserve Bank of India (RBI) surprised everybody today, by choosing to not raise the repo rate. The repo rate will continue to be at 7.75%. Repo rate is the rate at which the RBI lends to banks.
Economists had been predicting that Rajan will raise the repo rate in order to rein in inflation. The consumer price inflation(CPI) for the
 month of November 2013 was at 11.24%. In comparison the number was at 10.17% in October 2013. The wholesale price inflation(WPI) number for November 2013 came in at 7.52%. In comparison the number was at 7% in October 2013.
As Taimur Baig and Kaushik Das of Deutsche Bank Research wrote in a note dated December 16, 2013 said “The upside surprise in both CPI and WPI inflation for November leaves no option for RBI but to hike the policy rate(i.e. the repo rate) by 25basis points in Wednesday’s monetary policy review, in our view.”
Along similar lines Sonal Varma, India economist at Nomura, told CNBC.com that she expected the RBI to increase the repo rate by 25 basis points(one basis point is one hundredth of a percentage). But Rajan has chosen to stay put and not raise the repo rate.
Why is that the case? The answer lies in looking at the inflation numbers in a little more detail. The consumer price inflation is primarily being driven by food inflation. Food (along with beverages and tobacco) accounts for nearly half of the index. Food inflation in November 2013 as per the CPI stood at 14.72%. Within food inflation, vegetable prices rose by 61.6% and fruit prices rose by 15%, in comparison to November 2012.
So what this tells us very clearly is that consumer price inflation is being driven primarily by food inflation. In fact, this is something that the WPI data also clearly shows. The food inflation as per WPI was at 19.93%. Within it, onion prices rose by 190.3% and vegetable prices rose by 95.3%.
The RBI expects vegetable prices to fall. Baig and Das in a note dated December 18, 2013, said “vegetable prices, key driver of inflation in recent months, have started falling in the last couple of weeks (daily prices of 10 food items tracked by us are down by about 7% month on month(mom) on an average in the first fortnight of December).”
In case of WPI, food articles have a much lower weightage of around 14.33%. The other big contributor to WPI was fuel and power, in which case the inflation was at 11.08%. This is primarily on account of diesel and cooking gas prices being raised regularly in the recent past.
So inflation is primarily on account of two counts: food and fuel prices going up. The Reserve Bank of India cannot do anything about this. And given that raising the repo rate would have had a limited impact on high inflation.
In fact, if one looks at the WPI data a little more carefully, there is a clear case of the economy slowing down. Manufactured products form a little under 65% of the wholesale price inflation index. The inflation in case of manufactured products stood at 2.64% in November 2013.
When people are spending more and more money on buying food. They are likely to be left with less money to buy everything else. In this scenario they are likely to cut down on their non food expenditure.
And this has an impact on businesses. When the demand is not going up, businesses are not in a position to increase prices. And that is reflected in the manufacturing products inflation of just 2.64%. It was at 5.41% in November 2012.
Interestingly, the high cost of food should translate into the cost of labour going up. At the same time, energy prices are also going up. This is reflected in the fuel and power inflation of 11.08%. But businesses have not been able to pass through these increases in the cost of their inputs, by raising the price of their final products. This is primarily because of the lack of consumer demand.
The lack of consumer demand is also reflected in the index of industrial production(IIP), a measure of industrial activity. 
For October 2013, IIP fell by 1.8% in comparison to the same period last year. If people are not buying as many things as they used to, there is no point in businesses producing them.
In this scenario, raising interest rates would mean that people looking to borrow and spend money to buy goods, will have to pay higher EMIs. Businesses looking to borrow money and expand will also have to pay more. And this turn impacts economic growth. As the RBI’s statement today put it “The weakness in industrial activity persisting into Q3, still lacklustre lead indicators of services and subdued domestic consumption demand suggest continuing headwinds to growth.”
In this scenario the Rajan led RBI decided to keep the repo rate constant. What is interesting is that the RBI’s statement has suggested that it might raise the repo rate if the food inflation does not fall as it is expected to. “If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates if warranted,” the statement said.
Effectively, the RBI has bought some time. “
The RBI has effectively given itself a one-month window to see if inflation actually eases in December to decide on future monetary policy action,” wrote Baig and Das of Deutsche. 
In fact, Raghuram Rajan’s decision not to raise the repo rate has been seen as a surprise primarily because he has made several comments in the public saying that inflation was running higher than the comfort level. Also, Rajan is seen as an inflation fighter, and by not raising the repo rate, he has put that image at risk.
As Robert Prior-Wandesforde, director of Asian economics research at Credit Suisse, recently wrote “The data pose the now familiar dilemma for the central bank. While the direct effect of interest rate hikes on inflation is debatable, particularly when food prices are such an important driver, we very much doubt Dr. Rajan can be seen to be sitting on his hands at this stage …”To do so, would be take risks with his inflation fighting credentials,” he added.
It is hard to believe that Rajan will these credentials at risk. And given that we might just see a repo rate hike early in the new year.
The article originally appeared on www.firstpost.com on December 18, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

Explained: What the two sides of inflation tell us about the economy

Inflation
Vivek Kaul
So there is yet another inflation piece that I need to write,” he said, in a rather disappointed tone.
“Oh, but didn’t you just write one a few days back,” she replied. “And I was so looking forward to spending the afternoon at Phoenix Mills.”
“Ah. Safes me the trouble,” he said. “And for once I don’t have to eat that fancy, expensive and bland pasta in white sauce, that you make me eat.”
“But how come you need to write something on inflation so soon?” she asked ignoring the pasta jibe. “Didn’t you write one on Friday?
“Yes I did. But that was a piece around consumer price inflation (CPI). Today the wholesale price inflation number has come out.”
“Oh,” she said. “And how bad is it?”
“The wholesale price inflation(WPI) number for November 2013 came in at 7.52%. In comparison the number was at 7% in October 2013. Interestingly, the WPI number for September 2013 was revised to 7.05%, from the earlier 6.46%.”
“And what does that tell us?”
“What that tells us is that the WPI numbers after September are also likely to be revised upwards,”he said.
“Hmmm. So inflation might be more than what we are being told right now?”
“Yes. Also, the food inflation was at 19.93%. Within it, onion prices rose by 190.3% and vegetable prices rose by 95.3$. Interestingly, the onion prices have fallen by 5.1% between October and November 2013. But potato prices have risen by 30.8% in the same period.”
“Yeah. I bought both onions and potatoes recently and realised that.”
“But food inflation at nearly 20% is what is making the scenario difficult for most people. Half of the expenditure of an average Indian household in India is on food. In case of the poor it is 60%. Over the last few years the government has gone on a spending spree in rural India, in the hope of tackling poverty. It has led to wages in rural India going up by 15% per year, over the last five years.”
“But isn’t that good?”
“Well, not in an environment where food prices are going up by 20%. You must remember that half of the expenditure of an average Indian family is on food.”
“And that is having other economic repercussions?” she asked.
“Yes. When people spend significantly more money on food, they are likely to cut down on other expenditure. And this also reflects in inflation data.”
“How?”
“Manufactured products form a little under 65% of the wholesale price inflation index. The inflation in case of manufactured products stands at 2.64%. So inflation is primarily being driven by food articles. The other big contributors to inflation have been cooking gas and diesel, which have risen by 10.9% and 15.7% respectively.”
“Oh, is that really the case. I did not know that,” she replied. “But why are the prices of manufactured products not going up as fast as of the food articles and fuel?”
“I think I have already explained that to you.”
“Really?”
“Yes. When people are spending more and more money on buying food. They are likely to be left with less money to buy everything else. In this scenario they are likely to cut down on other expenditure.”
“Other expenditure?”
“It could be anything. From buying consumer durables to cars to everything without which one can do without in the immediate future.”
“And this has an impact on businesses?” she asked.
“Yes. When the demand is not going up, businesses are not in a position to increase prices. And that is reflected in the manufacturing products inflation of just 2.64%. It was at
5.41% in November 2012.
“Interesting.”
“Yes, what this really means is that business growth is slowing down and this in turn will be reflected in slow economic growth as well.”
“Hmmm. Thanks for explaining this to me.”
“My pleasure.”
“So why don’t you finish writing this and then we will go increase the other expenditure.”
“You mean pasta in white sauce?” he asked.
“Yes. Remember we are doing this for the nation.”
The article originally appeared on www.firstpost.com on December 16, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)

Why there can be no internal democracy in the Congress party

rahul gandhiVivek Kaul 
Rahul Gandhi wants to create a new Congress. “We will give you a party you will be proud of, and that has your voice embedded inside,” he said, after the Congress party was routed in the recent state elections.
Congress is no longer a party with the voice of people embedded in it because it has had no internal organisational elections for four decades now. 
As Ashutosh Varshney wrote in a recent colum in The Indian Express “Internal elections in the Congress party began in 1920 under Mahatma Gandhi’s stewardship and lasted till 1973, when Indira Gandhi suspended them.”
Indira Gandhi as we all know turned Congress into a family run business.
Varshney feels that if the Congress party has to have any long term future, it should start having internal elections again, even if it means that the Gandhi dynasty is ousted from the top rungs of the party.
The logic is if the party can revive internal democracy only then can it be in a position of choosing candidates who are likely to win elections. A candidate who has the support of the party members is also more likely to have the support of the people at large.
There are various reasons why this will not work. The foremost being that the party hasn’t had internal elections for four decades now and in the process has become a party of sycophants. It is a party of the 
chamchas, by the chamchas and for the chamchas. These chamchas start right at the top. The first level of chamchas report directly to the Gandhi family. The second level of chamchas reports to the first level of chamchas. The third level of chamchas reports to the second level of chamchas and so on. This is how the hierarchy works. Any attempts to break this hierarchy by encouraging true internal democarcy would mean that the party will stop functioning totally. And that can’t possibly be a good outcome.
The top two posts of the Congress party are held by the Gandhi family (i.e. Rahul and his mother Sonia). And that being the case, how can any Congress party member be expected to take the idea of internal democracy seriously?
Shekhar Gupta in a column in The Indian Express suggests that internal democracy can only happen by holding real elections for the posts of the party president and vice president. The question is will any real Congress member worth his salt decide to challenge Sonia and Rahul? Even if someone decides to do that what will be his chances of winning? And once he loses the elections, how safe will be his future within the party?
The culture of the party the way it has evolved has become such that it cannot think beyond the Gandhi family. When Indira Gandhi was assassinated in 1984, the party immediately looked up to Rajiv Gandhi, Indira’s son, to take over the party. When Rajiv Gandhi was assassinated in 1991, the party immediately went to Sonia, Rajiv’s wife, to take over the party. Rajiv accepted the post, Sonia did not.
In fact, it is very well known that Sonia did not like the idea of her husband entering full time politics after the death of his brother Sanjay in June 1980. Rasheed Kidwai’s 
24 Akbar Road – A Short History of the People Behind the Fall and Rise of the Congress has a small anecdote which proves the same. “’He(i.e. Rajiv) says his wife will divorce him if he joins politics,’ Indira Gandhi told writer Khushwant Singh, when he asked her if her son Rajiv would fill the gap left by his brother Sanjay.” Rajiv eventually did join the party in 1981. He contested and won the Amethi Lok Sabha seat on August 17, 1981 and was made the General Secretary of the party on February 3, 1983. He was elevated to the top post after his mother’s assassination on October 31, 1984.
But Sonia did not join the party after Rajiv’s assassination in May 1991. Even though she stayed away from full time politics in the years that followed, she was never really completely out of it. As Rasheed Kidwai writes in 
Sonia – A Biography “There is general consensus that she encouraged all those who were opposed to Rao (PV Narsimha Rao, who was the prime minister between 1991 and 1996). Throughout the Narsimha Rao regime, 10 Janpath(where Sonia continues to stay) served as an alternative power centre or listening post against him.”
In December 1997, Sonia Gandhi indicated that she wanted to play a more active role in Congress politics. It took the party less than three months to throw out Sitaram Kesri, the then President of the party and put Sonia in charge in his place. In fact, the manner in which it was done was quite dubious.
The point is that the Congress cannot really see itself beyond the Gandhis. Also, the bigger question is will the Gandhis ever not want to be at the top of their family run concern? If that was the case Sonia Gandhi would have never entered full time politics and neither would have Rahul.
In the recent past, elections have been held in the Youth Congress. This has been the brainchild of Rahul Gandhi and his team to encourage internal democracy within the party. They have used former election commission officials to manage these elections. But the results clearly prove the point that I had made earlier. The Congress is a party of the 
chamchas, by the chamchas and for the chamchas.
Aarthi Ramachandran in Decoding Rahul Gandhi gives examples of chamchas winning these elections in several states. As she writes “In Chhattisgarh Rahul Gandhi’s team member Jitendra Singh spoke to Congress strongman Ajit Jogi’s son Amit to dissuade him from contesting the elections…Though ‘Team Rahul’ managed to stop Amit from contesting it could do nothing about the post being won by his supporter, Uttam Kumar Vasudeo. In Jharkhand, Manas Sinha, a youth leader who had the support of…Subodh Kant Sahay (then a cabinet minister), became the president. Priyavrat Singh, a supporter of former chief minister Digvijay Singh was elected in Madhya Pradesh.”
This was repeated in almost every state throughout the country. A major reason for the same is the fact that it takes a lot of money to fight these internal elections in the Youth Congress. As Ramachandran writes “Only those who have a corpus of about Rs 5-10 lakh can aspire to win the Assembly level Youth Congress elections, one IYC(Indian Youth Congress) office-bearer from Bihar, who did not want to be named, said.”
At a higher levels the money can be a lot more. “The money required to fight IYC elections at higher level varies according to the socio-economic profile of states. The amount of money spent in states such as Bihar is still modest compared to the Rs 2 crore spent in Tamil Nadu for the position of the Lok Sabha Youth Congress president’s post, according to the figures of a party insider,” writes Ramachandran. Hence, it is not surprising that 
chamchas of the bigger chamchas in the party are winning these elections, given that so much money is needed to fight these elections.
Also, a party which has followed a certain way of operating for four decades cannot change overnight. It is worth asking here does the party really attract people who believe in the idea of internal democracy? Or does it just attract people who are looking to latch onto a reasonably senior 
chamcha?
And during the time it tries to change itself, it is not as if other political parties will be sitting around doing nothing. As Gupta writes in The Indian Express “If a rapidly declining, even self-destructive, political party wishes to rebrand, reposition and rejuvenate, will it be done through a 10-year project to democratise it from bottom up? By that time, the BJP would have taken away your mantle of being India’s largest political party and the Aam Aadmi Party would have stolen your Muslim vote-banks pretty much the way it took away Delhi’s urban poor.”
Given this, all this talk about rejuvenating internal democracy in the Congress party, should at best be taken with a pinch of salt.
The article originally appeared on www.firstpost.com on December 16, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek)