By Satarupa Bhattacharjya and John Chalmers
NEW DELHI (Reuters) - It had been a brutal August for India's Congress party: economic growth was wilting, the monsoon rains were failing and the opposition had it cornered on yet another corruption scandal.
In stepped Sonia Gandhi to revive the morale of the ruling party's lawmakers, exhorting them at a meeting to "stand up and fight, fight with a sense of purpose and fight aggressively". It was a stunningly assertive speech from the normally temperate matriarch of a dynasty that has ruled India for most of its post-independence era.
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 liberalizing the economy.
However, more than a dozen officials and party leaders close to the secretive inner circle of the Italian-born leader told Reuters 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, a left-of-centre Congress stalwart 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 Mrs. Gandhi that good economics was good politics."
Her acquiescence in the end led to this month's "big bang 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 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
However, insiders say Gandhi remains instinctively wary of economic liberalization 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 Mrs. 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.
Reuters reviewed more than 30 letters written by Gandhi to the prime minister and U.S. 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 prominent journalist and 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.
Sonia Gandhi, 65, carries the authority of a political family that, after India won independence from Britain in 1947, drove a vision of democratic socialism to uplift the vast rural masses. With that came a mind-boggling range of controls that tied the economy down and kept it closed to global markets.
A turning point came in 1991 when a slump in exports following the collapse of the Soviet Union and a leap in oil import costs due to the Gulf War tipped the country into a balance of payments crisis.
Manmohan Singh, then finance minister, responded with shock treatment, devaluing the rupee by nearly 19 percent. So determined was he to push this through, when the prime minister of the day got cold feet, he reportedly blamed the infamous inefficiency of India's telephone system to pretend that he couldn't contact the central bank in time.
His moves to prise open the economy set the stage for a long run of dazzling growth that peaked at 9.7 percent in 2006/07.
Although Gandhi appointed Singh as prime minister when the Congress party returned to power eight years ago, she has a far more socialist mindset than the Oxford-educated economist who drove that first round of reforms.
Sources close to the Gandhi family say she has been strongly influenced by her late mother-in-law, former prime minister Indira Gandhi, whose policies were considerably left of centre.
Sonia Gandhi initially declined the throne of the Congress party after the 1991 assassination of her husband and former prime minister, Rajiv, but she finally agreed to enter politics six years later to lift the flagging fortunes of the party under her family's brand name.
As party president and chairperson of the ruling coalition, she has kept a low and almost enigmatic profile, appearing to stand above the political fray. When she went abroad for surgery last year there was no official word on her illness, and the media tamely accorded her the privacy a royal might expect.
But Gandhi wields extraordinary power behind the scenes, shaping policy out of the public eye with a tight circle of decision-makers and relying on back-channel negotiations to manage relations with fractious coalition allies
Ratings agency Standard & Poor's, warning earlier this year that India could become the first of the emerging market BRICS economies to lose its investment-grade rating, took a swipe at her resistance to policies mooted by Singh.
"The Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalization of the economy," S&P said.
"Moreover, paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no cabinet position, while the government is led by an unelected prime minister ... who lacks a political base of his own."
A BENEVOLENT MATRIARCH
Gandhi gives little away about her thinking on economic policy, but dispatches from the U.S. 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 subsidized to cushion the poor.
"Key leaders (including Sonia Gandhi) have opposed the price hikes, criticized 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 prime minister and several ministers, she drew their attention to issues such as legal entitlement to subsidized foodgrains, child labor, 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 that 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 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 favor 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."
(Additional reporting by Ross Colvin and Raju Gopalakrishnan; Editing by Dean Yates)