India PM faces tough challenge on economy

Posted on July 19, 2012

Prime Minister Manmohan Singh

After presiding over sharply slowing economic growth and persistent inflation since 2009, Pranab Mukherjee, former finance minister, is on Thursday expected to be selected for the prestigious, but largely ceremonial, role of India’s president.

His promotion to head of state is a reward for decades of loyal service to the ruling Congress party and especially its leader Sonia Gandhi. The result of Thursday’s vote – which is a foregone conclusion – will be announced on Sunday.

Since Congress returned to power in 2004, Mr Mukherjee has managed Mrs Gandhi’s complex relations with the party’s coalition partners – a job that analysts say is ill-suited to Manmohan Singh, the soft-spoken prime minister.

    “This is like the ultimate babu being made the most important rubber stamp in the country,” said Hartosh Singh Bal, the political editor of Open Magazine, a leading current affairs magazine, referring to the British colonial-era term for an Indian government clerk.

    Mr Singh, the architect of the 1991 reforms that put India on a high-growth trajectory, has decided to take over the finance portfolio himself. This has raised hopes in the business community that he will make a fresh push for another round of long-stalled reforms to tackle India’s serious economic challenges.

    But with parliamentary elections less than two years away, analysts expect Mr Singh to face fierce resistance from his own Congress party and its allies over fresh reforms, despite economic growth being at a nine-year low.

    “It’s not going to be as simple as one guy giving way to another,” said Mr Bal. “There is no clear decision of where it is going on reforms. It has just lurched from one populist policy to another, without really implementing them.”

    India’s economy is going through what some analysts describe as its own version of stagflation, with slowing growth and persistently high inflation, as the output of everything from food to electricity to manufactured goods fails to keep pace with strong growth in demand due to numerous bottlenecks in the economy. Economic growth slowed to 5.3 per cent from January to March, reducing growth for the fiscal year ending in March to a nine-year low of 6.5 per cent.

    E. Sridharan, an India expert at the University of Pennsylvania, said most of the needed reforms would alienate powerful domestic constituencies, making it unlikely that Congress will give Mr Singh, whose political base is weak, the green light for such moves.

    “The party has to be convinced that this is an electorally viable strategy. A lot of people think, ‘if you do these things, you are going to lose the election for us’,” said Mr Sridharan.

    There appears to be a growing consensus in India that the time may be right for another wave of economic reforms

    – Barack Obama

    The finance ministry’s in-tray is filled with plenty of pending reforms. Overseas companies are waiting for increases in foreign investment limits in the insurance, aviation and retail sectors – moves that would bring more capital into India at a time when foreign direct investment from January to March dropped to a mere $1.4bn, down from $5bn last year.

    Reform of the colonial-era land acquisition law, for example, is seen as essential to kick-starting progress on large-scale projects, such as desperately needed power plants, and for the building of more factories and development of heavy industry.

    Painful decisions on raising the heavily subsidised price of diesel fuel and trimming costly fertiliser subsidies are also necessary to reduce a budget deficit that is estimated to balloon to about 8.4 per cent of gross domestic product this year.

    Mr Singh’s room to manoeuvre on sensitive issues – such as fuel prices – will also be constrained by the poor monsoon, which will increase demand for diesel as farmers are forced to reply more on pumps for irrigation.

    Despite these challenges, Rohini Malkani, chief economist for India at Citibank, believes Mr Singh could buoy sinking investor sentiment by tackling less sensitive issues such as coal shortages, clearing up uncertainty over tax policy, and implementing measures to plug fiscal leaks.

    “There are a host of measures that … if implemented could make the environment more conducive for investment,” she said recently.

    Analysts also suggest that the government could proceed with a much debated opening of India’s retail sector to foreign direct investment by administrative fiat. Congress had said it would open the sector to foreign investment last year, but then reversed itself amid howls of protest from the opposition and some of its own allies.

    However, foreign investment in retail does appear to have a fairly broad support, including among much of India’s increasingly acquisitive middle class, despite noisy opposition from India’s millions of mom-and-pop shop owners, and the powerful middlemen who control trade in agriculture.

    But challenges remain. Barack Obama, US president, last week told Indian media that “there appears to be a growing consensus in India that the time may be right for another wave of economic reforms”. Experts said his appeal to allow more foreign investment in the retail sector – which would benefit companies such as Walmart – may make the government even more reluctant to proceed.

    Open Magazine’s Mr Bal said: “Obama’s public pronouncement makes it more difficult. Everybody will say, ‘it’s being done under American pressure’, which is the one thing no Indian likes to hear.”

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