Putting Delhi back on its growth track

There is a buzz in the air in Mumbai. The news that Manmohan Singh, India’s prime minister, has taken over the finance portfolio from Pranab Mukherjee – now elevated to the country’s presidency – has raised a rare sense of optimism in the business community that Mr Singh can succeed in bringing back the spirit of the early 1990s and pass the overdue reforms that India needs to get its economy accelerating again.

Growth rates are plummeting in the country, which was once seen as one of the world’s most promising emerging markets. In the first quarter of 2012, gross domestic product expanded at an annualised rate of only 5.3 per cent – almost 4 percentage points less than in the first three months of 2011, when the growth rate was 9.2 per cent.

    Nor is there any obvious reason to expect the economy to pick up in the near future. With a budget deficit estimated to rise to 8.4 per cent of GDP this year, it would be unwise for the government to embark on a new round of fiscal stimulus. Monetary policy is constrained too. While in June inflation has dropped to a five-month low of 7.25 per cent it remains a concern for the Reserve Bank of India. The RBI governor has in effect ruled out more interest rate cuts soon.

    With the eurozone crisis taking its toll on world trade, foreign demand is unlikely to rescue Delhi. As for foreign direct investment, this has dropped to a mere $1.4bn in the first quarter of this year, $3.6bn less than in the first three months of 2011.

    All of which explains why Indian businessmen are pinning their slim hopes for recovery on the change at the helm of the finance ministry. During Mr Mukherjee’s term in office, India has watered down measures to open up its retail and insurance sector, which would have brought much-needed investment in the country. It has continued to hand out generous diesel and fertiliser subsidies, contributing to the hole in the country’s public finances. And it has failed to make the necessary investment in infrastructure, particularly in the energy sector.

    But while the replacement of Mr Mukherjee is good news for India, there is reason to be more sceptical about Mr Singh’s ability to turn the economy round. After all, the country’s slowdown has occurred on his watch. At 79, the prime minister is unlikely to have the strength to fight tooth and nail for a new reform drive.

    However, even without displaying a revolutionary zeal, there are still areas in which Mr Singh can make a difference. Existing subsidies can be better targeted to favour those most in need. Bureaucratic decision-making could be accelerated so companies are not held back from investing because of administrative obstructions.

    A case in point is the delay in a $7.2bn oil and gas investment announced by BP last February in partnership with Mukesh Ambani’s Reliance Industries. The difficulties in obtaining regulatory approval for planned capital expansion and improvement in production could prove a deterrent for other companies that may want to engage in similar ventures.

    Even small reform steps will not be possible, however, unless Mr Singh receives stronger political backing than he has enjoyed so far. The ruling Congress party and its president, Sonia Gandhi, have been too wary of the reaction of their coalition allies to support the bold steps that Mr Singh should have made.

    But if Congress wants to stand a chance of winning the next election, scheduled for 2014, this cautious approach must change. Voters have become used to much higher growth rates than the current ones. Unless Congress does something substantial now to lift the rate of economic expansion, citizens will tell the government what they think of the slowdown via the ballot paper.

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