A solution for Pakistan’s future

Singh scrambles for solutions to put India back on track

September 22, 2012
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Hamish McDonald

Hamish McDonald

Asia-Pacific editor, Sydney Morning Herald

View more articles from Hamish McDonald

Samajwadi Party activists block a train during a strike in Allahabad, India.Unrest … Samajwadi Party activists block a train during a strike in Allahabad this week, above, and burn an effigy of the Prime Minister, Manmohan Singh, below. Photos: AP/Rajesh Kumar Singh Photo: AP

THIS has been a tense and critical week in Indian politics, a week of decisions vital to the emerging economic giant regaining a high growth path.

We all know about the ”Incredible India” – the travel destination of palaces, temples, and human colour. Now the world’s economic analysts and strategists are looking for a ”Credible India” that can take decisions and stick to them.

Needless to say, resource and energy supplier Australia has a lot riding on it.

Activists hold an effigy representing Indian Prime Minister Manmohan Singh and his cabinet colleagues.Activists hold an effigy representing Indian Prime Minister Manmohan Singh and his cabinet colleagues. Photo: AP

India has been in the economic doldrums for a couple of years. Economic growth that had hit 8 per cent has slipped to a little over 5 per cent in the first half of this year and in July industrial output had almost flattened.


With its fiscal deficit bulging because of subsidies, and inflation edging up towards 8 per cent and requiring punitive interest rates from the central bank, India has been facing the humiliation of a big downgrade in its credit rating to junk status.

Three years after its re-election in 2009, the Congress Party-led coalition government of the Prime Minister, Manmohan Singh, has lost all credibility gained from the strong economic performance of its previous five years in office.

Opposition parties and trade unions called for shopkeepers, traders and labourers in India to block railway lines and close markets to protest against reforms.Opposition parties and trade unions called for shopkeepers, traders and labourers in India to block railway lines and close markets to protest against reforms. Photo: AFP

It has lurched from scandal to scandal, the latest being the so-called ”Coalgate” affair, after the Indian auditor-general calculated that over-generous terms of coal mining concessions would lose the government about $36 billion in future revenue. This came after a similar estimated giveaway in mobile phone licences.

Singh has looked a helpless figure throughout all of this. The former finance secretary and central bank governor has immense prestige as the father of India’s opening from his time as finance minister in 1991-96, but has more recently been a figurehead for Congress.

The most powerful figure in the party has been Sonia Gandhi, the Italian-born widow of the assassinated former prime minister Rajiv Gandhi who is nurturing the career of their son, Rahul, currently the party secretary and a backbench MP. Her instincts are populist, amplified by the clutch of regional and lower-caste parties giving the coalition its majority.

After a weak performance earlier this year in elections in Uttar Pradesh, India’s biggest state, at which Rahul failed to show the expected voter attraction of the Gandhi dynasty, the government had been in what its Minister for Heavy Industries, Praful Patel, admitted to be ”policy paralysis”.

It has clearly got to Singh. A preliminary sign was the removal of the former finance minister Pranab Mukherjee by getting him kicked upstairs to the presidency, and his replacement by Palaniappan Chidambaram, who had been Singh’s partner as commerce minister during the 1990s reforms.

In the past week they have announced a series of big new changes in fiscal and investment policies designed to get economic growth quickly up to an average 8.2 per cent for the next five years, hitting 9 per cent a year by 2017.

First off was a 14 per cent rise in the administered price of diesel fuel and a rise in the price of bottled gas for household use as part of an effort to bring subsidies, currently 2.4 per cent of gross domestic product, below 2 per cent.

Then came a lifting of barriers to foreign investment in two attractive sectors. Foreign multibrand retailers such as Carrefour and Walmart, previously excluded from India, will be allowed to set up local operations with 51 per cent ownership.

Single-brand retailers, such as the big multinational sportswear and electronics chains, will no longer have to source at least 30 per cent of their products from local small and medium-sized enterprises.

Foreign investors will be allowed to take up to 49 per cent of Indian airlines, opening the possibility of foreign partnership in the national carrier Air India to lift it out of its bureaucratic mindset, and fresh investment in the fast-growing private-sector carriers that have been struggling as the sinking rupee raises debt-servicing and fuel costs.

Similar foreign equity levels will be allowed in electricity-trading exchanges, and four big state-owned corporations – Hindustan Copper, National Aluminium, Mines and Minerals Trading Corp and Oil India – will be floated in the sharemarket.

The aim is to encourage a burst of capital inflow to lessen the need for foreign borrowing and thereby support India’s credit rating. Whether it will succeed depends on the politics now. Singh tried to lift the barrier to foreign retail chains at the end of last year, only to be forced into policy reversal a week later by a revolt in his coalition.

This week, one of the bigger coalition parties, the Trinamool Congress, led by the West Bengal Chief Minister, Mamata Banerjee, walked out after demanding the reversal of all the new measures. That brought Singh’s numbers in the lower house of parliament down from 273 to 254, 18 below the bare majority of 272.

Sonia Gandhi and other Congress leaders have been trying to rope in the two lower-caste parties strongest in Uttar Pradesh, the Samajwadi Party, whose Australian-educated Akhilav Yadav is the state’s Chief Minister, and the Bahujan Samaj Party, whose leader is his predecessor, Mayawati Kumar.

Their numbers in the national parliament would give the coalition a healthy majority. Both these parties have constituencies reliant on subsidies for their tractor, water pump and domestic fuel. No doubt Gandhi is also working on Singh to see if the subsidy cuts could be wound back a bit.

Singh’s best counter to win over their recruits is to point out that unless investment inflows and growth can be revived, the 2014 elections could see a return of the Bharatiya Janata Party, a Hindu-nationalist group seen by them as trying to perpetuate the old caste hierarchy.

Retail sector policy is also tailored to appeal to the rural communities. The minimum investment is $US100 million ($95.4 million) and half of that has to be in ”back end” local procurement and logistics chains in farming areas. Linfox is one Australian company that has already been investing in preparations for this opening.

”On more than one occasion during the last two years, the government has taken decisions only to withdraw them under pressure from allies,” says Amitendu Palit of Singapore’s Institute of South Asian Studies.

”If something similar happens this time too, then not only will the government be stripped of whatever credibility it has, but policy paralysis will be there to stay for the foreseeable future.”

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