Singh Embarks on Biggest Gamble to Revive Economy, Party

Singh Embarks on Biggest Gamble to Revive Economy
A man sleeps next to train tracks in the Dharavi slum area of Mumbai, India. Photographer: Prashanth Vishwanathan/Bloomberg

Indian Prime Minister Manmohan Singh has embarked on the biggest gamble of his second term, pushing through policy changes opposed by members of his own coalition as he seeks to revive the economy and the fortunes of his embattled party.

After two years of stalled policy making and amid slumping support, Singh’s Congress party-led cabinet Sept. 14 allowed overseas retailers to enter India, and said foreign airlines can own minority stakes in local carriers. While the second-largest party in the alliance, Trinamool Congress, vowed to take a “drastic step” if Singh, 79, doesn’t abandon the laws and roll back a diesel price increase, opposition lawmakers called for a nationwide strike over policies they say will trigger job losses and hurt the poor.

“Congress has been committing harakiri by doing nothing,” Satish Misra, a political analyst at the Observer Research Foundation in New Delhi, said by phone yesterday. “They have been pushed around so much that it was time to fight back.”

The architect as finance minister of India’s 1990s economic opening and recently the object of media ridicule, Singh may have judged that rivals unprepared for elections are not likely to try to topple the government, Misra said.

His administration has 18 months until the next election to ease gridlock in Parliament over corruption allegations and restore confidence in its management of an economy growing at near its slowest pace in three years. Warnings of a ratings downgrade to junk status and a 67-percent drop in foreign direct investment in the last quarter are spurring the boldest policy initiatives of a government re-elected in 2009.

‘Tragic Failure’

India’s complex web of national and local political tussles may ensure Singh -- branded an “underachiever” on the July 16 cover of Time magazine, and a “tragic figure” in a Sept. 5 Washington Post report -- and his government last until a ballot in early 2014.

Congress’ chief rival, the Hindu-nationalist Bharatiya Janata Party, is still divided over who should lead the party and in what direction. Mamata Banerjee, the West Bengal chief minister who controls 19 Trinamool members in Parliament’s 545-seat lower house, has to weigh the political risks associated with backing down on her opposition to foreign supermarkets with her bid to win a bailout for her indebted state.

Both will be aware that waiting in the wings are two parties from Uttar Pradesh state with more than 20 lawmakers, either of which may be willing to prop up the government.

Investors Cheer

One of those -- the Samajwadi Party, now ruling the state - - rescued Singh in 2008 over a nuclear cooperation deal with the U.S. The other, Mayawati’s Bahujan Samaj Party, was routed in this year’s assembly elections and is unlikely to want to face voters again so soon.

While political opponents protest, foreign investors will welcome the decisions along with a Sept. 13 deficit-reducing 14 percent increase in diesel prices, said Samir Arora, founder of Singapore-based hedge fund Helios Capital Management Pte, which focuses its investments on India.

“We’re very pleased and surprised because we had almost given up hope in the government doing anything,” said Arora in a phone interview yesterday. “Singh has finally delivered. He can take bold decisions after all.”

The BSE India Sensitive Index, or Sensex, today climbed to its highest level in 14 months on expectations the steps will lead to an acceleration of overseas flows into Indian shares before paring some gains after the central bank kept interest rates unchanged. The foreign investment decisions were announced after markets closed Sept. 14.

No Rollback

The rupee gained to the highest level since May.

In December, an earlier attempt to allow overseas companies such as Wal-Mart Stores Inc. and Carrefour SA to open stores in India resulted in a humiliating government defeat after it was forced to abandon the plans because of opposition from Banerjee and rival parties. This time there will be no need for a rollback as all problems with allies will be resolved, according to Congress spokesman Rashid Alvi. The reforms don’t need parliamentary approval.

Offering an olive branch to regional leaders who have said they’ll oppose the arrival of large overseas retail chains over concerns they will put millions of small shopkeepers out of work, the government said it will be up to state governments to decide if they want to adopt the policy.

‘Vicious Cycles’

Singh Sept. 15 underlined the concerns that had prompted the policy push. If political deadlock is allowed to continue “vicious cycles begin to set in and growth could easily collapse to about 5 percent per year,” he told members of the country’s Planning Commission, adding that would dent his bid to allow more of India’s poor to benefit from economic expansion.

India’s growth target has been lowered to 8.2 percent for the 12th five-year plan started April 1 from an earlier estimate of 9 percent given the state of the global economy, Singh said while addressing the commission.

India’s benchmark wholesale-price index, which has remained above the central bank’s 5 percent comfort level since December 2009, reducing scope for interest-rate cuts to aid the slowing economy, accelerated to 7.55 percent in August, data released Sept. 15 showed. Reserve Bank of India Governor Duvvuri Subbarao today kept rates unchanged while unexpectedly reducing the amount of deposits banks must set aside as reserves to boost growth.

In Control

The decisions signal “that Singh and Finance Minister Palaniappan Chidambaram have successfully leveraged the looming threat of a sovereign downgrade to re-assume control -- at least for now -- over India’s economic policymaking,” David Sloan, an analyst at New York-based Eurasia Group, said in a Sept. 14 e-mailed analysis.

Sloan and other analysts caution that proposals requiring parliamentary approval, such as raising the foreign investment cap in insurance from 26 percent to 49 percent “remain political non-starters” as Singh’s Congress party-led bloc has been unable to end a standoff with the opposition over alleged losses to the exchequer from an award of coal resources.

Singh may unveil as early as this week a cabinet reshuffle in a bid to counter negativity over his administration, the Hindu newspaper reported yesterday.

Chidambaram’s third tenure as finance minister, which began at the end of July, has been busy. He has ordered banks to lower lending rates to boost growth, promised to tackle the budget deficit and ordered a review of a divisive proposal for a retroactive taxation on capital gains.


Still, while Chidambaram favors more market-friendly policies than his predecessor, “the decision to open retail has probably been planned for many months so it would have happened anyway,” said A.K. Verma, a political analyst at Christ Church College in Kanpur in Uttar Pradesh, India’s most populous state.

In the latest sign of the frustration felt by voters toward Congress, only 38 percent of Indians said they were satisfied with the country’s direction, according to a Pew Research Center survey. That was down from 51 percent a year earlier, and was the largest drop among the 17 countries in the survey, including China, the U.S. and Brazil.

Amid the political gridlock, India’s economic growth potential may have fallen to 6 percent to 6.5 percent a year, below the Reserve Bank of India’s 7.5 percent estimate, JPMorgan Chase & Co. said. Foreign direct investment fell 67 percent to $4.43 billion in the three months ended June from a year earlier, government data show.

Deficit Target

Singh, who has been prime minister since 2004, is targeting a budget deficit of 5.1 percent of gross domestic product in the year ending March from 5.8 percent a year earlier. Asia’s third-largest economy grew 5.5 percent in the three months ended June 30 after expanding 5.3 percent in the previous quarter, the least in three years.

The budget shortfall and a deficit in the current account, the broadest measure of trade, led Standard & Poor’s and Fitch Ratings to say earlier this year that they may strip India of its investment-grade credit rating.

S&P on April 25 lowered the outlook on India’s sovereign credit rating to negative from stable, saying the move reflects a one-in-three likelihood of a ratings downgrade to junk status because of slower investment and economic growth. Fitch Ratings cut its outlook on June 18, citing limited progress in paring the budget deficit. Both companies rank India’s debt BBB-, the lowest investment grade.

Credit Suisse Group AG economist Robert Prior-Wandesforde said the steps taken by the government may delay a downgrade by the rating agencies in a note to clients today.

Starbucks, Ikea

India has been planning the policy change for its airlines for more than three years as Kingfisher Airlines Ltd., controlled by billionaire Vijay Mallya, and state-owned Air India Ltd. delayed salaries and defaulted on payments to airports and fuel suppliers because of cash shortages.

Jet Airways, India’s biggest carrier, has also been planning to raise funds through a rights offer for more than two years. The carrier and Kingfisher plunged more than 65 percent in 2011. Jet said last month that it plans to sell and lease back some planes to pare debt by about $400 million.

Foreign companies are currently permitted to invest in retail supply chains and wholesale stores, which sell to local businesses. In January, India allowed overseas companies full ownership of stores selling a single brand, letting the likes of Starbucks Corp. and Ikea operate without a local partner. Ownership had been limited to 51 percent.

Last week’s rash of reforms have raised expectations of further measures to come, said Eurasia’s Sloan.

“While the government will have to further slash subsidies, reduce expenditures, and raise new revenue in order to preserve its long term credit rating, the political courage that Singh and Chidambaram have exhibited suggests that more changes are in the pipeline,” Sloan said.

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