Too Many Missed Opportunities

Business is losing faith in Indian Prime Minister Manmohan Singh

It's been a rough summer for Manmohan Singh. In May the Indian Prime Minister endured a hail of criticism from the business community after he urged corporate chieftains to "eschew conspicuous consumption" or risk a backlash—a warning that left his audience wondering whether the sage economist was turning his back on reforms he himself had pioneered as finance minister 15 years ago.

The rupee then began to levitate, crimping competitiveness, especially vis-à-vis China. Heavy monsoon rains caused devastating floods, displacing thousands of villagers and focusing attention on the government's inability to shore up India's crumbling infrastructure. Now, leftist parties are threatening to withdraw their support for the ruling coalition unless Singh turns his back on a landmark agreement with the U.S. on nuclear power for civilian uses.

Singh's stumbles have not hurt growth, which is expected to come in at 8.5% for the year. But his government has been so embroiled in internal disputes that New Delhi has failed to capitalize on an extraordinary opportunity to cut farm and oil subsidies, abolish rent control laws, and change onerous labor regulations. These and other measures are essential if India is to keep growing at almost double digits and lower the poverty level from 25% of the population.

What went wrong? Part of the problem lies with the 16-party coalition led by Singh's Congress Party: Keeping it together is a full-time job in itself. Another is that voters had unrealistic expectations of Singh. As finance minister, the Oxford grad unshackled India's economy with the support of then-Prime Minister Narasimha Rao. Now he looks ineffective. Critics say it is Congress Party chief Sonia Gandhi—and not Singh—who really pulls the levers of power, and that she is lukewarm about market reforms. "We thought Manmohan Singh as Prime Minister would be the same as Manmohan Singh the finance minister," laments Subir Gokarn, chief economist for Asia-Pacific for Standard & Poor's (MHP). "Our expectation was misplaced."


The business community's list of complaints is long. Privatization of state-run companies has been put on hold, on ideological grounds. A program to build Chinese-style special economic zones has foundered over how much to pay displaced farmers for their land. Official approvals, slow to come, are blocking badly needed commercial and residential construction. "Our lives are getting choked," says Mohan Pai, head of human resources at Infosys Technologies Ltd (INFY). "The airports are choked, the trains are choked, the sewers are choked. I am feeling less optimistic about my country's ability to get out of this, at the best time in our history."

India's poor don't have much to cheer about either. In 2004 the government launched a $2.8 billion annual plan to guarantee rural laborers 100 days of work at minimum wage—a bid to provide a livelihood to millions. But in most states, critics say the scheme has been wasteful and ineffective and that a $6.1 billion project to revamp rural infrastructure has had mixed results. Meanwhile, measures to overhaul education and health care have not yielded a payroll yet, though Delhi raised taxes on the affluent to fund the reforms. "What is my tax for?" says Ajay Shah, an economist and former adviser to the finance ministry. "They are trying to improve outcomes by throwing more money at dysfunctional systems." A government spokesman says the programs are off to a good start.

Those inclined to optimism say that the quarrel between Singh and his left-wing partners could help reinvigorate his leadership. Others are already putting their hopes on the next regime. "Perhaps a new government, whatever it will be, will change things," says Madhav Bhatkuly of Mumbai equity fund New Horizon. That's cold comfort for those who were hoping for badly needed action now, not later.