Why India's Singh Can't Reform

Indian Prime Minister Manmohan Singh, 78 and silver-bearded, is known for his soft voice and polite manner. Two weeks ago, though, as India faced international humiliation over how unprepared it was to host the Commonwealth Games in New Delhi, he lost his temper, according to three people present at an emergency Cabinet meeting. "Just get it done," he snapped at the Minister for Sports when it became clear that repairs were urgently needed on stadiums and athletes' housing. An outright fiasco was avoided, though India has still sustained plenty of damage to its reputation.

Just as they did after the terrorist siege in Mumbai in 2008, Indians have seen the government's failure to handle the Games efficiently and effectively as a metaphor for how it handles the country. What Indians want to know is very simple: When confronted with a challenge, can their government get it right?

Under Singh, the answer often has been no. His second term as Prime Minister and head of a coalition built around the Congress Party, which runs until 2014, started with great expectations. In the 2009 election Congress had managed to assemble a strong enough majority in Parliament that it no longer needed its Communist allies, who had been an obstructive force during Singh's first term.

When the Congress Party was reelected, the Bombay Stock Exchange Sensex index shot up 17 percent in less than 60 seconds. Investors hoped that Singh, the economist who first opened India to the West in 1991, would deliver on big-ticket reforms. "There certainly was an expectation within the equity markets—and also economists—that would happen," says Robert Prior-Wandesforde, head of South-East Asia and India Economics at HSBC (HBC).

Instead, Singh's promises to reform rigid labor markets and ease the difficulties that manufacturers encounter in acquiring land have gone nowhere. Efforts to introduce banking reform have failed, as have halfhearted attempts to tamp down double-digit food inflation, leaving India's poor buffeted by global commodity markets.

A long-running guerrilla war in India's mineral-rich central states has gotten worse, claiming more lives in 2010 than at any other point in the 33-year struggle. More than 100 people have been killed in recent street protests in Kashmir. "What we've seen since the [2009] elections are minuscule reforms—dropping petroleum subsidies, higher education reform at the margin," says Razeen Sally, director of the Brussels-based European Center for International Political Economy. "The bigger things that are needed are things he hasn't even tried for." A spokesman for the Congress Party did not return calls.

Many critics wonder how such an able man could achieve so little. As Finance Minister in 1991, Singh cut import tariffs, allowed foreign companies such as Ford Motor (F) to set up factories, and removed regulations requiring government authorizations for new plants. The result was a burst of growth that ended the acute fiscal crisis threatening India.

One reason Singh has not repeated this performance may be his tendency to bore in on details—a useful trait when you're fixing a single ministry, less so when you're running an entire country. Singh showed this side of himself when he jumped into the Games mess, personally inspecting sites and ordering investigations. "It should not be the Prime Minister's problem to see if the loos are clean or the ceilings of a stadium are solid," says Lord Meghnad Desai, a professor emeritus of the London School of Economics and a member of the British House of Lords who knows and admires Singh.

Structural issues are hobbling Singh, too. India's raucous politics have never been amenable to the kind of discipline China's one-party state is capable of displaying, especially in economic development. Finally, the dynamics of the Congress Party may have affected the Prime Minister's performance. Rahul Gandhi, the 40-year-old son of the assassinated Prime Minister Rajiv Gandhi, is being groomed by his mother, Sonia, to take over as Prime Minister in a Congress government someday soon. (Rahul is grandson of Indira Gandhi, who was also Prime Minister, and also assassinated.) Both mother and son have shown a tendency for well-meaning yet expensive social programs, including food subsidies, rural work programs, and farm loan waivers. "The most significant change has come about in the social sphere, and one wonders how much that has to do with Singh," says Prior-Wandesforde, the HSBC economist. "The 2009 election was a vote in favor of social reform rather than a vote for massive economic reform."

If Singh can ride out the political storm triggered by the Games, and if Rahul's charisma helps the Congress Party win crucial state elections, the Prime Minister would still have three years to show real progress. He has maneuvering room: Economic growth has not yet stalled, though that's likely if the hardest reforms are not completed. Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management, warned in a report on Sept. 30 that India's 8.5 percent average growth rates in the past five years are in no way guaranteed to continue. Unless Singh's government focuses on ending crony capitalism, widespread corruption, and the insurrection, Sharma wrote, the country could go the way of the East Asian tigers of the 1990s, which couldn't sustain high growth over the long haul.

For now, India is holding its breath as the Games go on, hoping to avoid disaster. "It's just such a shame," says Radha Deshmukh, who turned 18 the same day the Prime Minister turned 78. "I wanted to sing the national anthem when our boxers won a gold medal." Deshmukh will instead watch the Games on television in Dubai. Her family, like many Delhites, decided to flee India until the athletes leave.

The bottom line: The problems besetting the Commonwealth Games reflect the larger problems dogging Prime Minister Singh's government.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE