Tuesday, December 06, 2011

India: The end of Manmohanomics?

Singh's legacy could depend on drawing a line in the sand on economic reforms.

By Jason Overdorf
GlobalPost (December 6, 2011)

NEW DELHI, India — Earlier this month, India's beleaguered prime minister drew a line in the sand. This weekend, he erased it. His legacy could well be determined by what happens next.

Here's what's on the scoreboard:

With his government seemingly paralyzed by corruption allegations, Prime Minister Manmohan Singh tried to set the stage for a bold winter season, betting that the country's future depends on the government's ability to push through economic reforms. But now it looks as though he will have to backtrack on his first big ticket play since the 2008 nuclear pact with the United States, putting a plan to open up the retail sector to foreign direct investment (FDI) in a deep freeze.

That could be a big blow for the country, according to India Inc.

“The next stage of our growth cannot take place without a huge influx of capital from across the globe,” said Vijayan Krishnmurthy, who headed JP Morgan Asset Management in India before moving to social investment firm Mi-India. But that capital won't come if it looks like India is regressing to the policies of 1962, he said.

With that same line of thinking, earlier this month, Singh moved to raise the cap on FDI in multi-brand retail stores like Walmart to 51 percent and to allow wholly owned single-brand stores like Ikea or Reebok — which proponents say will both create jobs and lower prices.

But to block the new FDI policy, legislators from the Opposition Bharatiya Janata Party and Singh's United Progressive Alliance (UPA) partners from the Dravida Munnetra Kazhagam (DMK) and Trinamool Congress prevented the parliament from conducting any business through the first week of the month-long session. And now it appears that Singh will admit defeat.

An official announcement from the government is expected Wednesday. But Trinamool Congress leader Mamata Banerjee already told reporters over the weekend that Singh had agreed to suspend the issue “until a consensus is evolved.”

And Finance Minister Pranab Mukherjee reportedly told the leadership of the BJP on Monday that the policy has been put on hold, only to have it thrown back at him that the Opposition will accept nothing less than a full reversal.

That's the score. Now, for the sake of establishing his legacy in what will doubtless be his last term, Singh needs to hit a buzzer beater.

Entering his second term with a near majority, Singh raised high hopes among Indian business leaders that “Manmohanomics” — combining economic liberalization with social welfare spending for the poor — would set the stage for the decade or so of 10 percent economic growth the country needs to pull its people out of poverty. But corruption scandals have prevented his government from making any significant progress, at least on the liberalization part of the formula.

Desperate, on Nov. 22 Singh pleaded with his political rivals to ignore the smell of blood in the water at the beginning of the winter session of parliament. Investor sentiment was plunging, economic growth was slowing and, just like the European Union, India could “also go down” if gridlock continued, he warned.

Indeed, a lot more than the future of Walmart is at stake.

India's economic growth dropped to 6.9 percent for the quarter that ended in September, marking its lowest clip in two years, and there was virtually no growth in FDI. Manufacturing projects have been stalled by land acquisition problems and environmental concerns. Infrastructure projects have been delayed by government sloth. And India continues to rank poorly in international surveys like the World Bank's Ease of Doing Business Report — where it comes in at 132 out of 183 countries ranging from Singapore to Chad.

“Investor sentiment is low. There's no doubt about it,” said Dharmakirti Joshi, chief economist at Crisil, the Indian arm of Standard & Poors. “If you take macroeconomic scenario outside India and in India, there's hardly any good news”

Meanwhile, several more key reforms are slated for the docket before the session ends.

In addition to opening up the retail sector, Singh reportedly hopes to push through reforms in India's laws governing land acquisition and the mining sector, for example.

Both issues are at least as contentious as FDI in retail. A bloody battle in 2007 over the acquisition of land effectively ended the 30-year reign of the Communist Party of India (Marxist) in West Bengal last term. And rapacious mining practices lie at the root of the Maoist rebellion simmering in the jungles of central and eastern India. Yet India's industrialization cannot proceed without land for factories or the iron and coal needed to build and fuel them.

“[These issues] are actually becoming binding on growth now,” said Joshi. “The mining issue needs to be sorted out, or it will lead to constraints for the steel sector and power sector. Then you need land acquisition issues to be made more transparent and accountable.”

Before the retail FDI debacle, the word was that Singh would also push forward on reforms ranging from allowing foreign investment in India's airlines and pension funds, as well. But at present, all the signs seem pointed in the wrong direction.

Political analysts say Singh and his colleagues miscalculated foolishly in introducing the FDI measure without first selling the policy to the broader Congress Party and negotiating for the support of its allies in the UPA. So some opposition emerged simply out of resentment of perceived unilateralism. And the subsequent climbdown only confirmed that Singh and company had blundered forward with the move without first playing out all the possible contingencies.

Whether it's good for the country or not, that doesn't augur well for Singh's economic agenda. And it leaves his opponents with the upper hand.

“They feel that if they paralyze the government and paralyze parliament, they will gain,” said a political analyst who asked not to be named. “Congress needs to confront them. But they're not willing to do that. For that, you have to be confident in yourself.”