Friday, June 24, 2011

Indian leaders steer economy off course

Yoga guru Swami Ramdev (centre) on a hunger strike against corruption earlier this month. The Indian government’s harsh treatment of his followers has suggested that it is more concerned about dealing with its enemies than coming up with policy strategies. — Reuters picture

IF there was ever a sign of rudderless leadership and misplaced priorities over economic policy, it was Indian Finance Minister Pranab Mukherjee's trip to Delhi airport this month to meet a yoga guru protesting against the government's inaction on graft.

The highly criticised trip, which initially emboldened the guru and then backfired when police tear-gassed his rally three day later, underscored a sense of distracted leaders fruitlessly trying to put out fires.

Critics would have preferred Mukherjee focus more on dealing with a confluence of worrying economic trends -- accelerating inflation, declining foreign investment and slower growth and domestic investment -- that policy inertia will only make worse.

Asia's third-largest economy is still set to grow around eight per cent this fiscal year, faster than any major economy, except China. However, there are ominous signs, from weaker car sales to a dip in steel imports, that have coincided with global worries that emerging markets could soon hit a financial bump.

Investment was essentially flat in the March quarter and industrial output rose 6.3 per cent in April, its slowest in three months. Inflation accelerated faster than expected in May, to 9.06 per cent, with price pressures spreading from food to the manufacturing sector, while the central bank may have run out of tools to contain it after 10 rate rises.

"India may grow around seven per cent without reforms," said Sanjay Mathur, a Singapore-based economist at Royal Bank of Scotland, one of several economists who have warned India's economic growth could fall below eight per cent. "In the India context, that's not enough."

Halfway through his second term, Prime Minister Manmohan Singh's reformist image has been hit by corruption scandals, weak leadership, infighting and a sense of complacency by many politicians focused more on enjoying the fruits of power.

"The government is losing control of the agenda. What makes it more serious is that this has coincided with a slowdown in the economy and a dip in investor confidence," said Delhi University professor Mahesh Rangarajan.

Many politicians and industrialists believe that a policy limbo is of no real consequence -- that the US$1.6 trillion (RM4.8 trillion) economic juggernaut will simply hum along in spite of the government, and so it has proved for most of Manmohan's seven years in power.

But a series of scams, topped by allegations of kickbacks in the granting of telecom licences that may have cost the government up to US$39 billion, have more than paralysed Parliament. They have led to a spiralling lack of confidence.

Foreign direct investment fell 28.5 per cent in 2010/11, while India's main stock index has fallen nearly 12 per cent since mid-November, when the corruption scandals began to unravel. That compares with emerging markets equities firming around two per cent in the same period.

The pessimistic scenario is one of lower growth, higher inflation and pressures on India's fiscal deficit.

The investor wish-list is long: speeding up environmental approvals for industry and making the process more transparent, raising fuel prices to help narrow the fiscal gap, giving foreign investment a boost with stake-sales in state-owned firms and reforms to open up sectors such as retail.

Other economists call for the government to increase its spending on infrastructure and push through a bill making it easier and clearer for companies to acquire land for industry.

Companies complain about murky regulations, especially with land acquisition and environmental policy. South Korea's Posco faces land protests over a planned US$12 billion steel plant even though environmental clearance was given in January.

All in all, investors want a confidence booster, and this was underlined recently when a group of top bankers and industrialists visited Manmohan's top economic adviser.

"The major concern was the slowdown in the economy, slowdown in the investment climate, also the number of projects getting aborted midway," said one participant at the closed-door meeting.

There appears little sign of an end to the paralysis. Indeed, many see the Congress Party-led government burying its head further into the sand. The harsh treatment of anti-corruption campaigners -- including a pre-dawn raid on thousands of followers of yoga guru Swami Ramdev -- suggests it is more concerned about dealing with its enemies than coming up with policy strategies.

"It's ominous when Congress gives out aggressive signals -- as it did with the anti-corruption campaigns," said political analyst Swapan Dasgupta.

"It means policy will be put in cold storage and there will be more populism."

Mukherjee, a wily and long-serving Congress stalwart, spent hours this month chairing a bickering committee drafting a decades-old anti-graft bill.

A promised cabinet reshuffle after state elections last month to bring in fresh faces has not yet materialised, even though a Congress party ally was thrown out of power in the key swing state of Tamil Nadu on the back of a corruption scandal.

Diesel price rises -- needed to help rein in a fiscal deficit bloated by subsidies -- have been put on hold for fear of an unpopular step that would only drive inflation higher.

The government is pushing a bill in the next parliamentary session to make land acquisition easier, but there are signs that polarisation between Congress and the Hindu nationalist opposition Bharatiya Janata Party (BJP) may hamper its progress.

Rangarajan argues that part of the problem is the current political set-up -- with the real power sitting with Congress president Sonia Gandhi rather than the prime minister she appointed, creating a dual but unequal leadership.

Congress has been far more concerned with policies aimed at staying in power -- like a popular but expensive scheme to provide jobs for the rural poor -- while Manmohan and some of his ministers and officials are seen as more reform-oriented.

And the party may be far more focused on its election campaign in the state of Uttar Pradesh next year -- a vote that will set the stage for a 2014 general election that could usher family scion Rahul Gandhi into the national race -- rather than reforms.

"The party and government are now out of synch," said Rangarajan. -- Reuters

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