Singh strikes back
Category: India, Global
By V G Kulkarni
Indian PM outwits divided opposition by sticking to economic reforms
To many foreigners there is a feeling of deja vous about Indian Prime Minister Manmohan Singh’s rapid fire announcement last month on easing foreign investment in retail and aviation sectors and other economic reforms. A year ago, Mr. Singh made a similar decision and had to backtrack owing to differences in the country’s multi-party coalition government.
But this time around Mr. Singh is unlikely to renege on reforms as both the politics and economics of reforms are vastly different now. A year ago the economy was still growing at a healthy pace; the effects of the global great recession had not yet been fully felt in India. Now with the continuing stagnation in the US and fall in European demand, Indian exports have taken a drubbing. The just concluded monsoon rains have been deficient and could affect the harvest and the resulting shortfall in rural Indian incomes. Over the past year, inflation has not eased. Fiscal deficit has continued to mount, foreign direct investment (FDI) has fallen, and the value of the rupee headed south. The overall prognosis is, unless drastic measures are taken to lure overseas capital, Indian GDP will only grow at 5.5% for the coming year, compared with the 8% plus it had notched up in recent years.
Thus backed into a corner, Mr. Singh hit back by unleashing reforms, defending them as necessary to revive investor confidence in a slowing economy and prevent a fiscal crisis. In a televised address to the nation he harked back to 1991, when a similar but more drastic situation led to the opening of the Indian economy by ending the License Raj. Mr. Singh was the architect of those two-decade old reforms as the then finance minister.
In addition to FDI in supermarket chains, the recent reforms will allow foreign airlines to invest in the ailing domestic aviation industry. Next in line is insurance as well as the further liberalisation of securities markets. While reducing the subsidy for diesel fuel and cooking gas is meant to reduce the fiscal deficit, some populist measures to raise public pensions and healthcare expenditure are being offered as goodies to the public. But it is the retail sector that has hogged the headlines and caused political rumblings.
The economic justification for FDI in retail has been that the local sector is notoriously inefficient with a quarter of the produce going to waste between the farm and the shop – raising overall costs to the seller and prices to the buyer. The US$450 billion retail industry could benefit with investment in an efficient supply chain that would give higher incomes to farmers and lower prices to consumers by cutting out several layers of middle men.
Opponents argue that the entry of the likes of Walmart and Tesco would affect the millions of mom-and-pop shops. Up to a point that is true, but experience elsewhere has shown many of the small family stores will continue to exist in large countries like India. At the same time the new retail chains would create millions of jobs as well.
But the politics of populism always stands in the way of reforms. The main opposition party, the Hindu-nationalist Bharatiya Janata Party (BJP), has opposed the retail reforms, though the same party favoured it a decade ago when it was in power. But then it would oppose anything its main national rival, the Congress, proposes. The communists and assorted leftist parties do not favour it on principle.
Over the past two years, the ruling Congress coalition regime has been wracked by corruption scandals involving the allotment of telecom and coal-mining licences – the BJP wants to exploit every avenue to bring the central government to a standstill. But neither the BJP nor the main regional parties want to precipitate early general elections as they are not sure of winning. The next general elections are due to be held in April 2014.
Such political stasis extends to other parties as well. The Bengal-based Trina Mool Congress (TMC) resigned from Mr. Singh’s coalition, just to outdo the Bengali communists whom it had ousted in that state – reducing Mr. Singh’s national government to a minority. But even as TMC resigned, two other regional parties – Samajwadi Party (SP) and BSP announced their backing to Mr. Singh’s regime. SP and BSP are pathologically opposed to the Hindu nationalists of BJP and do not want to see it return to power in the event of snap general elections.
The corruption scandals against Mr. Singh’s Congress are also losing their bite. The people’s movement against corruption, which hogged media headlines for a year is split and opposition parties which backed that movement can no longer derive political points. Moreover, almost all other parties have indulged in such practices, which have now come to be seen as corrupt.
The prime minister is shrewdly exploiting the disarray in the opposition to speed up economic reforms. Even if he has to make a few concessions in the pace of reforms, Mr. Singh still has more than a year-and-a-half to let the reforms bear fruit and simultaneously offer some fiscal sops for the broad mass of people before he has to renew the party’s mandate to govern.
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