Key risks to watch in India

NEW DELHI Fri Jul 1, 2011 1:51pm IST

Chief of India's ruling Congress party Sonia Gandhi (R) gestures as Prime Minister Manmohan Singh (C) and Finance Minister Pranab Mukherjee watch during a book release in New Delhi May 22, 2011. REUTERS/B Mathur/Files

Chief of India's ruling Congress party Sonia Gandhi (R) gestures as Prime Minister Manmohan Singh (C) and Finance Minister Pranab Mukherjee watch during a book release in New Delhi May 22, 2011.

Credit: Reuters/B Mathur/Files

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NEW DELHI (Reuters) - The mood in India is dark due to slowing growth, high inflation, and rising public disenchantment with Prime Minister Manmohan Singh's government, which is still mired in corruption scandals.

Few expect the coalition government to take decisive steps to stop the rot ahead of what is expected to be a stormy parliamentary session in August.

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Following is a summary of key political risks in India:

CABINET RESHUFFLE

Singh has promised to reshuffle his cabinet, but it is unclear if he will be able to send a strong message of change by bringing in younger, reformist politicians.

Coalition considerations will frame any hiring and firing, with an eye on 2012 state elections in Uttar Pradesh, the country's largest state by population.

What to watch:

-- Key ministers. The most powerful members of his cabinet, Finance Minister Pranab Mukherjee and Home Minister Palaniappan Chidambaram, are unlikely to be dropped.

-- Other ministries. Keenly watched will be any change in the foreign, trade and environment ministries, which are key to India's pursuit of foreign investment and control of natural resources.

-- Graft scandal repercussions. Dayanidhi Maran, the textiles minister from a key coalition partner, may face the axe over a probe into his involvement in a telecoms licensing graft scandal. Getting rid of him would be seen as a sign that Singh may be taking a tougher line on corruption.

LAND ACQUISITION DISPUTES

Protests by farmers against land acquisition are re-emerging as a factor that could put off foreign investors, and disrupt plans to industrialise India rapidly.

Land purchases for South Korean firm POSCO's proposed $12 billion steel mill was stopped after protests in June, while land given to Tata Motors for a car plant has been taken away to be given back to farmers.

The government has promised a new law that will take the edge off protests by giving farmers market prices or better for their land, but there is no guarantee laws will be passed by parliament during its August sitting.

Differences remain over the shape of the proposed law, most importantly whether the government should take over land on behalf of private firms, or let them do it on their own.

What to watch:

-- Whether the land acquisition bill is passed by parliament, and its final form.

-- Further agitations against the POSCO plant and the government's response.

-- Developments in the Tata case.

CORRUPTION, PROTEST, AND PARALYSIS

Rafts of high-profile corruption scandals in Singh’s second term have sharpened public anger against his government. As he struggles to deal with accusations, policymaking has drifted into limbo.

A former minister and two prominent lawmakers are in jail as they face charges of graft in the grant of telecoms licences and in the award of contracts for the 2010 Commonwealth Games. A third minister may be charged in the telecoms case.

Public support has swelled for Anna Hazare, a Gandhian social activist, who has vowed to start a fast in August if the government does not set up an independent ombudsman to probe graft charges against officials including the prime minister.

The government is sitting on approvals for two multi-billion-dollar foreign investments into the Indian oil exploration sector, test cases for the ease of doing business in India.

What to watch:

-- Progress of Vedanta Resources' bid to buy into Cairn Energy’s Indian assets, and BP's $7.2 billion deal with Reliance Industries .

-- The draft of the anti-corruption bill, which will give an independent ombudsman powers to prosecute ministers, bureaucrats and judges.

-- Hazare's planed August fast. If it goes ahead, it could spark a fresh wave of protests, further diverting the government's attention from pressing economic issues of growth, inflation and reforms.

RISING INFLATION, SLOWING GROWTH

India is still unable to get a grip on high prices and the ten rate hikes since March 2010 have only dragged on growth. Spending remains high, while tax revenue growth projections are clouded by weaker economic growth.

A long period of high prices will raise discontent, and the probability the government will slip into costly populist measures and keep controls on the prices of fuels.

The RBI is willing to sacrifice some short-term growth to cool prices, and markets expect it to continue its hawkish monetary policy stance.

Wholesale price inflation, the main gauge of prices in India, topped 9 percent in May, above the RBI's comfort level of around 5 percent, and may go up into double digits after fuel price hikes in end-June.

Many investors have fled the Mumbai stock market. With losses of 8.6 percent, it is the world's worst performing major market this year.

What to watch:

-- Official statements and data on inflation and growth.

-- Oil prices. Higher crude prices will mean a larger subsidy bill as well as greater inflationary pressures.

(Editing by Daniel Magnowski)

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