Key risks to watch out in India

NEW DELHI Mon Oct 3, 2011 5:12pm IST

School students shout slogans during a protest against a corruption case in Jammu February 12, 2011. REUTERS/Mukesh Gupta/Files

School students shout slogans during a protest against a corruption case in Jammu February 12, 2011.

Credit: Reuters/Mukesh Gupta/Files

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NEW DELHI (Reuters) - Weak under the weight of corruption scandals, the government wants to regain the initiative by reviving stalled economic reforms, but the opposition will not ease the pressure on Prime Minister Manmohan Singh.

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The cost of insuring against default on 5-year sovereign debt, in common with debt markets elsewhere in the world, jumped sharply in August and September, as fears of a global recession grew.

Following is a summary of key political risks in India:

RUDDERLESS GOVERNMENT

A sprawling scandal over the underpriced sale in 2008 of mobile telecoms licenses has reared its head again, revealing infighting in the cabinet and threatening to swamp the government.

The Supreme Court is due to decide later this month whether Home Minister Palaniappan Chidambaram should be investigated. If a probe were to go ahead it would likely mean the end for the minister and further destabilise Singh, but the court is expected to rule against an investigation.

Anti-corruption protest leader Anna Hazare now has a strong presence on the political scene and is likely to return to the forefront if Singh does not move quickly to pass anti-graft Lokpal legislation. Hazare might repeat a hunger strike in August that galvanized middle-class anger and forced a government U-turn.

The return in September of Congress party leader Sonia Gandhi after surgery may bring some order back to the government coalition, which has looked rudderless during the two-month absence of India's most powerful leader. But with the nature and gravity of her illness still not public, doubts remain over how involved she will be.

What to watch:

-- The passage of the anti-corruption bill, Hazare's threat of further protests and his plans to take on parliament on the subject of electoral reforms.

-- Revelations about Sonia Gandhi's health

INFLATIONARY PRESSURE AND POLICY RESPONSE

Inflation accelerated to 9.78 percent in August, leading the Reserve Bank of India to raise rates for the twelfth time in eighteen months despite mounting pressure from business groups and the government over slowing growth. Some economists now expect the bank to pause the tightening.

Spending remains high, while tax revenue growth projections are clouded by weaker economic prospects.

Investors are worried bond yields are set to rise after the government shocked the market by exceeding a borrowing target in September. Yields jumped to their highest in three years as bondholders trimmed their positions.

If inflation does not calm in the coming months, more rate hikes could be on the horizon, further denting bond prices, traders say.

Many investors have fled the Mumbai stock market. Losses of 12.8 percent in the three months to September mark its biggest quarterly fall since the months following the Lehman Brothers collapse in 2008.

Global growth worries combined with policy paralysis in the government have made India one of the world's worst performing major markets in 2011.

What to watch:

-- Review of monetary policy by the RBI, due on Oct. 25.

-- Monthly headline inflation, due to be announced on Oct. 14, two days after the release of industrial production data.

PARLIAMENT AND REFORMS

The government is trying to take control of the political agenda by revisiting a number of economic reforms thought vital to sustain high growth levels. The laws governing forced land acquisitions, mining, and food welfare programs are also populist measures to bolster flagging support for the government ahead of a key state election next year, and a general election in 2014.

Parliament is in recess so none of the reforms will be tabled before the winter session, due to begin in November. The main opposition Bharatiya Janata Party (BJP) is attacking the government on corruption and high prices, and could continue its tactic of obstructing parliamentary proceedings to prevent progress on the reforms. The winter session will also be dominated by the passage of the anti-corruption Lokpal bill.

As a result of the legislative logjam, it is extremely unlikely the government will in the near future be able to introduce a nationwide Goods and Services Tax (GST) which would simplify a Byzantine tax code, and raise revenues.

The wait for structural reforms feeds into investor wariness over India's prospects, with high rates and weakening global conditions bringing factory growth to a virtual standstill in September. Economic growth fell to 7.7 percent in the June quarter.

However, with most major economies suffering from flat growth, some economists predict a surge of investor interest in India in the coming months.

What to watch:

-- Government movement on the controversial plan to allow global giants such as Wal-Mart to directly invest in the supermarket sector, a move many economists say will help tackle inflation and waste, but will hurt small retailers.

-- Progress on reform bills, including those for land acquisition, mining, and financial sector reforms.

(Editing by Daniel Magnowski)

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