India's "big bang Friday" reforms might just stick

NEW DELHI Mon Sep 17, 2012 7:51am IST

Prime Minister Manmohan Singh flashes a victory sign after addressing a news conference in Mumbai April 13, 2009. REUTERS/Punit Paranjpe/Files

Prime Minister Manmohan Singh flashes a victory sign after addressing a news conference in Mumbai April 13, 2009.

Credit: Reuters/Punit Paranjpe/Files

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NEW DELHI (Reuters) - There were quiet celebrations in the offices of Prime Minister Manmohan Singh late last week after he stunned the country with a slew of steps to revive the tanking economy.

In the space of 24 hours, Singh had dispelled the image of an elderly ditherer and demonstrated - two decades after he launched India's transformative drive for economic liberalisation - that he remains a champion of reform.

"People were very happy," one aide to the Oxford-educated economist told Reuters. "There were no high fives, but people in the office were very satisfied."

So is this another "nuclear moment" for Singh, an echo of 2008 when he put his job on the line to push through a controversial civilian nuclear deal with the United States? Or is he still the wavering leader who backtracked on key economic policies three times in the past year to fend off protests?

Singh's government, already weakened by a string of corruption scandals, will inevitably face a political backlash over the reforms, perhaps enough to make him stop short of the difficult steps still needed to tackle a gaping fiscal hole.

But the signs are that this time the prime minister will stick to his guns, if for no other reason than because he may well have run out of alternatives.

"It will take courage and some risks but it should be our endeavour to ensure that it succeeds," Singh told a group of government economists on Saturday. "The country deserves no less."

GRAPHIC-Inflation, rates, IIP

His Congress party, which heads an unruly coalition, also seems confident that it can survive the onslaught.

In conversations with Reuters, several party and government officials said Congress leader Sonia Gandhi assessed the risks of losing coalition allies over the reforms - which could force an early election - and concluded they were safe.

"The calculation will be that these people will make noise but will not pull the plug," said Neerja Chowdhury, a political analyst, after the first of last week's bold steps, a sharp increase in heavily subsidised diesel prices.


Once seen as India's answer to Deng Xiaoping, who set China on the road to a market economy, Singh - who will be 80 next week - had seen his reputation crumble in recent months. In July, Time magazine dubbed him an "underachiever" unwilling to grasp the nettle of reform as economic growth sagged.

But over 24 hours on Thursday and Friday last week his government unveiled more big-ticket reforms than it had in all the eight years since it came to power in 2004.

In addition to the diesel price increase, it announced that it was opening up the retail sector to foreign supermarket chains and removing the bar on foreign investment in both airlines and broadcasters. It also approved the sale of stakes in four state-run industries.

India's economy is growing at about 5.5 percent, its lowest in three years and far short of the near-double-digit clip of the mid-2000s.

Its fiscal deficit is heading for at least 6 percent of GDP, blowing past the official target, inflation remains stubbornly high despite a long interest rate squeeze, investment has dried up and it is in danger of becoming the first of the big "BRICS" emerging economies to see its credit rating downgraded to junk.

Efforts to tackle the malaise have faltered time and again.

This was partly because Singh came under pressure from coalition allies and party colleagues opposed to steps that could alienate voters, and almost certainly because he enjoyed little support for reforms from his powerful, welfare-minded boss, Sonia Gandhi.

Over the past year the government has rolled back increases in petrol prices and rail fares. Most dramatically, Singh ditched an attempt to push through retail reform after mayhem in parliament and street protests led by his party's largest coalition partner, West Bengal Chief Minister Mamata Banerjee.

Banerjee told Reuters in May that she would never support the likes of Wal-Mart Stores Inc (WMT.N) opening supermarkets in India, and on Friday she gave the government a 72-hour deadline to backtrack. She led a large protest on Saturday and suggested her party was seriously considering leaving the coalition.

However, there are reasons to believe that Singh and Gandhi will ride out the storm this time.

The economic crisis is far deeper than last year and a U-turn now would seriously discredit their efforts to salvage it. As in 1991, when India was close to bankruptcy, reforms came - and stuck - only when a gun was put to its head.


With its popularity down due to corruption scandals and the economy, the Congress party may be hoping to win back middle-class voters by acting now and hoping to have the spending power to win over rural voters on time for an election due in 2014.

"There could be a period of turbulence but we are confident of a safe landing," commented a senior Congress Party source, who said neither Gandhi nor Singh were in a mood to reverse the decisions they had made. "We can live without Mamata."

In the two weeks leading up to "big bang Friday", Singh and Finance Minister P. Chidambaram met Gandhi several times to explain the gravity of the economic situation. Together, the two veterans - Singh the economist and Chidambaram the lawyer - built their case.

Gandhi was told that without high growth India simply could not afford subsidies or the food welfare scheme she is determined to roll out for the country's millions of poor.

"On Wednesday, in the last Core Committee Meeting, it was decided 'let's go ahead with everything'," a source close to Singh said, recalling the moment when the reform argument won.

"Finally the message has struck home that you have to grow the pie, rather than just talk about dividing the pie," said political analyst Subhash Agrawal of think-tank India Focus.

The political roller-coaster of the next few days will yet decide whether that party meeting becomes a defining moment in Indian history, or merely a footnote.

(Additional reporting by Rajesh Kumar; Editing by John Chalmers and Alex Richardson)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see
Comments (2)
si6ma wrote:
Thank you Prime Minister Dr. Manmohan Singh, you may not speak much but you still are best bet for India! :)

Sep 17, 2012 11:26am IST  --  Report as abuse
Subrabhama wrote:
India’s growth malaise run deeper. The structural imbalances are too skewed. Manufacturing has come to a standstill and even services are faltering. The explosion of the service sector reflcted the higher growth rate in recent years. But service sector is a treacherous and unreliable sector.

If major reforms have to come about, there should be attempts to improve agricultural production and productivity. There should be attempts to increase substantially the manufacturing capacity with the later day technology and improvements in productivity. There should be less reliance on the service sector, especially the BPO, ITES, etc, which tend to distort wage structure acorss the board and vitiate social structures.

FDI has played a very small part in India’s development even if we go back to study its role since the late 1980s. India never secured world class technology through foreign collaborations. The study by the Government’s Manufacturing and Productivity Council brought out some time ago is a damaging record on FDI role in India. So, to think that FDI opening in sectors like “retail”, “aviation”, etc will lift the economy from its current malaise is an illusion. This is being done to placate lobbies, both Indian and foreign. Even if retail giant play a beneficial role, a great if considering their records elsewhere, it may many years for them to build the marketing support. Aviation is a sector which is fashionable and elitist but plays a very limited role in economic growth.In any case, it is a tertiary sector and effects are indirect. Aviation is being opened to FDI more to placate a known lobbyist of dubious standing. If Dr. Singh wiahses to create a “clean” image of himself and his reforms, he has not served this cause by opening aviation to FDI. Soon, banks will be bullied to provide new loans to KF which would come back with a dubious foreign party as a saviour.

These reforms may not be called “reforms” in any sense of the term. They are knee-jerk reactions which partly address foreign criticism about policy paralysis and which, more importantly, cater to domestic lobbies such as KF, Bharti, etc. Dr. Singh will live long enough to regret these reforms when he retires from public life.

Sep 18, 2012 11:06am IST  --  Report as abuse
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