NEW DELHI (Reuters) - India’s coalition government has shown some signs of shaking off the paralysis it has suffered for months, but political wrangling will limit its thrust for reforms during the parliament session that begins on Aug 1.
Corruption charges and high inflation continue to dog Prime Minister Manmohan Singh’s government, while mid-July’s bomb blasts in Mumbai killed 18 people, and raised questions about how India’s security services failed to prevent the attacks.
RATINGS (Unchanged since July unless stated):
The cost of insuring against default on 5-year sovereign debt has barely changed this year.
Following is a summary of key political risks in India:
The main opposition Bharatiya Janata Party (BJP) has vowed to continue taking on the government on issues of corruption and high prices, which could lead to frequent suspensions pf parliament, seriously disrupting lawmaking.
Few expect the government’s proposals to introduce a nationwide Goods and Services Tax (GST), and to amend land and mining laws to fast-track industrial projects, will be approved by parliament in the current five-week sitting.
While there is no major immediate threat to India’s pace of economic growth, which is expected to be around 8 percent in the year to March 2012, the wait for structural reforms is preventing more rapid expansion.
What to watch:
-- Parliamentary sessions.
-- Opposition statements and actions on reform bills, especially GST, which needs bipartisan support to be passed.
Protests by farmers against land acquisition are re-emerging as a factor that could disrupt plans to industrialise and urbanise India rapidly.
A court has overturned the acquisition of several hundred hectares of land from farmers outside New Delhi, hitting plans to build tens of thousands of apartments for India’s rapidly growing middle classes.
Protests continue against land acquisition for South Korean firm POSCO’s proposed $12 billion steel mill, while land given to Tata Motors for a car plant has been taken away to be returned 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 it will be passed by parliament during its August sitting.
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.
-- Court decisions. A court will decide on Aug. 17 whether to strike down another batch of land purchases for apartment-apartments, and has given until then for real estate firms, the government and farmers to reach a settlement.
A raft of high-profile corruption scandals in Singh’s second term have sharpened public anger against his government. As he struggles to deal with accusations, the government’s drive for reforms has taken a backseat.
Anna Hazare, a popular Gandhian social activist, has vowed to embark on a hunger strike from Aug. 16 to protest against corruption, which could be a lightning rod for fresh anti-government protests.
Hazare’s fast in April had been widely popular amongst a public fed up with graft and had forced the government to draft a new anti-corruption bill. But Hazare slammed the proposed law as being toothless and said he would push for a tougher law.
The risk is that as the government scrambles to deal with protests, its attention could further be diverted from nurturing the economy and stamping down inflation.
What to watch:
-- Hazare’s planed August fast.
-- The passage of the anti-corruption bill.
India is still unable to get a grip on high prices and the eleven rate hikes since March 2010 have only dragged on growth. Spending remains high, while tax revenue growth projection are clouded by weaker economic growth.
A long period of high prices will raise discontent and with it the probability that the government will take costly measures to combat them, as well as maintain its controls on fuel prices.
The central bank, one of the world’s most hawkish, is willing to sacrifice some short-term growth to cool prices, and the government is resigned to further rate hikes.
Wholesale price inflation, the main gauge of prices in India, stood at 9.55 percent in June, above the central bank’s comfort level of around 5 percent, and may hit double digits after fuel price hikes in end-June.
Many investors have fled the Mumbai stock market. With losses of 10.7 percent, it is one of the world’s worst performing major markets so far 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