NEW DELHI (Reuters) - India’s economy grew at its slowest pace in nine years in the first three months of 2012, dragged by an extended euro zone crisis and policy paralysis at home, while the coalition government is under tremendous strain from scandals and rebellious coalition partners.
Some economists warn that unless the government acts to reverse the growth slump, India’s sovereign ratings may be jeopardised.
The risk of Prime Minister Manmohan Singh’s second term being cut short before a general election due in 2014 is low, but cannot be ruled out.
The failure of Singh’s Congress party in state elections in early March have put him and the party under even more pressure.
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The cost of insuring against default on 5-year sovereign debt traded at 106 basis points in mid-June, having risen around 30 points since late March.
Following is a summary of key political risks in India:
After lurching from crisis to crisis for more than a year, the policy paralysis of Prime Minister Singh’s government and its failure to pass significant reforms to sustain growth are blamed by economists for the slump in GDP growth. The figure fell to 5.3 percent in the first three months of this year from 9.2 percent in the same quarter of 2011.
Since it won a second term in 2009, the government led by Singh’s Congress party has taken no major policy initiatives to further the economic liberalisation he pioneered.
Instead, a seemingly endless series of corruption scandals, and coalition allies that block unpopular bills, have frozen the government into inaction.
Rahul Gandhi, son of current party leader Sonia Gandhi, utterly failed to deliver a promised comeback for the Congress party in crucial state elections in early March, casting fresh doubt on his capacity to become the next member of a dynasty to lead the country.
The party’s flop in Uttar Pradesh has reduced Singh’s scope to relaunch reforms and reverse a slowdown in economic growth.
Anger at Singh’s poor performance is rising, with some talk in the Indian media that he will not survive as prime minister until 2014 elections.
That is unlikely, and the government could probably also muster the support to survive a no-confidence vote. Also helping the government is the lack of appetite among the opposition Bharatiya Janata Party (BJP) for a general election before 2014. Despite Singh’s woes, it is by no means clear the BJP has won over sufficient voters to its Hindu nationalist cause.
Top government advisors are publicly calling for the leadership to tackle politically unpopular reforms between the July presidential selection and key state elections later in the year.
India’s president must be chosen by parliament before a July 24 deadline. Although the president does wield some power, the head of state is a largely ceremonial figure. Finance Minister Pranab Mukherjee is a leading candidate for the presidency, opening the possibility of a major cabinet reshuffle in coming weeks that could be the last chance for Singh to bring his floundering government back on track.
What to watch:
- Protests against Singh and the Congress, and the progress of attempts to pass laws through parliament.
- Economic data, especially any signs that GDP growth as slowing further, which would exert even more pressure on the government.
Investors says the government’s priorities should be cutting subsidies for fuel, fertiliser and food to fix the country’s fiscal credibility, tackling regulatory uncertainty, and reducing the high cost of doing business.
In May, state oil companies said they would raise the price of petrol by about 11 percent, the first increase in six months, in an effort to recover losses inflicted by higher global oil prices and a plunging rupee.
Only days later, the refiners agreed to a partial rollback of the increase as the government responded to a public outcry that included the burning of effigies of Singh and Gandhi, a policy reversal that suggests the government is highly unlikely to pass the tough reforms India needs to speed up its pace of growth again.
Asia’s third-largest economy is struggling to contain its fiscal deficit, which widened to 5.097 trillion rupees, or equivalent to 5.76 percent of its gross domestic product, in the 2011/12 fiscal year.
India announced a series of austerity measures in May, including a 10 percent cut in non-plan spending for this fiscal year, but analysts dismissed them as insufficient unlikely have much impact on the country’s overall expenditure.
India is sitting on a comfortable cushion of $300 billion in foreign reserves, so comparisons with India’s 1991 payments crisis are premature, but confidence is waning.
As ever, India’s dependence on imported, subsidised energy is a weakness, with high prices adding to pressure both on the current account and fiscal deficits. A long financial crisis in Europe could exacerbate capital outflows and further trim demand for Indian exports.
What to watch:
- The Reserve Bank of India’s mid-quarter policy review on June 18. The central bank has some room to reduce policy rates following moderate core inflation and softer global oil prices, a deputy central banker said in early June.
- Any more moves to roll back - or to press ahead with -subsidy reform, and how the public responds.
Editing by Daniel Magnowski