| NEW DELHI, June 4
NEW DELHI, June 4 India's economy grew at its
slowest pace in nine years in the first three months of 2012,
dragged down by an extended euro zone crisis and policy
paralysis at home, while the coalition government is under
tremendous strain from scandals and rebellious coalition
Some economists warn that unless the government acts to
reverse the growth slump, India's sovereign ratings may be
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.
RATINGS (Unchanged unless stated):
The cost of insuring against default on 5-year sovereign
debt traded at 111 basis points in early June,
having risen 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. T he 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.
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.
Top government advisors are publicly calling for the
leadership to tackle politically unpopular reforms between the
selection of a president in July and key state elections later
in the year.
India's head of state - a largely ceremonial role - must be
chosen by parliament before a July 24 deadline.
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
- Whether Mukherjee is relieved of his portfolio, and which
new faces might enter the cabinet if a reshuffle takes place.
FAILURE TO REFORM
Investors says the government's priorities should be cutting
subsidies for fuel, fertiliser and food to improve 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
Asia's third-largest economy is struggling to contain its
fiscal deficit, which widened to 5.097 trillion rupees ($90.86
billion), 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 its 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)