| NEW DELHI, June 12
NEW DELHI, June 12 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
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 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
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
FAILURE TO REFORM
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
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 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)