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Key risks to watch out in India
November 14, 2011 / 9:50 AM / 6 years ago

Key risks to watch out in India

NEW DELHI (Reuters) - Weak under the weight of corruption scandals, the government is accused of paralysis by top business leaders eager for economic reforms, while worries over the health of Sonia Gandhi could further weaken the Congress party ahead of key state elections.

Supporters of veteran social activist Anna Hazare dance as they celebrate after Hazare ended his fast in Mumbai August 28, 2011. REUTERS/Danish Siddiqui/Files

RATINGS (Unchanged since October unless stated):




The cost of insuring against default on 5-year sovereign debt, in common with debt markets elsewhere in the world, jumped sharply in August and September, as fears of a global recession grew. It fell in October, and at the start of November was around 100 basis points, up 30 since the start of the year.

Following is a summary of key political risks in India:


Shaken by a graft cases including a sprawling scandal over the underpriced sale of mobile telecoms licenses that landed politicians and businessmen in jail, ministers are now wary of approving policies in case they get accused of corruption.

India’s top business leaders are calling on the government to pass reforms to allow foreign direct investment in supermarkets and airlines to kickstart a slowing economy.

Parliament is due to convene on Nov. 22, with the government under a lot of pressure to create an anti-graft watchdog during the month-long winter session.

Anti-corruption protest leader Anna Hazare, who galvanised middle-class anger and forced a government U-turn with a hunger strike in August, has been weakened by allegations of financial misdeeds by his top aides. However, he remains a strong presence on the political scene and threatens a new hunger strike if Prime Minister Manmohan Singh does not move quickly to create the Lokpal.

Hazare has also warned he will campaign against the ruling Congress party in key state elections next year if his demands are not met, a development that would darken an already cloudy electoral outlook for the government.

With its eye on elections that include Uttar Pradesh, Congress hopes to push through bills on mining, land acquisition and food welfare that contain populist measures, but opposition disruption may well slow their passage.

Party chief Sonia Gandhi cancelled her first scheduled public appearance since undergoing surgery for an undisclosed illness, fuelling speculation she may soon hand over the party’s reins to her son Rahul Gandhi.

Rahul Gandhi has staked his political reputation on getting a good result in Uttar Pradesh, which may be a barometer for the national mood ahead of general elections in 2014. However, high inflation and graft scandals have soured support for the party.

As a result of the legislative logjam, it is extremely unlikely the government will in the near future be able to introduce a nationwide Goods and Services Tax (GST) which would simplify a Byzantine tax code, and raise revenues.

Bucking the trend, the government last month passed a long-awaited policy to spur industrial investment.

What to watch:

-- The Gandhi dynasty. Rahul Gandhi has yet to prove himself as an effective politician, raising concerns he will struggle to lead the party if his mother steps down. The Uttar Pradesh election early next year is a key test.

-- Government movement on the controversial plan to allow global giants such as Wal-Mart to directly invest in the supermarket sector, a move many economists say will help tackle inflation and waste, but will hurt small retailers.

-- Legal proceedings connected with the corruption scandal.


In October, the Reserve Bank of India (RBI) raised interest rates for the 13th and possibly final time in a tightening cycle that began in early 2010, on expectations that persistently high inflation, which has topped 9 percent for nearly a year, will finally begin to ease starting in December.

The RBI lifted its policy lending rate, the repo rate, by 25 basis points to 8.5 percent. It maintained its forecast that headline wholesale inflation will ease to 7 percent at the end of March.

Investors are worried bond yields may rise after the government shocked the market by exceeding a borrowing target in September. If inflation does not calm, and the central bank is forced to raise rates again, bond prices would suffer.

Many investors have fled the Mumbai stock market. Losses of 12.8 percent in the three months to September marked its biggest quarterly fall since the months following the Lehman Brothers collapse in 2008, though it did partially rebound in October.

Global growth worries combined with the policy paralysis in the government have made India one of the world’s worst performing major markets in 2011.

What to watch:

-- Inflation data, and how the RBI responds to it.

-- Growth. Singh questioned in October whether Asia’s third-largest economy would meet an average growth target of 9 percent annually over the next five years, given global economic volatility.

-- Foreign trade policy. At the start of November, Pakistan announced it was upgrading India to a most favoured nation (MFN) in early November, a move that would help normalise commercial ties between the nuclear-armed rivals by ending heavy restrictions on what India is allowed to export across the border. A senior Indian government source then accused Pakistan of backtracking since the announcement, but Islamabad immediately denied the allegation.

Editing by Daniel Magnowski

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