By Unni Krishnan and Andrew MacAskill
Indian Prime Minister Manmohan Singh’s biggest opening to foreign companies since taking office in 2004 boosts odds of an expansionary budget in February to defuse populist opposition to the moves.
Undermined by political allies that opposed his initiatives, and facing the weakest growth since the 2009 global recession, Singh this month took a page out of his two-decade old playbook. The former finance chief, who started dismantling regulations in the early 1990s, opened retail, aviation and energy markets to overseas investors and plans to head a new board that will approve major infrastructure projects.
To cope with the political fallout, which has already included a national strike and the defection of his largest coalition partner, and set the Congress Party up for elections due in 2014, Singh may next focus on measures to alleviate poverty. Steps could include expanded rights for the poor to buy grains at subsidised rates, said economist Laveesh Bhandari.
“These are the last of the reform measures and as we enter the election mode we will see populist measures,” said Bhandari, director of Indicus Analytics, an economics research firm in New Delhi. The September 14 package from Singh’s administration “does nothing for growth in the short term, but it is to unleash the animal spirit,” he said.
India’s rupee has been the best performer against the dollar among emerging markets since Singh’s announcements, climbing about 4 percent. The currency had tumbled to a record low in June as economic growth slumped below 6 percent and policy stagnation hurt investor confidence in the nation’s prospects of living up to its billing as a BRIC powerhouse.
Singh is gambling that the long-delayed opening measures will revive economic growth in time to salvage Congress’s fortunes before a general election due by May 2014. Goldman Sachs predicts the restructuring will help lift growth to 7 percent in the year through March 2014, while staying below the average of about 8 percent in the past decade.
“Separately, these reforms are incremental steps, but when taken together, they could have a large impact on market and corporate confidence,” Tushar Poddar, an economist at Goldman Sachs in Mumbai, wrote in a report. “There are clearly a number of risks to the reform process, especially the uncertain political environment.”
The Bombay Stock Exchange’s Sensitive Index has gained almost 4 percent since the changes were unveiled, compared with a 1.3 percent advance for the MSCI Asia Pacific Index.
After announcing plans to allow foreign retailers to open supermarkets during a parliament last year, rival political parties used the assembly as a venue to vent their opposition, blocking proceedings for two weeks. The government eventually announced it would withdraw the policies. In December, Singh vowed in an interview with Bloomberg News that he would revive the opening of the retail industry in 2012.
Singh’s latest initiatives may take time to bear fruit. Wal-Mart Stores, the world’s largest retailer, which operates 17 wholesale outlets in India in a tie-up with billionaire Sunil Mittal’s Bharti Enterprises, will take 12 to 18 months to open retail outlets in the world’s second-most populous country, Scott Price, head of Wal-Mart’s Asia operations, said in an interview in Hong Kong.
Singh’s decision to push through the reforms cost him the support of his biggest coalition ally, the Trinamool Congress, whose ministers quit in protest, leaving the government about 24 seats short of a parliamentary majority. The changes don’t require the approval of the legislature, which is in recess and doesn’t meet again until November.
“Congress wanted to get these reforms out of the way because they are necessary,” said N R Bhanumurthy, a New Delhi-based economist at the National Institute of Public Finance and Policy. “Then it will want to start focusing on more populist, vote-winning policies next year which have the best chance of delivering the election.”
To fund a pre-election budget, Finance Minister Palaniappan Chidambaram may have to accelerate the sale of state assets or increase India’s record borrowings.
Government debt sales will rise by 9 percent in the year ending March 31, overshooting Chidambaram’s `5.69 trillion ($106bn) target by `500bn, according to the median of eight estimates from investors and analysts compiled by Bloomberg.
India’s gross domestic product rose 5.5 percent in the three months through June from a year earlier, holding near a three-year low of 5.3 percent in the previous quarter. Among India’s challenges are infrastructure bottlenecks that have contributed to keeping the nation’s inflation in excess of 7 percent, restricting the central bank from cutting interest rates to aid growth.
This month’s initiatives include plans to speed up approvals for projects, along with a debt restructuring for electricity companies to give them more cash to invest in new plants in the aftermath of this year’s north India power grid shutdowns that highlighted deficiencies. Singh will chair a new board to clear infrastructure projects worth more than 10 billion rupees.
“In India it’s never clear what a final approval is,” said Samiran Chakraborty, an economist at Standard Chartered in Mumbai. “So this should help to accelerate the process.”
With assistance from Rina Chandran in Singapore.
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