Time for hard decisions from New Delhi

The beleaguered government of Manmohan Singh in New Delhi is expected to kick off a series of measures to fix the country’s financial health, ward off a sovereign rating downgrade and help halt a slide in economic growth.

An increase in state-administered prices of diesel, cooking gas and kerosene could be announced in the coming days, along with a rise in petrol prices that are decontrolled but are still revised only with the government’s approval. The likely move would help rein in out-of-bound subsidies which have been cited by Standard & Poor’s and Fitch Ratings as one of the trouble spots for India.

The coalition government, wracked by a spate of corruption scandals and policy inaction, has a couple of months to take hard decisions and help revive investor confidence. Market-friendly P. Chidambaram, who took over as finance minister in August, is pushing aggressively to retrieve the ground for the government that has done hardly anything for the past three years since re-election.

A fuel price hike would also warn the central bank to tone down its hawkish stance before the monetary policy review on September 17. High borrowing costs have contributed to the sharp slowdown in economic growth, but the Reserve Bank of India (RBI) is in no mood to lower interest rates until the government takes concrete steps to curtail wasteful expenditure.

“There is cautious optimism of positive action forthcoming,” said equity salesman Manish Dave. “Chidambaram is a go-getter and has a better equation with the ground realities and the central bank. He understands the situation is precarious and we need quick decision making.”

Little surprise the top-30 Sensex rallied nearly 2 per cent yesterday, its biggest rise in more than two months. The rise was also supported by the European Central Bank’s decision to tackle the region’s debt crisis, which would soothe global investor worries.

“At his juncture, if the Indian government were to push through a decision to raise domestic diesel prices, it will provide the direction the markets need,” the Indian Express newspaper wrote in an editorial on Saturday.

In 2011-12, diesel subsidies alone cost New Delhi about Rs411 billion rupees, or 0.7 per cent of GDP. With soaring consumption of diesel, which is priced more than 40 per cent cheaper than petrol, the subsidy bill is set to explode and drag the government into deep debt.

India’s $1.6 trillion economy has been wobbling for many months, largely due to the government’s policy paralysis that has held up many large projects. With approvals not forthcoming and business confidence at a low, companies are ploughing cash overseas.

Indian companies directly invested $1.9 billion overseas in August, higher than $1.2 billion a month earlier, the RBI said last week.

Manufacturing activity in August slowed to a nine-month low as export orders fell for a second month, highlighting the risks to the economy from Europe’s debt problems. The HSBC manufacturing Purchasing Managers’ Index (PMI) eased to 52.8 in August, its lowest level since November, from 52.9 in July.

“The momentum in the manufacturing sector eased further on the back of weak external demand and output disruptions caused by the major power failures in early August,” said Leif Eskesen, economist at HSBC, in a report.

Exports in July fell 14.8 per cent from a year earlier to $22.4 billion, with officials blaming poor demand in major markets such as the US and Europe. The data buttressed the argument that New Delhi must do more to boost domestic demand to support growth.

Industrial output data for July, scheduled to be released on Wednesday, is expected to eke out a fractional growth after unexpectedly slumping 1.8 per cent in June. The factory production, which contributes a little over 15 per cent of the gross domestic product, is unlikely to soothe market sentiment.

The focus will be on the fuel price revision, which would give a shot in the arm to reform hopes. Chidambaram could also set the ball rolling for stake sales in government companies and allow global supermarket chains to open shops.

“The pessimism was probably a bit overdone,” said Dave, referring to the subdued stock markets after an early spurt at the beginning of the year. “There is always light at the end of the tunnel.”