There are enough signs that India’s policy makers will stand their ground and press ahead with reforms needed to get Asia’s third-largest economy back on track. This should provide a strong springboard for investors and the stock markets as business confidence builds in the coming weeks, ahead of the festival season that is traditionally a big demand booster.
Shedding his usual reticence Prime Minister Manmohan Singh went on national television to speak directly to the people, explaining why some “hard” decisions were necessary to tide over the troubled times and rubbishing scare-mongering by opposition parties and some allies.
The speech, which many said was better late than never, was well received and triggered the promise of more policy initiatives such as opening up the pension and insurance sectors to bigger foreign participation.
“We are at a point where we can reverse the slowdown in our growth,”
Singh said on Friday. “We need a revival in investor confidence, domestically and globally. The decisions we have taken are necessary for this purpose.”
In a stunning move a week earlier, the government decided to open up the supermarket sector to global giants like Wal-Mart, Carrefour and Tesco, allowed foreign carriers to own up to 49 per cent of domestic airlines, raising foreign ownership limit in media companies to 74 per cent and hiked the heavily subsidised retail prices of diesel – a holy cow in India – for the first time in 16 months.
A nationwide strike called by opposition parties against the measures was a flop in the financial capital of Mumbai, while there was near shutdown in states like Kerala and West Bengal. For Singh, his shining moment was when he refused to buckle to pressures by the ruling coalition’s biggest parliamentary ally, the Trinamool Congress, to roll back the policy decisions.
Led by maverick Mamata Bannerji, the Trinamool Congress pulled out its six ministers from Singh’s cabinet and withdrew support to the government, sparking worries of political instability and possible early general elections. Those fears were quickly laid to rest with the Samajwadi Party declaring to provide support.
The prime minister’s speech, against this background, spelled out the unsustainability of the fuel subsidy bill – which reached Rs1.4 trillion last year and would have hit Rs2 trillion in 2012-13 – was more than the combined spend on health education. “Money does not grow on trees,” he said, drumming up support for reforms to boost investment and the need to cut deficits.
“It conveyed the immense promise as well as the grim context of the government’s recent economic decisions,” the Indian Express wrote in an editorial on Saturday referring to the speech. “While states with reservations were free not to invite FDI in retail, he said they had no right to block the aspirations of others.”
Wal-Mart expects to open its first retail outlet in India within 12 to
18 months, Scott Price, president and CEO for Asia, told the Wall Street Journal. The US giant already runs 17 wholesale “cash-and-carry” stores in a joint venture with Bharti Enterprises in India.
“We need to do more, and we will do more,” Singh said in his address, indicating the determination of the government, which had been hobbled by a series of corruption scandals and policy paralysis, to redress the economic issues on a war footing. The new found urgency also stems from the threat of a sovereign ratings downgrade to junk status by agencies by Standard & Poor’s and Fitch Ratings.
“If the measures proposed by the government are implemented, we would expect a medium-to-long-term positive impact on the macro-economy,”
S&P director for sovereign ratings Takahira Ogawa said in a note.
Given Congress party’s lack of a majority in parliament on its own and chieftain Sonia Gandhi’s penchant for populist schemes, Singh has had a difficult and frustrating task to rein in the fiscal deficit that hit 5.9 per cent of GDP in 2011-12 and is set to exceed the 5.1 per cent target in the budget for 2012-13. However, with elections in several states coming up in the next few months and a general election due by 2014 the government is under pressure to revive investment, create jobs and boost growth – all necessary for a feel-good factor.
The flurry of decisions has warmed the cockles of investors. The
top-30 Sensex rose 1.6 per cent last week, shrugging off political uncertainty worries that had initially caused concern, to 18,752.83 points, its highest close since late July last year.
“The timing of announcements has propitiously combined with the positive announcements from European and US central bankers, and will ensure that India does not miss out on the ongoing global risk rally,”
Abhay Laijawala and Abhishek Sarat, analysts at Deutsche Bank, said in a note on Monday. “We are raising December 2012 Sensex target to 20,000.”
The rupee rallied 1.8 per cent last week to 53.45 against the dollar, and well off its record low of 57.32 touched in late June. Sentiment for the currency was boosted by Finance Minister P. Chidambaram’s decision to slash withholding tax on overseas borrowings by companies to 5 per cent from 20 per cent.
Currency traders expect the rupee, which had hit a 4-month intraday high of 53.33 on Friday, to strengthen towards 50.50 in the December quarter as foreign investment inflows pick up. Data from the Securities and Exchange Board of India shows foreign portfolio investments at nearly $19 billion so far this year, with equity inflows contributing $14 billion.
— The writer is a journalist based in India.
