Political pressure takes toll in weak economic climate

Mumbai: With political wrangling jeopardising badly needed reforms to rejuvenate a rapidly slowing Indian economy, Dalal Street faces a gloomy outlook at least in the next six months if not more.

Many economists believe industrial output in October contracted for the first time in two years, indicating the severe effects of sustained rate increases by a central bank singularly focused on containing inflation and a lame-duck government unable to take policy decisions vital for growth.

The factory data, due tomorrow, will set the tone for the stock market that has been grappling with dwindling foreign investor interest, and worries the Eurozone debt crisis could potentially trigger a sell-off if some European banks go belly up.

"We're caught between the deep sea and a hard place," said equity trader Anmol Bhushan. "You can forget all economic reform and political expediency will rule the roost until the state elections are over."

He was referring to Uttar Pradesh, the country's most populous state that goes to the polls next year. The election to the state, which also has the largest number of seats in the federal parliament or Lok Sabha, is widely seen as a rehearsal for national elections due by 2014.

The political posturing has already forced Prime Minister Manmohan Singh's ruling coalition to backtrack on a decision to open up the retail sector to multinationals like Wal-Mart and Carrefour.

The reform was expected to attract large foreign investments, crucial to tide over a widening current account deficit that could spiral into a major balance of payments crisis. The large foreign chains were also expected to pour money into building warehouses, cold storage facilities and other logistics, reducing wastage of farm produce.

The government was forced to mothball the decision because it could not muster the support of even its allies, but the embarrassing volte face would further frustrate foreign investors and also domestic business confidence.

"Political differences and vested interests should never be allowed to stand in the way of India's economic progress," Ratan Tata, who heads India's largest conglomerate that bears his surname, wrote on the social networking site Twitter.

"It would be a question of national pride for every Indian to rebuild the past glory and re-establish the country's economic leadership," he said.

The top-30 Sensex slid 3.8 per cent last week to 16,213.4, and could slide another 20 per cent over the next six months as the economic situation worsens.

There could be a mild pullback if the Reserve Bank of India hold rates at its scheduled meeting on Friday and reiterate a shift in stance towards supporting growth.

"December has historically been a positive month for the Indian markets. We could see a year-end rally this year too given a likely pause in RBI rate hikes. However, we would advise investors to sell the year-end rally," Bank of America-Merrill Lynch said in a note.

It said the Sensex could slide to 14,500 over the next six months led by disappointment in GDP and earnings growth.

The writer is a journalist basedin India.

Forecast slashed

The government on Friday slashed its 2011-12 growth forecast to 7.25-7.75 per cent, falling in line with private economists and analysts at foreign investment banks who had cut the projection to around seven per cent.

New Delhi had initially forecast the $1.6 trillion (Dh5.9 trillion) economy, Asia's third-largest, would expand nine per cent this year, but those expectations began to fade as near double-digit inflation, rising borrowing costs and a struggling global economy began to take a toll.

Growth in the September quarter slumped to 6.9 per cent, the slowest in more than two years.