The Indian government faces protests, strike threats and internal dissent this week in what promises to be a test of its reform credentials and its bid to regain momentum.
Determined to reduce public borrowing and revive investor confidence, the country’s beleaguered left-leaning coalition last week unleashed a slew of long-stalled measures aimed at opening up the economy and boosting growth.
“It’s a big gamble, but they had to take this chance,” said Neerja Chowdhury, an independent political analyst in New Delhi.
In the space of 24 hours, ministers hiked diesel prices by 12 percent, opened the doors to foreign investors in retail, aviation and the broadcast media sectors, and approved the part-privatization of four state-run companies.
The administration of Indian Prime Minister Manmohan Singh has been roiled by a string of corruption scandals that have put him and other ministers on the defensive almost since the last elections in 2009.
With legislation held up by a perceived lack of political courage as well infighting in the coalition, optimism about India’s vibrant prospects has slowly drained away.
Indian Commerce Minister Anand Sharma denounced a “motivated campaign to project India in a bad light” as he unveiled the new foreign investment rules on Friday evening, which he said were a message to doubters.
Economists, Indian business leaders, rating agencies as well as sections of the domestic media have long been calling for bold action from Singh, the architect of a radical wave of liberalization reforms in the 1990s.
One of India’s most famous businessmen, NR Narayana Murthy who founded information-technology outsourcing giant Infosys, said earlier this month that while traveling abroad it was “no longer possible to sell the ‘India story.’”
The test this week will be whether Singh can face down trade unions, protests and his unreliable coalition ally Mamata Banerjee, who runs the regional Trinamool Congress party based in the state of West Bengal.
She, along with other regional parties and the main national opposition Bharatiya Janata Party (BJP), have called for the reforms to be reversed, creating a powerful counter-weight along with truckers’ unions, which have threatened strike action.
The coalition “has run up a record of sorts making promises it could not keep, which is why the critical period for the government starts now,” the Indian Express newspaper wrote in an editorial on Saturday.
Sharma said on Friday that “come what may, there will be no policy reversal. The reforms are here to stay.”
The mood would be brightened if the central bank cuts interest rates at a policy meeting in Mumbai today, a move business leaders have been clamoring for to revive growth in the moribund industrial sector.
The bank’s governor, Duvvuri Subbarao, has consistently stressed that policy action was needed from the government to reduce subsidies and improve the investment climate before further rate cuts could be countenanced.
Analysts are unsure of the outcome given the fast-changing environment.
“There have been so many swings and so fast that it has been tough to take a call,” said Siddhartha Sanyal, chief India economist with Barclays Capital, when asked what he thought the bank would do. “But now the RBI [Reserve Bank of India] cannot remain silent, it has to deliver something. Growth is faltering to new lows.”
The once-booming economy grew by 5.5 percent in the March-June quarter — holding around a three-year low — and US ratings agency Standard and Poor’s has threatened to downgrade the country’s credit rating into “junk” status.
Under the reforms, the government has allowed foreign supermarkets to own up to 51 percent in Indian subsidiaries in the retail sector providing they met a series of conditions including investing at least US$100 million.
In the aviation sector, foreign airlines will be able to buy stakes in domestic carriers for the first time up to 49 percent.
There may still be further announcements this week from Singh, whose description as a “dithering bureaucrat” in a recent Washington Post profile drew a furious response from his office.
A senior leader from his Congress party hinted last week at a cabinet reshuffle that could see 42-year-old Rahul Gandhi, the next-in-line in the Nehru-Gandhi political dynasty, take his first cabinet berth.
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