Graft crisis may hand India “Eureka” moment on reform

NEW DELHI, (Reuters) – If the optimists are to be  believed, India’s huge anti-corruption protests may give impetus  to a beleaguered government to push its reform process and help  ailing economic growth and plummeting business confidence.

Anna Hazare

If so, it comes not a moment too soon. Hit by high interest  rates and policy paralysis, economic growth in April-June looks  set to slow to its worst in six quarters. August  business confidence by one leading survey has plummeted to a  two-year low.

The fast by social reformer Anna Hazare not only forced  parliament to move on an anti-graft bill, it may have woken the  ruling Congress party to the fact governance is more important  than playing populism with regional and caste-based votes.

“The last year has been one of drift and policy paralysis  and the pummelling of the government by Hazare was the last  straw,” said V. Ravichandar, chairman of Feedback Consulting in  Bangalore, which advises multinationals.

“The government just cannot afford to play dead any more.”

In power for most of India’s independence and with its roots  in Soviet-style five-year plans, the left-of-centre Congress  emerged as the party of the poor villagers. The rising middle  class has often played second fiddle.

Hazare, who ended his fast on its 13th day on Sunday, may  have been a turning point. Hundreds of thousands of the urban,  middle class took to the streets, confounding those who saw the  sector as a political footnote compared to the rural majority of  India’s 1.2 billion population.

The way to win over that urban, young middle class behind  Hazare may be to boost the urban economy and reforms like  foreign investment in the modern supermarket sector, making it  easier for industry to acquire land and the creation of  national, streamlined taxes.

“Now the government may want to take the high ground, and  reforms may be one way to achieve that. Congress may realise it  can no longer just pander to rural and poor votes,” said  Ravichandar.

And pander it has — for years.

The government spends a huge amount on subsidies for the  mainly rural poor, including a rural employment scheme that is  widely seen as allowing it to win its second term in 2009. That  now accounts for more than three percent of the annual budget.

The cost of food subsidies has roughly tripled since Prime  Minister Manmohan Singh first came to power in 2004, to 600  billion rupees ($13 billion), according to a report by Standard  Chartered Research.

At the same time, the government has gone slow on reforms  like opening up supermarkets to foreign investors, a move that  would help India’s stubbornly high inflation rate and ease the  burden of India’s urban classes hurt by rising food prices.

 ECONOMY SLOWS   

“At the moment India suffers from a double whammy of policy  lethargy and high interest rates,” said D.K. Joshi, principal  economist at Crisil in Mumbai. “Confidence will be boosted if  the government moves on reforms. People want to know that it is  smoother to invest on the ground.”

Ominously, car sales fell in July by nearly 16 percent, the  first drop in two and a half years, as fewer consumers can  afford to get affordable car loans. China’s sales rose nearly 7  percent in the same month.

The central bank, which has been one of Asia’s most  aggressive central banks by raising rates 11 times since last  March, has warned against accepting inflation as a “new normal”.

Some analysts say economic growth may slow to seven percent  if there are no reforms, not enough for Asia’s third-largest  economy that needs to grow nearer double digits to compete with  the likes of China and deal with its widespread poverty.

“The Anna Hazare movement itself is a reflection that things  are not moving. Some positive things must happen now otherwise  it will be a disaster,” said a finance ministry adviser, who  asked to remain anonymous.

The last week of parliament will see investor eyes on  whether Congress pushes through reforms, with only a week of the  session left.

These measures in themselves are no magic wand. But what  they may install — relatively quickly — is business  confidence, and with it a more benign investment climate.

The August report on business confidence by the Federation  of Indian Chambers of Commerce and Industry came before Hazare’s anti-graft campaign transfixed India. The survey said weak  demand and high rates were two of their biggest concerns.

The survey said business was looking for big-ticket items,  including a reform to streamline taxes that may be introduced by  the 2012 fiscal year

PESSIMISTS – HISTORY ON THEIR SIDE   

If the pessimists are to be believed — and they have  history on their side — a rudderless leadership may hold India  back.

The government’s fumbling response to Hazare, briefly  arresting him before releasing him after a protest backlash,  only underscored how out-of-touch Singh and his elderly  ministers are.

Finance Minister Pranab Mukherjee is the wily political  firefighter of the government and was key to reaching a  compromise with Hazare. But there were frustrations his gaze was  not on the $1.6 trillion economy.

“Yes, unfortunately, the government has been caught up in  defusing this crisis. I must admit even here in the finance  ministry, policy decisions have been held up,” said another  senior finance ministry official who declined to be named.

“I have not met the finance minister for more than three  days and decisions on the table have been held up.”

The Congress party is also without Sonia Gandhi after she  underwent surgery in the United States for an undisclosed  illness. Her son, Rahul Gandhi, has shown little leadership  qualities, remaining mostly sidelined during the Hazare dispute.

Singh may have been responsible for the 1991 reforms that  set the stage for India’s two-decade boom, but he has shown an  inability to push aggressive reforms in his second term.

Still, the deal with Hazare saw unusual parliamentary  consensus between the Congress and opposition, and some analysts  say there is a chance this will feed into the reform bills.

The Hazare crisis may also soon spark the rise of Rahul Gandhi and some younger politicians unshackled by the  decades-long statist history of Congress.

“Now it is all behind us, the government will be able to  concentrate on reforms,” said Shubhada Rao, chief economist at  the Yes Bank in Mumbai.

“These may have a medium-term impact, but what is important  is to boost business confidence.”

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