Analysis: In India, muddled leadership leaves economy adrift

Congress blames unreliable allies in coalition government for blocking major reforms aimed at opening up the economy.

NEW DELHI: "Dear God," wrote economist Rajeev Malik as he called on the Almighty to help India's "rudderless" government in a biting critique that underscored a growing frustration at home and abroad with the stewardship of Asia's third-largest economy.

Writing in India's Business Standard newspaper, the well-respected Malik echoed the exasperation of Indian and foreign business groups pressing for the government to swiftly implement major economic reforms and formulate a coherent strategy to deal with its mounting problems.

Another newspaper said India could be heading to a Greek-style crisis.

Prime Minister Manmohan Singh's Congress Party blames unreliable allies in his coalition government for blocking major reforms aimed at opening up the economy to much-needed foreign investment and tackling obstacles in the way of growth, from creaking infrastructure to endemic corruption.

"Political paralysis" has become the favored shorthand of politicians, journalists and other India watchers.

But events since the announcement of the 2012/13 budget in March suggest a deeper dysfunction: a leadership vacuum that has led to empty promises and muddled policy decisions, most notably on tax reform.

They also raise questions about the most important economic relationship in government – the one between Singh, who engineered the opening up of India's economy in 1991, and his former boss, Finance Minister Pranab Mukherjee.

Foreign companies looking for action are frustrated by the government's determinedly rosy view of the future that appears to ignore a recent raft of negative economic data.

The finance ministry pitched for a credit rating upgrade in a meeting with Fitch Ratings on Thursday even though Standard & Poor's Ratings Services cut the country's credit outlook just last month.

Self-awareness could avert a "macro-economic train wreck," wrote Ron Somers, president of the US-India Business Council.

India's economic growth has slumped to a near three-year low and its current account deficit is the highest since 1980, a gap that is difficult to control when the rupee is at a record low.

The government has projected a budget deficit of 5.9 percent of GDP, which Moody's Investor Service says is credit negative. Inflation is the highest among the so-called BRICS group of major developing countries, and industrial production contracted unexpectedly in March.

"We have a full-blown crisis on our hands," said Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry.

"The Indian growth story is intact," Mukherjee insisted in a speech to parliament this week as Singh sat impassively at his side in the upper house of parliament.

Who is in control?

The Hindustan Times warned on Friday of a Greek-style debt crisis unless the government took firm action to rein in its fiscal and current account deficits.

"But increasingly the sense is that the government simply lacks the political capacity to make tough decisions," it said.

The government was forced late last year to backtrack on plans to open up the $450 billion supermarket sector to foreign firms such as Wal-Mart Stores after a political backlash, including from within the coalition.

Just this month, it delayed plans to tax foreign investors after an exodus of funds, partly driven by concerns the tax could be applied retroactively, battered the rupee.

"It is not an exaggeration to state that the magnitude of the economic damage and mismanagement by the Congress party under Dr Singh's watch will be embarrassing for even a student of introductory economics," Malik wrote.

Singh, who turns 80 this year, struggles to control an unruly coalition government made up of mercurial allies pulling in different directions. Earlier this month he was forced to play peace-maker between his squabbling food, trade and farm ministers who could not agree on crop export policy.

A quiet intellectual who once described himself as an "accidental politician", Singh also appears to have little influence over his politically more powerful finance minister.

"He (Singh) has zero influence over Mukherjee," said a senior representative of Indian industry who asked not to be identified because of the sensitivity of the issue.

The two are reported to have different views on the economy. Singh is a big picture economist who is more concerned with integrating India into the global economy. Mukherjee is known as Congress's trouble-shooter, an astute politician who favors populist policies that will play well domestically.

Govinda Rao, one of Singh's economic advisers, dismisses suggestions of friction between the prime minister and the man who was once his political master. Mukherjee was finance minister between 1982-1984 when Singh was central bank governor. But he acknowledges that Singh struggles to exert control over his cabinet.

"As finance minister, Manmohan Singh was great, but as prime minister he has to discipline everybody and he is not a political heavyweight," said Rao, stressing that he was speaking in his personal capacity and not as Singh's adviser.

Both offices for the prime minister and the finance minister declined to comment. A close Mukherjee aide, who didn't want to be identified because of the sensitivity of the issue, said the minister and Singh "respect each other and are on talking terms."

Mukherjee for president?

Indeed, insiders say the two men have a polite but formal relationship and that Singh does not openly question Mukherjee's decisions even though he may have misgivings, suggesting Mukherjee has free rein over economic policy.

"Pranab was 100 percent responsible for the budget. This year he thought he would do what he likes. I think he is out of his depth. He has incompetent staff, and he is paying the price," said Sanjaya Baru, a former media adviser to Singh.

Mukherjee may also be distracted by his own ambitions - he is a leading candidate to become the country's next president, a position he is known to covet.

He initially shrugged off the outrage of investors and business groups over his vaguely worded proposals in March to crack down on tax evasion, insisting that what India was proposing was no different to practices in other major economies. Last week he relented, announcing a one-year delay in implementing the proposals.

But the damage to investor sentiment was already done.

Tim Roemer, who was US ambassador to India between 2009 and 2011, said US businessmen were watching the latest developments and "starting to scratch their heads".

"On the one hand the US has grown the strategic homeland security and counter-terrorism relationship to historic levels, but on the other hand the business community is increasingly frustrated and fatigued by flip-flops and roll-backs and reversals of decisions," he said.

The government insists it is committed to taking further steps to liberalise the economy and attract foreign investment but the window of opportunity is fast closing.

As campaigning gets underway for general elections that must be held by 2014, political compromise and the tough economic reforms that investors are clamoring for will become even less likely.