Bloomberg News

General’s Bribe Bombshell Adds to India Leadership Disarray

April 01, 2012

Manmohan Singh, India's prime minister. Photographer: SeongJoon Cho/Bloomberg

Manmohan Singh, India's prime minister. Photographer: SeongJoon Cho/Bloomberg

His striped cravat tucked inside a heavily decorated uniform, India’s army chief last week sent tremors through one of the few government ministries to have escaped 17 months of scandal and intrigue.

A day after the general said he’d been offered a bribe to approve a contract, Defense Minister A.K. Antony told parliament he’d known of the claim since 2010 yet hadn’t ordered an inquiry. The flap deepened a perception of mismanagement pervading Prime Minister Manmohan Singh’s cabinet that began with auditors in 2010 vilifying the handling of sales of mobile-phone licenses.

Antony, whose personal probity helped him win charge of a department where graft scuttled an earlier government, joined cabinet colleagues engaged in fighting fires rather than making policy. With two years left before a national election is due, the vacuum of leadership has helped fuel a surge in support for regional parties now crippling efforts by the federal government to shrink a fiscal deficit and embrace foreign investment.

“The government is just limping from crisis to crisis,” said Satish Misra, a political analyst at Observer Research Foundation, a policy-research group based in New Delhi. “Just as it tries to get some traction, another problem drags it down.”

The political impasse has stymied an agenda that envisioned building on the economic transformation that Singh, 79, first helped engineer as finance minister in the early 1990s. Efforts to overhaul the tax system, usher foreign retailers including Wal-Mart Stores Inc. (WMT:US) and strengthen the rail system by boosting passenger fares, have proved fruitless.

Limiting Ambition

In the proposed budget for the fiscal year that began this month, Finance Minister Pranab Mukherjee targeted a deficit in excess of 5 percent, after last year seeking to shrink the shortfall to 4.6 percent. India is paying a price for the lack of ambition: yields on benchmark 10-year government bonds rose 15 basis points to 8.57 percent since the budget’s March 16 release.

“The government should be coming up with more radical policies but it was stopped from doing so by the increasing power of regional parties,” said Sonal Varma, India economist at Nomura Holdings Inc. in Mumbai. “This was a status quo budget, it was just an accounting statement.”

Among the biggest beneficiaries of discontent with the Congress Party, which has led the nation for most of the period since independence in 1947, is the Samajwadi Party. The group swept to victory in Uttar Pradesh, India’s most populous state, last month and has the third-highest number of seats in the national parliament’s lower house.

Gearing Up

Samajwadi’s leader, Mulayam Singh Yadav, has signaled greater ambitions, telling his colleagues to prepare for a national election ahead of the 2014 schedule. In West Bengal, the fourth-most populous state, the Trinamool Congress party contributed to shooting down efforts by the federal government to allow Wal-Mart and other foreign companies to hold majority stakes in multi-brand retailers.

Even with support seeping away, a near-term reckoning for Singh’s administration may not materialize. The only other political group that can claim a nationwide following, the Bharatiya Janata Party, has failed to capitalize on Congress’s slide, and has an equal incentive of avoiding an early election.

The BJP came third in Uttar Pradesh last month, and is battling its own corruption scandal in the southern state of Karnataka. Between them, the two biggest parties control 320 seats in the 545-seat lower chamber.

Reckoning Prolonged

“The government is likely to last,” said Sanjay Kumar, a New Delhi-based analyst at the Centre for the Study of Developing Societies. “Congress and the BJP have so far shown little appetite for mid-term polls.”

Meantime, other institutions are exercising power.

The Supreme Court in February canceled 122 mobile-phone licenses after the country’s auditor found a 2008 sale of second-generation spectrum lacked transparency, with permits awarded to ineligible bidders at “unbelievably low” prices. Norway’s Telenor ASA (TEL) is among companies that may seek damages as a result.

The government also has had to fend off media reports, based on an incomplete official audit, that it underpriced coal blocks by $211 billion.

“You can throw anything at this government and it will stick, even the most outlandish accusations because it can’t defend itself,” said Surjit Singh Bhalla, chairman of New Delhi-based Oxus Fund Management. “It has lost all sense of which direction it should be heading.”

Singh’s administration passed just 22 laws last year, the second-lowest number since 1952, according to New Delhi-based PRS Legislative Research.

Growth Outlook

Even with the leadership vacuum, India’s economy will probably sustain growth in excess of 8 percent in the coming four years, according to International Monetary Fund’s estimates in September. An expanding labor force and rising middle class demand for cars, dwellings and household goods may continue to grab foreign investors’ interest.

“The headlines can be quite loud and noisy but at the grassroots India’s growth story is still intact,” said Rajat Jain, chief investment officer with Principal PNB Asset Management Co. in Mumbai, who helps to manage $1.2 billion. “India’s story has always been about good bottom-up companies and that has not changed in spite of what the government does.”

Even so, a perception that the government has failed to tackle corruption has lowered investment and contributed to a 15 percent slide in its stock market since early 2008, according to a report by the Bank of Singapore Ltd. published in February.

Latest Blaze

Army Chief V.K. Singh’s allegation he was offered a $2.75 million bribe to purchase 600 vehicles he says he found “sub- standard” and the media criticism of Antony’s failure to act is the latest blaze that needs extinguishing.

Arun Jaitley, a BJP leader, led the attacks on the government last week saying Antony’s negligence left the impression that graft is an acceptable part of Indian life. Failing to order a probe “means that we’re learning to live with corruption,” he said in parliament’s upper house on March 27.

Oxus Fund Management’s Bhalla likens India’s government to a relaxed tourist taking a holiday.

“It is the ultimate laid back government; it is so laid back that it can’t get up again,” Bhalla said. “Calculations about the attractiveness of India as a place to put your money have to assume this government doesn’t have any will or vision.”

To contact the reporter on this story: Andrew Macaskill in New Delhi at amacaskill@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net


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