Bloomberg News

Singh’s Growth Push Imperiled as Graft Scandals Rattle: Economy

May 17, 2013

India's Prime Minister Manmohan Singh

Manmohan Singh, India's prime minister. At stake is Singh’s ability to extend an eight-month push to revive Asia’s No. 3 economy that included allowing more foreign investment in aviation and retail, measures for which parliamentary approval weren’t required. Photographer: Nelson Ching/Bloomberg

Indian Prime Minister Manmohan Singh’s latest skirmish with corruption risks setting back efforts to spur growth, worsening a legislative logjam under a government set to pass the fewest bills ever in a full term.

Singh, 80, is grappling with renewed allegations that he has allowed corruption to fester after separate graft probes led to the May 10 dismissal of the law and railways ministers. Parliament ended two days early last week as opposition parties demanding the men’s resignation blocked proceedings, with proposals to open up the country’s pension and insurance industries to overseas investment still stalled.

At stake is Singh’s ability to extend an eight-month push to revive Asia’s No. 3 economy that included allowing more foreign investment in aviation and retail, measures for which parliamentary approval weren’t required. With just the monsoon and winter sessions left this year before a general election in 2014 and India’s expansion at a decade low, the government is running out of time to complete its legislative agenda.

“This is going to hinder the economy’s recovery,” said R.K. Gupta, New Delhi-based managing director at Taurus Asset Management Co. “The chances of any meaningful reforms before the elections are gone, that is almost a forgone conclusion now.”

Since Singh’s Congress party won re-election in 2009, the ruling coalition has passed 158 out of 194 bills introduced, on course for the least of any government serving a full five-year term, according to Parliament figures. The coalition has to pass 89 bills in its remaining time, more than half the number achieved in the past thirteen sessions, to even match Congress’s previous term, then the worst legislative record since independence in 1947.

Rupee Declines

Almost 51 percent of the scheduled budget session of Parliament’s lower house didn’t take place because of disruptions, according to PRS Legislative Research.

The rupee has declined 2 percent this month to 54.885 a dollar. India’s gross domestic product rose 5 percent in the year ended March, the least since 2003, according to an estimate from the statistics agency. Moderating investment, an extended fight against inflation and a drop in exports hurt the economy’s expansion.

The economy probably expanded 4.9 percent last quarter from a year earlier, after growing 4.5 percent in the previous three-month period, according to the median estimate in a Bloomberg survey before data due later this month.

“All these corruption issues must be a net negative for the reform process and for the short-term growth prospects,” said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG. “Spending ministries become more cautious and it is creating a lot of noise which is distracting the parliament from the structural reform measures.”

Six Ministers

Congress party chief Sonia Gandhi forced Singh to seek the exit of the two ministers from his council, the Indian Express reported on May 11. The president’s office issued a brief statement the same day saying on Singh’s advice, President Pranab Mukherjee accepted the resignations.

Rail Minister Pawan Kumar Bansal resigned after the Central Bureau of Investigation earlier this month arrested a member of his family on charges he accepted money to help secure an official a top post in the rail department. Law Minister Ashwani Kumar quit after the CBI told India’s top court last month that he was among officials who vetted a probe report on allocation of coal mines and altered its contents. Both men deny any wrongdoing.

Over the last four years, at least six ministers have resigned after being accused in corruption cases, with the opposition parties claiming this is the most graft-ridden government in India’s history.

Chidambaram Roadshows

The scandals threaten to undermine progress made by Singh’s administration since September to spur expansion and avert a credit-rating downgrade. The steps included trimming the budget shortfall, opening the retail and aviation industries to more investment from abroad and reducing a levy on foreign investors in local bonds.

Proposals for India’s biggest opening to foreign investment since the 1990s may be ready in June, Finance Minister Palaniappan Chidambaram signaled in an interview last month. The minister said then plans to ease caps on foreign direct investment could be submitted to the Cabinet as early as June, and that he had urged the opposition to back pending legislation to open the insurance industry further and allow overseas involvement in pensions.

The finance minister has traveled to major financial centers including New York, London and Tokyo this year, spearheading efforts to attract foreign investment in a bid to bridge the current-account deficit.

‘Short Memories’

He is under pressure to prevent a recurrence of the 1991 financing crisis, which prompted India to pledge gold as collateral for a loan from the International Monetary Fund after foreign reserves slid. The country devalued the rupee then, tackled government monopolies, cut tax rates and let foreign companies take majority stakes in sectors including automobiles and pharmaceuticals to rescue the economy.

“Ultimately people have short memories and we are potentially a year away from the next election,” said Satish Misra, an analyst at the Observer Research Foundation, a policy group based in New Delhi. “Congress knows if they bring inflation down and get the engine of the economy going the damage of the last few years will be greatly reduced.”

Standard & Poor’s

Standard & Poor’s today affirmed its BBB- long-term sovereign-credit rating on India while keeping the outlook on the rating negative.

“India’s external position remains resilient despite a deterioration in the past two years,” S&P credit analyst Takahira Ogawa said in a statement. “High fiscal deficits and a heavy government debt burden remain the most significant constraints on our sovereign ratings on India,” the company said.

Compared to a year ago, while there’s some easing of pressure toward a downgrade, there’s more-than one third chance for a reduction unless India shows “a significant improvement in the macro economy, fiscal policy and structural reform,” Ogawa said in a conference call today.

“The current negative outlook will change to stable if the government could have stronger commitment to fiscal consolidation,” Ogawa said on the call.

Elsewhere in Asia today, Singapore exports fell less than economists estimated in April, while Japan reported machine orders rebounded in March. Data in Europe showed the region’s construction output fell in March. In the U.S., confidence among consumers probably rose this month, economists forecast before the release of the Thomson Reuters/University of Michigan index.

To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Andrew MacAskill in New Delhi at amacaskill@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Rosalind Mathieson at rmathieson3@bloomberg.net


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