Source: Bloomberg BusinessWeek


Undermined by political allies that opposed his initiatives, and facing the weakest growth since the 2009 global recession, Singh this month took a page out of his two-decade old playbook. The former finance chief, who started dismantling regulations in the early 1990s, opened retail, aviation and energy markets to overseas investors and plans to head a new board that will approve major infrastructure projects.

To cope with the political fallout, which has already included a national strike and the defection of his largest coalition partner, and set the Congress Party up for elections due in 2014, Singh may next focus on measures to alleviate poverty. Steps could include expanded rights for the poor to buy grains at subsidized rates, said economist Laveesh Bhandari.

“These are the last of the reform measures and as we enter the election mode we will see populist measures,” said Bhandari, director of Indicus Analytics Pvt. Ltd., an economics research firm in New Delhi. The Sept. 14 package from Singh’s administration “does nothing for growth in the short term, but it is to unleash the animal spirit,” he said.

Top Performer

India’s rupee has been the best performer against the dollar among emerging markets since Singh’s announcements, climbing about 4 percent. The currency had tumbled to a record low in June as economic growth slumped below 6 percent and policy stagnation hurt investor confidence in the nation’s prospects of living up to its billing as a BRIC powerhouse.

Singh is gambling that the long-delayed opening measures will revive economic growth in time to salvage Congress’s fortunes before a general election due by May 2014. Goldman Sachs Group Inc. predicts the restructuring will help lift growth to 7 percent in the year through March 2014, while staying below the average of about 8 percent in the past decade.

“Separately, these reforms are incremental steps, but when taken together, they could have a large impact on market and corporate confidence,” Tushar Poddar, an economist at Goldman Sachs in Mumbai, wrote in a Sept. 21 report. “There are clearly a number of risks to the reform process, especially the uncertain political environment.”

The Bombay Stock Exchange’s Sensitive Index has gained almost 4 percent since the changes were unveiled, compared with a 1.3 percent advance for the MSCI Asia Pacific Index. The Indian gauge climbed 0.3 percent as of 12:51 p.m. in Mumbai, while the rupee appreciated 0.5 percent to 53.2525 per dollar.

Pledge Fulfilled

After announcing plans to allow foreign retailers to open supermarkets during a parliament last year, rival political parties used the assembly as a venue to vent their opposition, blocking proceedings for two weeks. The government eventually announced it would withdraw the policies. In December, Singh vowed in an interview with Bloomberg News that he would revive the opening of the retail industry in 2012.

Singh’s latest initiatives may take time to bear fruit. Wal-Mart Stores Inc., the world’s largest retailer, which operates 17 wholesale outlets in India in a tie-up with billionaire Sunil Mittal’s Bharti Enterprises, will take 12 to 18 months to open retail outlets in the world’s second-most populous country, Scott Price, head of Wal-Mart’s Asia operations, said in a Sept. 21 interview in Hong Kong.

Singh’s decision to push through the reforms cost him the support of his biggest coalition ally, the Trinamool Congress, whose ministers quit in protest, leaving the government about 24 seats short of a parliamentary majority. The changes don’t require the approval of the legislature, which is in recess and doesn’t meet again until November.

Election Looms

“Congress wanted to get these reforms out of the way because they are necessary,” said N.R. Bhanumurthy, a New Delhi-based economist at the National Institute of Public Finance and Policy. “Then it will want to start focusing on more populist, vote-winning policies next year which have the best chance of delivering the election.”

To fund a pre-election budget, Finance Minister Palaniappan Chidambaram may have to accelerate the sale of state assets or increase India’s record borrowings.

Government debt sales will rise by 9 percent in the year ending March 31, overshooting Chidambaram’s 5.69 trillion rupee ($106 billion) target by 500 billion rupees, according to the median of eight estimates from investors and analysts compiled by Bloomberg.

Growth Slumps

India’s gross domestic product rose 5.5 percent in the three months through June from a year earlier, holding near a three-year low of 5.3 percent in the previous quarter.

China has also seen its expansion moderate, with a report today showing industrial company profits down 3.1 percent in the first eight months this year compared with a year earlier.

German unemployment probably remained at 6.8 percent in September, according to the median forecast in a Bloomberg News survey ahead of a report due today. The U.K. is scheduled to publish revised second-quarter economic growth estimates.

The U.S. also releases revised economic growth figures, as well as data on weekly initial jobless claims and pending home sales.

Among India’s challenges are infrastructure bottlenecks that have contributed to keeping the nation’s inflation in excess of 7 percent, restricting the central bank from cutting interest rates to aid growth.

Grid Shutdowns

This month’s initiatives include plans to speed up approvals for projects, along with a debt restructuring for electricity companies to give them more cash to invest in new plants in the aftermath of this year’s north India power grid shutdowns that highlighted deficiencies. Singh will chair a new board to clear infrastructure projects worth more than 10 billion rupees.

“In India it’s never clear what a final approval is,” said Samiran Chakraborty, an economist at Standard Chartered Plc. in Mumbai. “So this should help to accelerate the process.”

The first political test for the Congress party since unveiling the changes comes with provincial elections next year. Votes will take place in Gujarat and Himachal Pradesh by mid- January, with key ballots in Karnataka in June, followed by Madhya Pradesh, Rajasthan and New Delhi. Karnataka and Madhya Pradesh, which combined have more than 130 million people, are ruled by the chief opposition group, the Bharatiya Janata Party, and will be main battlegrounds in the general election.

Sonia’s Role

One benefit is a perception of support for Singh and Chidambaram’s initiatives among Congress’s leadership. The Congress Working Committee -- the party’s highest decision- making body, and led by its president, Sonia Gandhi -- backed the economic changes at a meeting on Sept. 25.

A swathe of populist policies before the 2014 election would mimic Singh’s winning formula in 2009, when Congress announced it would write off farmers’ loans to shore up rural support. At the same time, the need to retain votes may prevent Singh from tackling some areas, said Satish Misra, a political analyst at the Observer Research Foundation in New Delhi.

“It’s a good start,” said Misra. “This will go down well with international and foreign financial investors. There will be incremental reforms to boost growth but the government will not dare to attempt controversial reforms like foreign investment in insurance and pensions.”

Unlike foreign investment in retail and aviation, which are enacted under existing laws, opening insurance, pensions and banking would require approval in parliament, where Singh must now rely on smaller regional parties outside his coalition to get measures passed.