Key risks to watch out in India
By Frank
Jack Daniel | Reuters
From NEW
DELHI (Reuters) - India's economy is exposed to an extended euro zone crisis
and policy paralysis at home, while the coalition government is under
tremendous strain from scandals and rebellious coalition partners.
The risk
of Prime Minister Manmohan Singh's second term being cut short before a general
election due in 2014 is low, but cannot be ruled out.
The
failure of Congress party in state elections in early March, and a looming
fight over the cheap sale of coalfields have put him and the party under even
more pressure.
The
2012/13 budget, delivered in March, shied away from commitments to bold reform,
its cautious tone reflecting the government's frailty.
RATINGS
(Unchanged since March unless stated):
S&P:
BBB-
MOODY'S:
Baa3
FITCH:
BBB-
The cost
of insuring against default on 5-year sovereign debt traded at 83 basis points
in mid-March, down around 25 points from the start of the year.
Following
is a summary of key political risks in India:
SCANDALS,
ELECTORAL FAILURE
Lurching
from crisis to crisis for more than a year, Prime Minister Singh's government
has a new front to deal with in the form of a looming fight over the low-priced
sales of coalfields in his first term. A draft report by the Comptroller and
Auditor General of India leaked to a newspaper estimated lost revenue of $211
billion from the sales, but the CAG has since backed away from that number.
All
parties will now wait for the final report to be tabled in parliament, when the
government will once again be put under severe pressure.
Rahul
Gandhi, son of current party leader Sonia Gandhi, utterly failed to deliver a
promised comeback for the Congress party in crucial state elections in early
March, casting fresh doubt on his capacity to become the next member of a
dynasty to lead the country.
The
party's flop in Uttar Pradesh has reduced Singh's scope to re-launch reforms
and reverse a slowdown in economic growth.
Anger at
Singh's poor performance is rising, with some talk in the Indian media that he
will not survive as prime minister until 2014 elections.
That is
unlikely, and the government could probably also muster the support to survive
a no-confidence vote. Also helping the government is the lack of appetite among
the opposition Bharatiya Janata Party (BJP) for a general election before 2014.
Despite Singh's woes, it is by no means clear the BJP has won over sufficient
voters to its Hindu nationalist cause.
Party
chief Sonia Gandhi, who is at least as influential as the prime minister, has
made more public appearances of late, but shed no light on her illness, which
some Indian media reports say is cancer.
What to
watch:
- CAG's
report on coal, which has the potential to be even bigger than the telecoms
scandal that rocked the government last year. No evidence of wrongdoing has yet
emerged.
- The
Gandhi dynasty. Rahul Gandhi has yet to prove himself an effective politician,
raising concerns he will struggle to lead the party if his mother steps down.
ECONOMIC
MALAISE, BUDGET FAILS TO INSPIRE
The
stock market fell in response to Finance Minister Pranab Mukerjee's annual
budget on March 16, seen as a weak attempt at tackling the fiscal deficit, the
worst among the big emerging market BRIC nations.
Mukherjee
unveiled a smattering of anti-deficit measures including an increase in
services and excise taxes, but dared not cut subsidies for petroleum products,
which have weighed heavily on government finances especially as oil prices stay
high.
Some
analysts believe the government may miss its newly-set target of cutting
subsidy spending to 2 percent of GDP, as well as a goal of cutting the fiscal
deficit to 5.1 percent from 5.9 percent in 2011-12.
In the
main, the problems afflicting Asia's third-largest economy remain unsolved.
Inflation
is down sharply, but almost entirely because of a drop in volatile food prices.
With the government embroiled in corruption scandals, and dealing with
unreliable coalition partners, the prospects seem slim for tricky tax reform or
a softening of foreign investment rules that could help deal with
infrastructure bottlenecks.
An early
2012 Supreme Court order that 122 telcoms licences be revoked was deeply
embarrassing for the government, and Singh has had to roll back even modest
economic measures like a railway fare rise.
The
government has succeeded in passing no major legislation, leaving it with a
heavy load of promised reforms to push through two fractious houses of
parliament. Fickle coalition partners and a disruptive opposition mean the
government is often effectively a minority when it tables bills.
Singh
has promised to revive a stalled policy to allow foreign supermarkets into
India, along with a corruption ombudsman. The first stage of a new tax system
is planned for April. On current form, nobody should hold their breath.
India is
sitting on a comfortable cushion of $300 billion in foreign reserves and a
confidence-building $15 billion currency swap line with Japan was unveiled in
December, so comparisons with India's 1991 payments crisis are premature.
As ever,
India's dependence on imported, subsidised energy is a weakness, with high
prices adding to pressure both on the current account and fiscal deficits. A
long financial crisis in Europe could exacerbate capital outflows and further
trim demand for Indian exports.
What to
watch:
-
Response to the budget, both political and economic. Moody's Investors Service
said the budget was "credit negative" and lacked new solutions to
address India's fiscal constraints.
-
Headline inflation. If price rises show a sustained slowdown, expect the
monetary easing India Inc. has been demanding for months.
- Oil
prices, the global economy and domestic demand.
(Editing
by Daniel Magnowski)
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