For decades, the Indian economy had been characterized by its slow, Hindu growth rate (under 6 percent) and limited foreign trade and investments. Then in the early 1990s, the countrys current Prime Minister, Manmohan Singh, who was serving as Finance Minister at the time spearheaded a series of reforms that opened up the economy and ushered in foreign investments.
Those reforms could not have come at a better time as India had appeared perched on the edge of a balance of payments crisis and business confidence had tanked. As the license raj was finally uprooted, and the Indian economy was liberalized, competitive forces prevailed and a new era of efficiency propelled the country to the forefront of the BRICs race.
Over a decade later, the worlds third largest economy in terms of purchasing power is confronted with a similar debacle. Economic growth crawled at an unimpressive 5.5 percent in the April-June period, flirting with decade-long lows; the current account deficit has soared to a record level of 4.2 percent of GDP and the Indian Rupee has tanked by more than 12 percent against the US Dollar in the past 12 months.
And once again, Manmohan Singh appears to be the man with the plan to pull India away from economic slumber. After much opposition from within the Congress Party, besides the din from coalition partners and opposition benches alike, Singh announced reforms, aimed at boosting foreign investment to India as well as bridging the widening fiscal deficit.
Among the prominent steps taken, earlier this month the Indian Government has allowed foreign investors up to 51 percent stake in multi-brand retailers and 49 percent stake in Indian airlines. Further, subsidy on diesel has also been rationalized, nudging up fuel prices.
But even as Singh urged policymakers to understand that, good economics is good politics; the political realm will likely prove the biggest hurdle in making these reforms, tangible. The ruling coalition is already at risk of losing two allies, the Bahujan Samaj Party and the Samajwadi Party as the two are opposed to the slashing of the diesel subsidy.
While many international retail chains are reportedly eager to enter India, "the final decision rests with the states, and opposition-ruled states are almost certain to keep the global chains out" cited Business Today, a leading Indian newspaper.
In order to reign in the fiscal deficit from the current 4.9 percent of GDP, the implementation of a standard, Generalized Sales Tax has been proposed to replace the various tax rates charged by different states. Here again, the government will need to enact a Constitutional Amendment which is not possible without at least partial support from the main opposition party, Bharatiya Janata Party.
The current government has not helped its own cause either in the recent past. The previous government had already done away with fuel subsidies on diesel and petrol back in 2002, but these were reinstated by the Congress-led coalition in 2004.
Corruption scandals against ruling MPs and the contentious allocation of land leases and telecom licenses already have the opposition parties breathing fire. Now as the Indian government faces the unenviable task of mustering support for necessary legislation to push forward with its economic reforms agenda, Singhs economic mastery will have to be supplemented by some sound political punditry.
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