INDIA: WHAT ECONOMIC REFORM?
As Indian inflation rises, Prime Minister Singh has little time left to push privatizing state companies and other financial reforms
Nandini Lakshman
As Indian inflation rises, Prime Minister Singh has little time left to push privatizing state companies and other financial reforms
Nandini Lakshman
Business Week, August 14, 2008
Barely three weeks ago, there was a new buoyancy in New Delhi. The Congress-led coalition government had won a vote of confidence in Parliament in favor of the U.S.-India civilian nuclear deal (BusinessWeek.com, 07/22/08). To protest the controversial deal, the Communists, uneasy coalition partners with Congress since 2004, quit the government. Free of the Communists and fresh from its nuclear-deal triumph, the government, it appeared, was finally set to pick up the baton on economic reforms.
But many observers worry the government is about to squander this golden opportunity. Right after the vote, Prime Minister Manmohan Singh said he'd look at financial reforms and divestment, but since then his government has made just a single significant move: allowing select private players to manage public pension funds for the first time.
And events may be overtaking New Delhi's intentions. In July, Fitch downgraded India from stable to negative, and Standard & Poor's issued a warning that the country's sovereign credit-rating outlook may turn negative. On Aug. 4, Moody's also cautioned investors about a possible downgrade of India's credit rating. The culprit is inflation, now over 12%. India's public finances are feeling the pressure from high oil and fertilizer subsidies, hefty payouts for government employees—which will equal 2.4% of the country's $1 trillion gross domestic product—and a $15 billion farm debt forgiveness program whose efficacy has yet to be determined. "Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities," wrote Moody's senior analyst Aninda Mitra in the report.
But many observers worry the government is about to squander this golden opportunity. Right after the vote, Prime Minister Manmohan Singh said he'd look at financial reforms and divestment, but since then his government has made just a single significant move: allowing select private players to manage public pension funds for the first time.
And events may be overtaking New Delhi's intentions. In July, Fitch downgraded India from stable to negative, and Standard & Poor's issued a warning that the country's sovereign credit-rating outlook may turn negative. On Aug. 4, Moody's also cautioned investors about a possible downgrade of India's credit rating. The culprit is inflation, now over 12%. India's public finances are feeling the pressure from high oil and fertilizer subsidies, hefty payouts for government employees—which will equal 2.4% of the country's $1 trillion gross domestic product—and a $15 billion farm debt forgiveness program whose efficacy has yet to be determined. "Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities," wrote Moody's senior analyst Aninda Mitra in the report.
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