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Rudderless Government

Political paralysis and policy uncertainty have undermined the unity of Prime Minister Manmohan Singh’s INC-led government, raising doubts as to what the UPA administration might accomplish during the more than two years remaining in its term, assuming it survives to the end of its five-year mandate.

The Parliament failed to approve a closely watched anti-corruption measure in late December, capping off a particularly bad month for Singh’s government, which began with a credibility-damaging reversal on a plan to liberalize restrictions on foreign ownership in the country’s $450 billion retail sector. The forced U-turn was an unambiguous defeat for the government, and it coincided with the release of official data that confirmed fears that negative external developments are contributing to economic deceleration.

Growth of fixed investment is slowing, and the sustainability of strong private consumption is being tested by interest-rate hikes aimed at beating back inflation. Unfortunately, the dismal economic outlook for Europe suggests that exports are unlikely to pick up the slack. Investment proposals fell to a five-year low in 2011, as economic uncertainty made companies less inclined to tolerate the administrative roadblocks and bureaucratic inertia that are a fact of life for businesses in India. The government’s recent legislative failures and policy reversals can only reinforce that sentiment.

Consequently, there is a high probability that real GDP growth will remain stuck below 7% once again in 2012/2013. The combination of slowing growth, widening fiscal and current account deficits, and a pronounced slide in the value of the rupee creates a risk of a balance-of-payments crisis. Moreover, as long as growth rates remain below 7%, numerous infrastructure investment projects—which account for roughly one-fourth of total lending from domestic banks—will remain on hold, increasing the risk of defaults that could reverberate through the banking system.

There is little in any of this that can be seen as favoring the INC’s chances of winning re-election in 2014, a consideration that will complicate the party’s task of choosing a successor for Singh, whose age and sagging popularity make it likely that he will not lead the INC into the next elections. If the main opposition BJP manages to repair the internal divisions that have troubled the party almost continuously since it lost control of the national government in 2004, the INC will face an uphill battle to win a third term, regardless of who leads it into the campaign.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

 

REGIMES & PROBABILITIES

UPA-led Coalition 45% UPA Minority
30%
BJP-led Coalition 25%
RISK FACTORS CURRENT
Turmoil High Same Same Same
Investment
  Equity Moderate Same Same Same
  Operations High Same Same SLIGHTLY MORE
  Taxation Moderate Same Same Same
  Repatriation Moderate Same Same Same
  Exchange Low Same Same Same
Trade
  Tariffs High SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
  Other Barriers High SLIGHTLY LESS Same Same
  Payment Delays Moderate Same Same Same
Economic Policy
  Expansion Very High Same SLIGHTLY MORE SLIGHTLY MORE
  Labor Costs Moderate SLIGHTLY LESS SLIGHTLY MORE SLIGHTLY MORE
  Foreign Debt Moderate Same Same Same

SUMMARY OF FIVE-YEAR FORECAST

 

REGIMES & PROBABILITIES

BJP-led Coalition 45% UPA-led Coalition 35% UPA Minority
20%
RISK FACTORS BASE  
Turmoil Moderate SLIGHTLY MORE Same SLIGHTLY MORE
Restrictions
   Investment Moderate SLIGHTLY LESS SLIGHTLY LESS Same
   Trade Moderate SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
Economic Problems
   Domestic High Same Same SLIGHTLY MORE
   International High SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY MORE
   * When present, indicates forecast of a new regime

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