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.
SUMMARY OF 18-MONTH FORECAST
REGIMES & PROBABILITIES
|UPA-led Coalition 45%||UPA Minority
|BJP-led Coalition 25%|
|Tariffs||High||SLIGHTLY LESS||SLIGHTLY LESS||SLIGHTLY LESS|
|Other Barriers||High||SLIGHTLY LESS||Same||Same|
|Expansion||Very High||Same||SLIGHTLY MORE||SLIGHTLY MORE|
|Labor Costs||Moderate||SLIGHTLY LESS||SLIGHTLY MORE||SLIGHTLY MORE|
SUMMARY OF FIVE-YEAR FORECAST
REGIMES & PROBABILITIES
|BJP-led Coalition 45%||UPA-led Coalition 35%||UPA Minority
|Turmoil||Moderate||SLIGHTLY MORE||Same||SLIGHTLY MORE|
|Investment||Moderate||SLIGHTLY LESS||SLIGHTLY LESS||Same|
|Trade||Moderate||SLIGHTLY LESS||SLIGHTLY LESS||SLIGHTLY LESS|
|International||High||SLIGHTLY LESS||SLIGHTLY LESS||SLIGHTLY MORE|
|* When present, indicates forecast of a new regime|
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