Indian economy: Reforms seen on hold; politics, poor rains to blame
Posted on: 26 Jul 2012
New Delhi: Prime Minister Manmohan Singh will hold off on widely anticipated fuel subsidy and retail reforms because of renewed opposition from party colleagues and coalition allies, leaving budget targets in tatters and rattling investors.
Members of Congress Party and senior government officials said that no movement was expected until at least the second week of September, despite market expectations of an announcement this week or the next.
Despite consultations with partners and state governments, it was not clear how Singh would be able to build a consensus on opening the $450 billion retail sector to foreign supermarkets like Wal-Mart Stores or on increasing fuel prices.
'Such an announcement will not be made unless a political consensus is reached,' one party leader said.
The rupee fell for a fourth successive session on Wednesday on growing worries of government dithering on policy reform.
A month-long session of parliament starts on August 8. While the government does not need parliamentary approval for the reforms, many Congress politicians said the party would find it hard to stomach protests from allies and the opposition.
Singh took over the finance ministry portfolio after Pranab Mukherjee resigned in June to contest and later win election to the largely ceremonial role of the nation's president.
Singh, the architect of India's initial economic reforms in the 1990s, promised to revive the 'animal spirit' of the economy and many investors had expected him to move in the period between Mukherjee's election on July 19 and the opening of what is dubbed as the monsoon session of parliament.
Changing rules to allow multi-brand foreign retailers to operate in India was expected to be the first major announcement. But that plan hit fresh opposition from the Samajwadi Party, a major Congress ally, and Left parties last weekend.
'We urge the government not to open up the retail trade to FDI (foreign direct investment) any further,' Samajwadi leader Mulayam Singh Yadav and communist party leaders told Singh in a letter that was published in newspapers.
Shares of retailers fell as much as 7 percent after the contents of the letter were made public.
Singh had introduced the retail reform plan last year but quickly abandoned it after protests in parliament and on the street.
The plan to reduce subsidies on diesel, kerosene and cooking gas, that are aimed at India's poor and rural majority, also looks in trouble because crop yields this year could be affected by poor rains.
Most Indians work in agriculture and political parties are loathe to hurt their pockets, especially since inflation has run at over 7 percent for two years.
The PMO said this week that the rains in the June-September monsoon season that irrigate 55 percent of India's farmlands were likely to be below average. The season accounts for 75 percent of the country's annual rainfall and half of that is usually delivered in June and July.
The oil ministry indicated this week that diesel prices wouldn't be raised before September, and unlikely to cover the subsidy, putting more pressure on the budget.