IF there was ever a sign of rudderless leadership and misplaced priorities over economic policy, it was Indian Finance Minister Pranab Mukherjee's trip to Delhi airport this month to meet a yoga guru protesting against the government's inaction on graft. The highly criticized trip, which initially emboldened the guru and then backfired when police tear-gassed his rally three day later, underscored a sense of distracted leaders fruitlessly trying to put out fires. Critics would have preferred Mukherjee focus more on dealing with a confluence of worrying economic trends —accelerating inflation, declining foreign investment and slower growth and domestic investment — that policy inertia will only make worse. Asia's third-largest economy is still set to grow around 8 percent this fiscal year, faster than any major economy except China. However, there are ominous signs, from weaker car sales to a dip in steel imports, that have coincided with global worries that emerging markets could soon hit a financial bump. Investment was essentially flat in the March quarter and industrial output rose 6.3 percent in April, its slowest in three months. Inflation accelerated faster than expected in May, to 9.06 percent, with price pressures spreading from food to the manufacturing sector, while the central bank may have run out of tools to contain it after ten rate rises. “India may grow around 7 percent without reforms,” said Sanjay Mathur, a Singapore-based economist at Royal Bank of Scotland, one of several economists who have warned India's economic growth could fall below 8 percent. “In the India context, that's not enough.” Halfway through his second term, Prime Minister Manmohan Singh's reformist image been hit by corruption scandals, weak leadership, infighting and a sense of complacency by many politicians focused more on enjoying the fruits of power. It is a running joke in Delhi that Singh will delay policies by forming committees to probe thorny issues. There is even a “GOM” (Group of Ministers) committee on briefing the media. “The government is losing control of the agenda. What makes it more serious is that this has coincided with a slowdown in the economy and a dip in investor confidence,” said Delhi University professor Mahesh Rangarajan. “It's on a slippery slope.” Many politicians and industrialists believe that a policy limbo is of no real consequence — that the $1.6 trillion economic juggernaut will simply hum along in spite of the government, and so it has proved for most of Singh's seven years in power. But a series of scams, topped by allegations of kickbacks in the granting of telecom licenses that may have cost the government up to $39 billion, have more than paralysed parliament. They have led to a spiralling lack of confidence. Foreign direct investment fell 28.5 percent in 2010/11, while India's main stock index has fallen nearly 12 percent since mid-November, when the corruption scandals began to unravel. That compares with emerging markets equities firming around 2 percent in the same period. After the Thai baht, the Indian rupee is the weakest currency this year against the dollar among the currencies monitored daily in Asia by Reuters. The pessimistic scenario is one of lower growth, higher inflation and pressures on India's fiscal deficit. “The pace of investments ... is a key determining factor for overall growth, and once it loses momentum, it is difficult to bring it back,” Udayan Bose, a senior member of the Federation of Indian Chambers of Commerce and Industry, wrote in a letter to Mukherjee this week. The investor wish-list is long: speeding up environmental approvals for industry and making the process more transparent, raising fuel prices to help narrow the fiscal gap, giving foreign investment a boost with stake-sales in state-owned firms and reforms to open up sectors such as retail. Other economists call for the government to increase its spending on infrastructure and push through a bill making it easier and clearer for companies to acquire land for industry. Companies complain about murky regulations, especially with land acquisition and environmental policy. South Korea's Posco faces land protests over a planned $12 billion steel plant even though environmental clearance was given in January. All in all, investors want a confidence booster, and this was underlined recently when a group of top bankers and industrialists visited Singh's top economic advisor. “The major concern was the slowdown in the economy, slowdown in the investment climate, also the number of projects getting aborted mid-way,” said one participant at the closed-door meeting, who asked not to be named.
