Business, Economics and Jobs

India: Singh's bet on reforms pays stock market dividends

Battling an impression of "policy paralysis" for months, Indian Prime Minister Manmohan Singh pulled two big economic reforms out of his turban on Friday, prompting an immediate threat from one of his allies to pull down the government and force early polls.

For Singh's Congress Party, it's a politically risky move, as Business Standard and others have explained -- though in some quarters it's a "political masterstroke" that has changed Singh from a "ineffectual ditherer" (WashPo) and "underachiever" (Time) to a “courageous reformer," reports

One of the reforms, a five rupee hike in the price of diesel designed to cut the deficit by reducing the subsidy the government pays to state-owned oil companies, promises to be deeply unpopular with the middle class and threatens to increase inflation that at higher than 7 percent is already smiting India's poor.

The other -- a move to allow 51 percent foreign direct investment in so-called "multi-brand retail," which will allow stores like Walmart into the market, and 49 percent foreign direct investment in the aviation sector -- has prompted claims from opposition parties and even some of his allies that he is selling out workers in thousands upon thousands of mom and pop "kirana" stores. (Read more about that here).

The last time Singh tried such maneuvers, he was forced to hedge. When he increased petrol prices in May, nationwide protests forced him to accept a partial rollback -- as well as tax cuts and other moves by state governments to reduce the bite.

And when he initially loosened the rules of FDI in retail by cabinet fiat back in November, a threat that Mamata Banerjee, of the Trinamool Congress, would pull down the government by withdrawing from the United Progressive Alliance forced him to put the plan on ice.

Insiders told me in May that the policy paralysis would come to a natural end as the elections -- scheduled for 2014 -- draw nearer. The reason? Campaigns are uncertain and costly affairs, while being part of the government allows Singh's allies to mint money (okay, not literally). If the only difference is a few months, and it's altogether possible that you won't be in any better position after snap polls, there's no upside to pulling down the government. And for every day that passes, the downside for Singh's Congress Party grows smaller.

That's the biggest reason that Singh's latest wave of reforms will probably stick, according to Business Standard. 

But there are a couple others. One, the new FDI rules allow the individual states to make their own decision, so Banerjee's West Bengal can decide to deny Walmart access to its market if Mamata so desires (my bet is she'll suddenly see the economic benefits of big retail when the political benefits of opposing it disappear). And two, Singh's maneuvers are already paying economic dividends.

For the first time in a long while, the benchmark Sensex is climbing steadily above 18,000 -- closing at a 14-month high of 18542.31 Monday and prompting a bold forecast from Morgan Stanley that it will hit a record high 23,069 points by December 2013, according to Reuters.

Meanwhile, the rupee, which had plummeted over the past year, immediately gained back 1 percent following the announcement of the diesel hike, which encouraged the central bank to slash the cash reserve ratio and therefore free up banks to lower lending rates and push money into the market, as NDTV profit reports.

Will it save Singh's skin? Or cost him his shirt? Though he's not as charismatic, his political future looks as uncertain as Obama's. And, like Obama, whenever he does the stuff that people have been criticizing him for not doing, the same people start criticizing him for doing it.