New Delhi - If the optimists are to be believed, India's
huge anti-corruption protests may give impetus to a beleaguered government to
push its reform process and help ailing economic growth and plummeting business
If so, it comes not a moment too soon. Hit by high interest
rates and policy paralysis, economic growth in April-June looks set to slow to
its worst in six quarters. August business confidence by one leading survey has
plummeted to a two-year low.
The fast by social reformer Anna Hazare not only forced
parliament to move on an anti-graft bill, it may have woken the ruling Congress
party to the fact governance is more important than playing populism with
regional and caste-based votes.
"The last year has been one of drift and policy
paralysis and the pummelling of the government by Hazare was the last
straw," said V Ravichandar, chairperson of Feedback Consulting in
Bangalore, which advises multinationals.
"The government just cannot afford to play dead any
In power for most of India's independence and with its roots
in Soviet-style five-year plans, the left-of-centre Congress emerged as the
party of the poor villagers. The rising middle class has often played second
Hazare, who ended his fast on its 13th day on Sunday, may
have been a turning point. Hundreds of thousands of the urban, middle class
people took to the streets, confounding those who saw the sector as a political
footnote compared to the rural majority of India's 1.2 billion population.
The way to win over that urban, young middle class behind
Hazare may be to boost the urban economy and reforms like foreign investment in
the modern supermarket sector, making it easier for industry to acquire land
and the creation of national, streamlined taxes.
"Now the government may want to take the high ground,
and reforms may be one way to achieve that. Congress may realise it can no
longer just pander to rural and poor votes," said Ravichandar.
And pander it has - for years.
The government spends a huge amount on subsidies for the
mainly rural poor, including a rural employment scheme widely seen as allowing
it to win its second term in 2009. That now accounts for more than 3% of the
The cost of food subsidies has roughly tripled since Prime
Minister Manmohan Singh first came to power in 2004, to 600 billion rupees
($13bn), according to a report by Standard Chartered Research.
At the same time, the government has gone slow on reforms
like opening up supermarkets to foreign investors, a move that would help
India's stubbornly high inflation rate and ease the burden of urban classes
hurt by rising food prices.
Double economic whammy
"At the moment India suffers from a double whammy of
policy lethargy and high interest rates," said D K Joshi, principal
economist at Crisil in Mumbai.
"Confidence will be boosted if the government moves on
reforms. People want to know that it is smoother to invest on the ground."
Ominously, car sales fell by nearly 16% in July, the first
drop in two-and-a-half years, as fewer consumers can afford to get affordable
car loans. China's sales rose nearly 7% in the same month.
The central bank, which has been one of Asia's most aggressive
central banks by raising rates 11 times since last March, has warned against
accepting inflation as a "new normal".
Some analysts say economic growth may slow to 7% if there
are no reforms, not enough for Asia's third-largest economy that needs to grow
nearer double digits to compete with the likes of China and deal with its
"The Anna Hazare movement itself is a reflection that
things are not moving. Some positive things must happen now - otherwise it will
be a disaster," said a finance ministry adviser, who asked to remain
The last week of parliament will see investor eyes on
whether Congress pushes through reforms, with only a week of the session left.
These measures in themselves are no magic wand. But what
they may install - relatively quickly - is business confidence, and with it a
more benign investment climate.
The August report on business confidence by the Federation
of Indian Chambers of Commerce and Industry came before Hazare's anti-graft
campaign transfixed India. The survey said weak demand and high rates were two
of their biggest concerns.
The survey said business was looking for big ticket items,
including a reform to streamline taxes that may be introduced by the 2012
If the pessimists are to be believed - and they have history
on their side - a rudderless leadership may hold India back.
The government's fumbling response to Hazare, briefly
arresting him before releasing him after a protest backlash, only underscored
how out of touch Singh and his elderly ministers are.
Finance Minister Pranab Mukherjee is the wily political
firefighter of the government and was key to reaching a compromise with Hazare.
But there were frustrations his gaze was not on the $1.6 trillion economy.
"Yes, unfortunately, the government has been caught up
in defusing this crisis. I must admit even here in the finance ministry, policy
decisions have been held up,"” said another senior finance ministry
official who declined to be named.
"I have not met the finance minister for more than
three days and decisions on the table have been held up."
The Congress party is also without Sonia Gandhi after she
underwent surgery in the United States for an undisclosed illness. Her son,
Rahul Gandhi, has shown little leadership qualities, remaining mostly sidelined
during the Hazare dispute.
Singh may have been responsible for the 1991 reforms that
set the stage for India's two-decade boom, but he has shown an inability to
push aggressive reforms in his second term.
Still, the deal with Hazare saw unusual parliamentary
consensus between the Congress and opposition, and some analysts say there is a
chance this will feed into the reform bills.
The Hazare crisis may also soon spark the rise of Rahul
Gandhi and some younger politicians unshackled by the decades-long statist
history of Congress.
"Now it is all behind us, the government will be able
to concentrate on reforms," said Shubhada Rao, chief economist at the Yes
Bank in Mumbai.
"These may have a medium-term impact, but what is
important is to boost business confidence."