India's economy skids as leaders sleep at the wheel

(Reuters) - If there was ever a sign of rudderless leadership and misplaced priorities over economic policy, it was Finance Minister Pranab Mukherjee's trip to Delhi airport this month to meet Swami Ramdev, who was protesting against the government's inaction on graft.

The highly criticised 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."
GOT A PROBLEM? FORM A COMMITTEE
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 the Sensex 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.
"The feeling was the government should announce some big project to lift the psychology ... some policy clarity had to be there."
POLICY IN COLD STORAGE
There appears little sign of an end to the paralysis. Indeed, many see the Congress party-led government burying its head further into the sand.
The harsh treatment of anti-corruption campaigners -- including a pre-dawn raid on thousands of followers of yoga guru Swami Ramdev -- suggests it is more concerned about dealing with its enemies than coming up with policy strategies.
"It's ominous when Congress gives out aggressive signals -- as it did with the anti-corruption campaigns," said political analyst Swapan Dasgupta. "It means policy will be put in cold storage and there will be more populism."
Singh, 78, appears to have settled in as a lame-duck prime minister, his reputation hit by corruption scams. Like many prime ministers, he may now put his focus on foreign policy and relations with Pakistan as one, lasting legacy.
Mukherjee, his chief troubleshooter and a wily and long-serving Congress stalwart, spent hours this month chairing a bickering committee drafting a decades-old anti-graft bill.
A promised cabinet reshuffle after state elections in May to bring in fresh faces has not yet materialised, even though a Congress party ally was thrown out of power in the key swing state of Tamil Nadu on the back of a corruption scandal.
"There is no action," a senior Congress party official told Reuters, adding that the chance of a reshuffle this month was low.
Diesel price rises -- needed to help rein in a fiscal deficit bloated by subsidies - have been put on hold for fear of an unpopular step that would only drive inflation higher.
The government is pushing a bill in the next parliamentary session to make land acquisition easier, but there are signs that polarisation between Congress and the Hindu nationalist opposition Bharatiya Janata Party (BJP) may hamper its progress.
Mahesh Rangarajan argues that part of the problem is the current political set-up - with the real power sitting with Congress president Sonia Gandhi rather than the prime minister she appointed, creating a dual but unequal leadership.
Congress has been far more concerned with policies aimed at staying in power -- like a popular but expensive scheme to provide jobs for the rural poor -- while Singh and some of his ministers and officials are seen as more reform oriented.
And the party may be far more focused on its election campaign in Uttar Pradesh next year -- a vote that will set the stage for a 2014 general election that could usher family scion Rahul Gandhi into the national race -- rather than reforms.
"The party and government are now out of synch," said Rangarajan.
Tellingly, Sonia Gandhi reportedly did not know of the finance minister's visit to the yoga guru, a sign of a lack of political coordination.
Local media said Mukherjee told lawmakers some key political decisions would be put on hold while Sonia Gandhi was out of the India this month, something confirmed by one Congress official.
By ignoring the economy, Congress may shoot itself in the foot. Dasgupta pointed out a food security bill aimed at giving cheap grain to the poor could be put on hold due to its expense.
"The trouble is that a slowing economy will mean Congress has less leeway to introduce populist measures."
(Additional reporting by C.J. Kuncheria in NEW DELHI and Suvashree Choudhury in MUMBAI; Editing by C.J. Kuncheria and John Chalmers)