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Drought, Scandal, Recession: Can India Recover From Its Summer Of Discontent?

Article illustrative image Partner logo Waiting for the rain, Delhi

NEW DELHI - It was a long, hard summer in New Delhi -- and it was made worse by the nice weather. In a country subject to monsoons (rainy season from June to Sept.), it’s when it doesn’t rain in July and August that the weather is considered bad. From this point of view, summer started terribly with rainfall in early July 20 to 30% below normal.

With 55% of agricultural land that isn’t irrigated, the summer monsoon is vital for agriculture. And even if the sector represents no more than 15% of the country's GDP, the rural communities who depend on it represent more than 60% of India's population, which currently stands at 1.2 billion. The result is that weak monsoons seasons push up food inflation, which is already quite high, while bringing down consumption in rural communities.

Fortunately, the weather changes quickly and the past few weeks have seen a return of the rain. Rainfall is only 10% less than average now, which is still considered as a drought, but it is less serious than previously thought.

All problems, however, are not so easily solved by a simple change of weather. This is the case concerning the complete breakdown of the country's electricity grid at the end of July, which saw up to 600 million people go without power for two days. This incident showed once again that the country's infrastructure is inadequate.

However, the main disappointment from these past two months is without doubt the continuing political crisis. For two years, major corruption scandals (such as those surrounding the fraudulent telecoms industry or the construction of the Commonwealth Games facilities), the fragility of the governmental coalition and major divergences on economic reforms have brought the government to a standstill.

There was a fleeting window of opportunity when Pranah Mukherjee left his post as finance minister to be named president of the Indian Republic. The Prime Minister, Manmohan Singh, temporarily assumed the post of finance minister and several observers thought that he would have taken the opportunity to lobby for reforms, like he did in the 1990s when he initiated the modernization of India's economy. But nothing of the sort happened. Manmohan Singh passed on the baton to a new finance minister, P. Chidambaram, after a few weeks without having made any decisions.

The paralysis of the government was furthered by another scandal, this time concerning government authorities giving private businesses licenses to exploit coalmines, under hardly transparent circumstances. Several investigations are now underway over the affair that could cost tens of thousands of dollars in public finances and which has the potential to destabilize government.

Economy woes

Yet, whilst government authorities are in the throes of corruption scandals and political jousting, the economy suffers. The rate of economic growth was at 5.5% during the second trimester in 2012, marginally better than the 5.3% in the first trimester but far from 8% the previous year. The drop in investment is particularly worrying.

According to economists at the French bank PNB Paribas in India, the latest figures "demonstrate no improvement." The bank expects a growth rate of 5.7% for the 2012-2013 fiscal year (at the end of March).

Similarly, the majority of economists are also banking on a lower growth rate of 6%, a figure that is a far cry from the 9% that is needed to fight against poverty and invest in infrastructure. The deterioration of economic performance poses a strong threat that India may well be downgraded by rating agencies. In the spring, Standard & Poor's and Fitch gave India a negative mark and nothing much has happened since then to change their opinion. At the end of August, the Indian central bank's governor declared that the country should prepare itself for being downgraded. It would make them the only country in the BRICS to be considered as "junk" and therefore a terrible humiliation.

The government is, however, conscious of these problems. The question is whether they will take the opportunity of the end of the parliamentary session to finally call for reforms. Economists and the business sector have previously been crying out for strong initiatives. Firstly, they want to see the government raising sales prices on energy products so as to reduce the subsidies created by public authorities. In the current system, diesel, kerosene and bottled gas are sold much lower than the market price and the state is virtually making up the difference.

But the expected figures for the 2012-2013 budget are extremely insufficient. This alone is, in nature, compromising a key element of the government's policy: the recovery of public finances. After a budgetary deficit of 5.8% of India's GDP during the previous fiscal year, it is now a priority to reduce it to 5.1% this year. It is an objective that seems more and more compromised in the eyes of analysts that are expecting a worsening of the deficit to 6% of the GDP. Stopping subsidies for energy would therefore be a symbolic gesture to show that they have a strategy to stabilize public finances.

The second proposed measure would symbolize a willingness to modernize the economy: finally opening up large distribution to international investors. It is doubtful that at the head of government, they are convinced of the necessity of such decisions. However, these two strategies both have the potential of being politically explosive. The coming weeks will demonstrate whether the authorities in New Delhi have decided to take a leap or not.

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