After widespread national protests, Indian social activist Anna Hazare has struck a deal to allow a 15-day fast to protest against new anti-graft laws.
The Indian government eased its latest political crisis, but while all eyes were on the circus in the streets of the capital, a problem that may in the end prove far greater lurked unaddressed in the background.
The Indian National Congress-led government has struck a deal that will see anti-corruption activist Anna Hazare leave prison Friday and begin a 15-day fast for a new anti-graft law. Street protests are expected to die down as a result.
But the issue once more dominated parliament, and consumed the energy of senior political figures Thursday at a critical time when, many in the Indian business community say, the economy ought to be the focus.
India has been somewhat protected from recent global economic gyrations because of the huge role domestic consumption plays in driving its growth. But recent events in the West have caused a slowdown of foreign-capital inflows, as nervous investors shun emerging markets.
And that, combined with persistent near-double-digit inflation and a series of interest-rate hikes, have Indian business leaders worried that growth will not hit the 8 to 9 per cent target that government envisioned for the year – and paralysis over the Hazare crisis, and other political issues, is killing the reform legislation that was their hope for economic salvation.
The current session of parliament was slated to pass a number of bills seen as critical to the health of the economy – including laws to streamline investment, land acquisition and foreign partnerships. Now it seems that few if any of these will make it through the house before this session ends on Sept. 8. The next session begins in November.
"What government needs to do … is fast-track some of the reforms which have been on the backburner," said Dharmakirti Joshi, chief economist in the Mumbai office of the analytics firm Crisil Ltd. Restrictions on foreign ownership were eased slightly last month, he noted, but that's not nearly enough. "We need to see some action for land acquisition to smooth the process and make it more investor-friendly – we need to get the confidence back."
Government is getting the same message from its own advisers. "The uncertainty arising from political developments has had a very negative impact on business confidence and investor outlook," the Prime Minister's Economic Advisory Council, a body of eminent economists, said in a recent forecast for government – and cut its growth forecast from 9 to 8.2 per cent.
Growth of 8.2 per cent, of course, sounds just fine to ailing Western economies, but growth of at least that level is needed to fund the government's broad social-welfare agenda and continue the process of lifting millions of Indians out of the grinding poverty in which they live.
There is more than just the political paralysis to worry about. Events in the West are being watched with anxiety; the biggest fear is a withering of foreign-investment inflows to an economy hungry for capital for industrial and infrastructure expansion, as foreign institutional investors pull back funds from emerging markets.
"There has been a fair bit of selling from foreign institutions in the last two weeks – and sometimes it doesn't even have to be huge amounts of net selling, just the absence of buying creates a slow down of activity and new investments," said Madhav Bhatkuly, a fund manager with New Horizon Investments in Mumbai. "So we're very much in the watch-this-space zone right now."
The U.S. credit downgrade sparked the latest stock market turmoil, but it's the slowing of the U.S. economy that is the biggest risk for India, as it dries up sources of both credit and trade. The European debt crisis doesn't help either; the EU and U.S. together buy a third of India's exports. "If advanced economies sink into recession again India's growth will also suffer as it did in 2009, and this time the impact could be more prolonged," Mr. Joshi said.
That said, domestic factors are the most critical. "Domestic consumption or private is about 60 per cent of GDP which is quite large – even in comparison to China it is very large – so that provides the buffer against global turbulence," Mr. Joshi said.
Mr. Bhatkuly, however, warned of the impact on the closely watched growth figure: "Domestic consumption can carry India to 6 or 7 per cent GDP growth – anything above that is dependent on capital flows."
Fears of a slowdown in India were eased slightly by robust industrial figures released by government this past week. June factory output grew at 8.8 per cent; capital good production is up 38 per cent and merchandise exports grew by 82 per cent in July, the highest rate since 1995.
That said, the normally rock-solid car sales figures were down 16 per cent in July – the first drop in nearly three years, according to the Society of Indian Automobile Manufacturers; the drop is blamed on higher interest rates and fuel costs.
And it's not just cars: high interest rates are quashing sales of all consumer goods, and most analysts predict government will raise rates yet again in September, the 12th hike in 16 months. The rate hikes are part of an ongoing but unsuccessful effort to reign in inflation that flicks perilously close to double digits (the rate was 9.4 per cent in June.) "Inflation is intolerably high and to cut it down to tolerable levels they will have to sacrifice some growth," Mr. Joshi said.
The one upside of a recession in the West is that it would bring commodity and oil prices down; it is these that are driving inflation here. And with lending rates so high, the government has a fair bit of room to manoeuvre should it need to boost consumer spending.
"One would have to be stupid to be pessimistic over the long term," Mr. Bhatkuly said. "India's growth was never going to be in a straight line."