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Corporate Sep 14, 2012

A wave of bold decisions: Has MMS got his mojo back?

By Sourav Majumdar

Since last evening, the beleaguered United Progressive Alliance government of Manmohan Singh has been on overdrive. First came the bold diesel price hike and the cap on LPG cylinders, and now the cabinet decision on allowing 51 percent foreign direct investment (FDI) in multi-brand retail and 49 percent FDI for foreign airlines in aviation. These apart, disinvestments in a few key public sector undertakings like Oil India, Nalco, Hindustan Copper and MMTC have also been cleared.

Taken together, these steps, after months of shilly-shallying and confusion, signal an apparent new resolve by Singh's government to finally walk the talk on the next phase of reforms. The corporate sector, after months of waiting for some action and a breaking of the policy paralysis which had gripped the government, may now have some reason to smile.

Has Manmohan Singh finally managed to get his act together?

Across the spectrum, business leaders have been wanting some concrete steps from a government busy battling both allies and opposition alike, to signal their commitment to reform, but little had happened on the ground.

With the slew of moves, Prime Minister Manmohan Singh, despite facing a barrage of criticism for inaction for long, is perhaps seeking to give a strong repartee to those who have been questioning the UPA's reformist credentials. With Finance Minister Palaniappan Chidambaram, the corporate sector has once again begun hoping that the combination of Singh and Chidambaram will be effective in delivering the goods in terms of bringing a sputtering economy back on the growth path.

Already, the latest figures have shown inflation once again shooting up to 7.55 percent, a steep spike from the July figure of 6.87 percent, reflecting that the price rise will continue to be a worrying issue for the government as it heads into election season. Besides, a serious slowing down in factory output, with the Index of Industrial Production at a measly 0.1 percent, means there are more mountains left for Singh and Co to climb in the days ahead.

However, the brighter side may now be that with these measures, the Reserve Bank of India, which has been refusing to buy the government's talk of fiscal consolidation, may now be prompted to take it more seriously. After all, given the political situation, a steep diesel price hike like the one effected this time can be called a bold decision under the circumstances. The RBI meets on 17 September to review its monetary policy, and while most reckon a rate cut may not happen since inflation is well above the central bank's comfort level and the quantitative easing (Q3) in the US will keep oil prices at escalated levels, the UPA's latest moves will soften RBI Governor Duvvuri Subbarao and give him a reason to lower rates in the near future.

Yes Bank's chief economist Shubhada Rao seems to echo this sentiment. Says Rao: "Despite the government finally biting the bullet on fuel price revisions, which is clearly a positive step from a macroeconomic perspective, we continue to expect RBI to maintain status quo on Monday. However, the revision in fuel prices and the concomitant fiscal adjustment will give RBI a greater room to cut policy rates (expect a 50 basis points cut) in the third quarter of FY13 (October-December 2012)."

The bigger question, however, relates to Manmohan Singh. Has Singh finally got his groove back and been able to push through his views with the help of the Congress high command? Is this the first big sign that the government will swallow more bitter political pills in the coming days in the interest of keeping its reformist image intact? After all, given the fact that state elections are due by year-end and the 2014 general elections are looming, there's very little headroom for Singh's government.

Says Sanjaya Baru, former media advisor to Singh and now director for geo-economics and strategy at the International Institute for Strategic Studies: "FDI now stands for Finally Decisive Intervention."

"I believe India will grow at between 6 to 8 percent if the government is proactive in bringing about reforms and encourages lots of investment - both domestic and foreign," writes Infosys chief mentor NR Narayana Murthy in Entrepreneur magazine. In a similar vein, saying that India's greatest challenge is inaction, Confederation of Indian Industry (CII) President Adi Godrej points out in the magazine that India's exposure to the global economy is still relatively small. "This gives our country a wider berth to initiate reforms and push the country to grow faster despite what is happening in other parts of the world," says Godrej.

As India heads towards the weekend, there will be lots for analysts and the corporate sector to discuss ahead of Monday's RBI meeting. One big point of discussion will have to centre around whether one of the architects of the 1991 reforms, the man who is now Prime Minister, has hit a purple patch once again.

by Sourav Majumdar

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