Indian Decade

Mamata Divorces UPA – But Economic Reforms May Come of Age

An ally deserts India’s embattled government, but the PM presses on with plans to reinvigorate the economy.

Manmohan Singh’s ambitious reform program encountered a potential setback last week, when one of the Prime Minister’s key coalition partners withdrew its support from the ruling Congress Party. The Trinamool Congress (TMC), led by the Chief Minister of West Bengal Mamata Banerjee, formally severed its ties with the United Progressive Alliance (UPA) government on September 21 in protest over the policy shake-up, reducing the UPA to a minority government. The TMC contended that the UPA therefore had no right to press ahead with the proposed reforms, which included reducing fuel subsidies and facilitating investment by foreign multinationals in the Indian retail and aviation sectors.

The Indian economy has slowed in the last year, from 8% in 2011 to around 5.4% now. In the wake of the split, Indian share prices rallied and the Rupee recovered impressively against the U.S. dollar as the markets gave a thumbs-up to the Singh government sans Trinamool Congress.

Yet only hours after the TMC withdrew its six ministers from the cabinet, Singh went on an offensive rarely seen during the 40-month existence of the UPA government. In one of his rare television appearances, Singh attempted to explain the rationale behind the raft of measures his government had proposed.

A combative and aggressive Singh said that “money does not grow on the trees”: that no government wants to “burden the common man”, but that it was necessary to regain investors’ confidence in order to reboot the Indian economy. He told the people that his government’s reforms were needed to create employment for the country’s youth, and that the foreign direct investment (FDI) would benefit farmers. Singh did not mention the controversy surrounding the withdrawal of the TMC.

The Prime Minister justified his government’s unprecedented hike in diesel prices of five rupees per liter on the basis of rising world oil prices, noting that the subsidies accounted for a greater share of the government’s budget than health and education combined. Singh also contended that far from FDI marginalizing small traders, as some fear, Indian small businesses stood to benefit from the government initiatives.

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Earlier in the week, the Congress Party upped the stakes by stating its intention to permit FDI across a number of economic sectors — most controversially in retail — on the eve of the Trinamool delegates’ scheduled resignations. Banerjee today announced a protest rally for her party in Delhi on October 1. In his address to the nation, the Prime Minister made it clear that his minority government had re-discovered its old touch and was willing to go down fighting, as Singh himself has said on record.

Yet the leader of the regional Samajwadi Party, Mulayam Singh Yadav, has 22 MPs in the Lok Sabha and has already pledged his support for the UPA. Indeed, the departure of Banerjee may free up the government to push ahead with other reforms unconstrained by the compromises and climb-downs that the TMC demanded. On the other hand, it forces Mr. Singh to finesse his other regional allies like Mr. Yadav to ensure their allegiance. With the departure of the TMC ministers, the Indian press are reporting  that a cabinet reshuffle is imminent. The knives and daggers may be out for the UPA government, but it is too early to write its obituary.