Prime Minister Manmohan Singh pulled two big economicreforms out of his turban on Friday, prompting an immediate threat from one ofhis allies to pull down the government and force early polls.
For the first time in a long while, the benchmark Sensex hasclimbed steadily above 18,000 -- closing at a 14-month high of 18542.31 andprompting a bold forecast from Morgan Stanley that it will hit a record high23,069 points by December 2013.
Meanwhile, the rupee, which had plummeted over the pastyear, immediately gained back 1 percent following the announcement of thediesel hike, which encouraged the central bank to slash the cash reserve ratioand therefore free up banks to lower lending rates and push money into themarket.
One of the reforms, a five rupee hike in the price of dieseldesigned to cut the deficit by reducing the subsidy the government pays tostate-owned oil companies, promises to be deeply unpopular with the middleclass and threatens to increase inflation that at higher than 7 percent isalready smiting the poor.
The other -- a move to allow 51 percent foreign directinvestment in so-called "multi-brand retail," which will allow storeslike Walmart into the market, and 49 percent foreign direct investment in theaviation sector -- has prompted claims from opposition parties and even some ofhis allies that he is selling out workers in thousands upon thousands of momand pop "kirana" stores.
Insiders told me in May that the policy paralysis would cometo a natural end as the elections -- scheduled for 2014 -- draw nearer. Thereason? Campaigns are uncertain and costly affairs, while being part of thegovernment allows Singh's allies to mint money (okay, not literally). If theonly difference is a few months, and it's altogether possible that you won't bein any better position after snap polls, there's no upside to pulling down the government.And for every day that passes, the downside for Singh's Congress Party growssmaller.
That's the biggest reason that Singh's latest wave ofreforms will probably stick, the business magazine said.
But there are a couple others. One, the new FDI rules allowthe individual states to make their own decision, so Banerjee's West Bengal candecide to deny Walmart access to its market if Mamata so desires (my bet isshe'll suddenly see the economic benefits of big retail when the politicalbenefits of opposing it disappear). And two, Singh's maneuvers are alreadypaying economic dividends.
Will it save Singh's skin? Or cost him his shirt? Thoughhe's not as charismatic, his political future looks as uncertain as Obama's.And, like Obama, whenever he does the stuff that people have been criticizinghim for not doing, the same people start criticizing him for doing it.
