By Cherian Thomas and Kevin Hamlin
Dec. 1 (Bloomberg) -- Prime Minister Manmohan Singh, who opened up India to foreign investors as finance minister in the early 1990s, must now shield the economy from the effect of terror attacks and a global recession.
Singh, 76, took over the government’s top economic job yesterday after shifting Finance Minister Palaniappan Chidambaram to the home ministry to tackle the threat of terrorism in the wake of shootings and bombings in Mumbai. Elections due by May will make Singh’s task even harder.
India’s economy, which grew last quarter at the slowest pace since 2004, is suffering as a credit crunch curtails bank lending and a global slump hits exports. The worst terrorist attack in 15 years may also spook overseas investors, who have sold a record $13.5 billion of Indian equities this year.
“If there is one man who has more credibility in economics and finance even than Chidambaram then it is Prime Minister Singh,” said Robert Prior-Wandesforde, a senior economist at HSBC Holdings Plc in Singapore. “It’s a clever decision.”
Singh, who served as central bank chief from 1982 to 1985, has taken a hands-on approach to economic policy since becoming prime minister in May 2004. In October he summoned Reserve Bank of India Governor Duvvuri Subbarao to discuss the fallout of the global financial turmoil on India. Less than a week later, Subbarao cut interest rates for the first time since 2004.
‘License-Permit Raj’
As finance minister from 1991 to 1996, Singh lowered import tariffs, allowed non-Indian companies such as Ford Motor Co. to set up manufacturing plants and removed the so-called “license- permit Raj,” or regulations requiring government authorization for new factories.
“The prime minister started economic reforms in India and he knows how to steer the economy in these times,” said Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai.
India’s stock and bond markets, which were shut the day after the terror attacks on Nov. 26, advanced today for the second day on optimism the assault won’t derail economic growth. The key Sensitive index rose 2.1 percent to 9280.68 at 10:05 a.m. in Mumbai, while the 10-year government bond yield fell 5 basis points to 7.02 percent. The rupee strengthened 0.03 percent to 50.0900 per dollar.
Singh told investors Nov. 21 that his government will use all instruments including the exchange rate, fiscal and monetary policies and public spending to combat the effects of the global economic downturn.
Credit Crunch
Chidambaram, appointed finance minister in 2004, consulted the prime minister before announcing important policy steps. Chidambaram was in the process of unveiling measures to help the textile, automobile and gems and jewelry industries, hurt by the credit crunch and global recession.
Economic growth in the year to March 31 will slow to between 7 percent and 8 percent before rebounding to 9 percent in the following year, according to Chidambaram. He said Nov. 28 that the effects of the terrorist attack would be short term and India would “overcome” the negative business sentiment caused by the assault on Mumbai.
Singh, one of the leaders who attended the Group of 20 nations meeting in Washington Nov. 14-15 on the global crisis, may be able to push through reforms faster than Chidambaram as he wouldn’t need to negotiate inter-ministry hurdles.
Singh, an Oxford-educated economist, entered active politics in 1991 when he was unexpectedly chosen as finance minister by then Prime Minister P.V. Narasimha Rao. With India facing a balance of payments crisis, Rao and Singh set about freeing the economy of its socialist-era shackles.
Faster Growth
The reforms within a decade catapulted India from the so- called “Hindu rate of growth” of about 3.5 percent to the fastest-growing major economy in the world after China.
Having taken over from Chidambaram, who has overseen record average growth of 8.9 percent since 2004, Singh needs to prevent the economy from slumping in a nation where three-quarters of the population survives on les than $2 a day.
Growth in the $1.2 trillion has already slowed for two straight quarters, with the 7.6 percent pace of expansion in the three months to Sept. 30 the weakest in four years.
India’s exports fell for the first time in seven years in October, according to Trade Secretary Gopal K. Pillai, as the U.S., Europe and Japan fell into a recession in the third quarter. Textile exporters may cut about 500,000 jobs by April, according to India’s textile ministry.
Other Portfolios
Singh, who also holds seven other portfolios including coal, space and environment, may rely on Montek Singh Ahluwalia, deputy chairman of the Planning Commission, to assist him on the finance portfolio, The Financial Express reported today.
Yesterday’s cabinet reshuffle came after the terrorist attacks in Mumbai last week left 195 people dead. About 300 people have died this year in India from bombs explosions in markets, mosques, bus stations and theaters.
“With Singh taking over at the finance ministry, there shouldn’t be any problem,” said David Cohen, director of Asian forecasting at Action Economics in Singapore. “Shoring up investor confidence shaken by the attacks is now one of India’s biggest economic challenges. In that sense Chidambaram is continuing his finance ministry work in another portfolio.”
To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.
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