India’s Political Stability Will Aid Recovery, Mukherjee Says

By Cherian Thomas

May 25 (Bloomberg) -- Pranab Mukherjee, named this weekend as India’s finance minister, will likely take advantage of the government’s stable majority to introduce measures to revive the economy amid a global slump.

The 73-year-old Congress party veteran told the Economic Times yesterday the new government’s numerical strength would encourage credit flows and boost confidence. Mukherjee has been acting in the finance portfolio since January as Prime Minister Manmohan Singh, 76, recovered from surgery.

Mukherjee, who ran a closed economy as the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, inherits one that is now open and exposed to the worst worldwide recession since the Great Depression of the 1930s. He earned a reputation as a trouble shooter in Singh’s cabinet since 2004 by resolving spats among ministries and coalition partners.

“He is a deliverer,” said Alastair Newton, a political analyst at Nomura International Plc in London. “He will have challenges in the economic portfolio given the political realities -- market expectations are high.”

The Bombay Stock Exchange’s benchmark stock index surged by a record 17 percent on May 18, the first day after Singh’s re- election, as investors bet the resounding victory will enable the new finance minister to ease foreign investment rules and sell state assets -- policies that were stalled by Singh’s communist partners in his previous term.

Congress has the support of 322 lawmakers in the lower house of parliament, with the party getting 206 lawmakers of its own. That’s the most since 1991, when Singh as finance minister abandoned Soviet-style state planning and introduced free-market policies that have helped India’s economy quadruple in size.

‘Strong Endorsement’

The victory was as much Mukherjee’s as Singh’s. As the No. 2 in the cabinet, he backed the prime minister’s policies ranging from creating jobs in rural areas and writing off farmers’ loans to closer ties with the U.S., renewing a relationship that began in the early 1980s when he appointed Singh as the central bank governor.

“Despite the strong endorsement from voters, the finance minister may have a tough job pushing through some much-needed reforms,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “It’s very hard for politicians, for example, to do away with subsidies, which may result in a backlash. Expectations should be tempered.”

India spends one trillion rupees ($21 billion), or a tenth of its budget, on food, fuel and other subsidies each year in a country where the World Bank estimates three-quarters of the people live on less than $2 a day. About 13 percent of spending goes to defense and 20 percent to pay interest on national debt. That leaves little for other needs, such as health, education and power plants, boosting borrowings.

Ballooning Deficit

The federal government budget deficit was at 6 percent of gross domestic product for the year ended March 31, more than double the target of 2.5 percent of GDP.

Moody’s Investors Service places India’s long-term local currency rating at Ba2, two levels below investment grade, and lower than the ratings assigned to Colombia, Romania and Kazakhstan. S&P has a BBB- long term credit rating on India, the lowest investment-grade level.

Investors will be looking at how much fiscal stimulus Mukherjee, who was on the boards of the International Monetary Fund and the World Bank in the 1980s, can provide in his first policy statement -- the budget for this year -- expected in early July.

Singh’s government said before the elections that stimulus of at least another 1 percent of GDP is needed to prop up an economy that’s growing at its slowest pace since 2003.

Policy Conflicts

Mukherjee, who first became a minister in 1973, estimated in February that India may need to raise a record 3.62 trillion rupees from bond sales in the fiscal year that started April 1. The central bank governor Duvvuri Subbarao said May 22 that borrowings have “already expanded rapidly” and that it goes against his efforts to keep borrowing costs low.

“The government faces a challenge to balance two conflicting issues -- to stimulate the economy while preventing fiscal position from further erosion,” said Takahira Ogawa, S&P’s director of sovereign ratings. “There is a possibility for the government to implement various measures to further expand the economy and consolidate the fiscal situation.”

Singh’s administration, which doesn’t need communists’ support for a majority in parliament, could raise as much as $20 billion from sale of state-run companies, according to Rashesh Shah, chief executive officer of Edelweiss Capital Ltd.

Asset Sales

Among the companies that could be placed on the block are NHPC Ltd., India’s largest producer of electricity from water, explorer Oil India Ltd. and fuel retailer Hindustan Petroleum Corp., according to Mumbai-based brokerage Religare Capital Markets Ltd.

Still, analysts such as Seema Desai at Eurasia Group, a London-based political-risk advisory firm, expect economic changes will be “selective and gradual.”

“There is a significant segment within the party that is suspicious of sweeping pro-market reforms,” Desai said.

Mukherjee, who last year successfully rallied China, Japan, Russia and 42 other nations to end India’s nuclear isolation and resume supplies without signing the Nuclear Non-Proliferation Treaty, needs to bring the same acumen to gain support of his party colleagues, many of whom are still tied to the original socialist principles of the Congress party.

At stake is a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non- state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.

“Mukherjee is a seasoned politician with excellent skills to bring people around,” said N. Bhaskara Rao, chairman at the Centre for Media Studies in New Delhi. “Expectations from him will be high.”

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.