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Taste of the pudding: UPA's big implementation challenge

It had to happen. After the euphoria over the UPA government's sudden awakening and aggressive return to the reform agenda, the focus is shifting back to the current scenario and the challenges the government will face in implementing the slew of reforms it has announced.

The twin waves of measures announced by Prime Minister Manmohan Singh's government - from the politically thorny FDI in retail to hiking FDI limits in insurance - had predictably cheered corporate India and analysts who now feel the government is serious and determined in bringing economic reform back as top priority despite political compulsions. But the heat over the announcements is now over and it's time to focus on how feasible it would be for the government to actually push through these reforms on the ground.

The acid test for the UPA will be to negotiate the next - and crucial - political tightrope walk to try and get some of the reforms implemented. If it fails, it will throw all calculations off gear

To be sure, things are far from hunky dory on the political front, and the 10 October decision of the Bahujan Samaj Party and its leader Mayawati, of keeping the UPA on tenterhooks about whether she would continue to support the government or not, isn't helping the UPA cause. With Mamata Banerjee out of the equation, Mayawati and Mulayam Singh Yadav become crucial in helping the UPA stay afloat and, more importantly, push the reforms forward. A belligerent Bharatiya Janata Party (BJP), hungry for fodder to nail the government with, is already upbeat after the latest exposes on Robert Vadra. All in all, a recipe for more political uncertainty at the centre.

Whether rating agency Standard & Poor's (S&P) is saying anything new or not, the latest statement from the agency saying that India still faces a one-in-three chance of a credit rating downgrade over the next 24 months is enough evidence that there is growing concern that political reality will take precedence over economic resolve.

Even if Manmohan Singh decides to go down fighting, it hardly solves the economic problems facing the nation in the face - a ballooning fiscal deficit, mounting inflation, an adverse global economic scenario and a woeful lack of fresh investment from corporate India. And that is exactly what finance minister Palaniappan Chidambaram perhaps sought to convey when, at the recent Economic Editors' Conference.

He warned that the Indian economy ran the risk of a major slowdown if reform measures didn't continue. Chidambaram, in fact, promised continuing reform and fiscal consolidation to bring growth back on track. The first quarter GDP growth for FY13 slipped to a worrisome 5.5 percent , and the International Monetary Fund (IMF) has just slashed India's growth estimate to a much lower 4.9 percent for calendar 2012.

The crucial visit of US Treasury Secretary Timothy Geithner and Federal Reserve chairman Ben Bernanke has also brought the focus sharply on the economic agenda. Predictably, Geithner lauded the government's recent reform initiatives, calling them significant, with Chidambaram expressing concerns over the impact of the latest round of quantitative easing (QE3) on India, in particular on commodity prices and, hence, inflation.

RBI and the global signs

The reality on the ground is that there is a distinct possibility of commodity prices moving up as the momentum of QE3 rises, and this is bound to have an inflationary impact on India. One man who will be acutely aware of this possibility is Reserve Bank of India (RBI) governor Duvvuri Subbarao, who Bernanke met on 10 October in a significant meeting. On October 30, Subbarao and his colleagues at RBI will sit down to review the monetary policy and there is already a growing clamour for a repo rate and cash reserve ratio (CRR) cut from bankers and policymakers. However, with the economic situation being what it is, all bets are off on whether Subbarao will be comfortable lowering rates with inflation at 7.55 percent at last count. RBI has already staved off pressure to cut rates the last time it reviewed its policy on 17 September, reducing CRR instead to put more money in the hands of banks for productive lending. This time too, analysts expect RBI to hold firm on key rates.

The global signs aren't encouraging either. The latest HSBC Emerging Markets Index reading shows a slippage from 53.2 in the second quarter to 52.1 in the third quarter of 2012, as Brazil and China slow down. Besides, emerging market manufacturing output has also fallen as the problems in the developed world hit demand. Emerging economies are being impacted for the miseries of the developed world, says Murat Ulgen, HSBC's chief economist for Central and Eastern Europe and sub-Saharan Africa.

The current account deficit (CAD) is the one clear figure which seems to have improved, with the latest figure coming in at 3.9 percent of GDP in the first quarter of FY13. While analysts agree, as reported by Firstpost earlier, that the CAD may have peaked in FY12, Goldman Sachs estimates it will likely trend downward due to the sharp depreciation of the rupee. In fact, S&P also estimates CAD to stand at 3.5 percent for FY13. The Goldman Sachs analysis says the rupee will now improve with improved CAD and greater capital inflows, and pegs the 12-month rupee-dollar target at 51.

The estimates, however, aren't that bright for the fiscal deficit. S&P estimates it at 6 percent for FY13, much higher than the government's target of 5.1 percent. The acid test for the UPA will be to negotiate the next - and crucial - political tightrope walk to try and get some of the reforms implemented. If it fails, it will throw all calculations off gear. And reduce the bold announcements on reform to just a lot of lofty promises.