Indian Investment Story blocked

Decision-making slows down because forging a consensus between different stakeholders is a challenge.

Indian Prime Minister Manmohan Singh’s re-election 18 months ago sent stocks and the rupee to record gains as investors anticipated measures to promote investment. Now, the regional parties keeping Singh in power are blocking his agenda.

One of Singh’s 10 parliamentary partners is at the center of a federal telecommunications probe that may turn out to be India’s biggest case of political corruption. Another regional ally is slowing Singh’s efforts to change rules on how steelmakers Posco and ArcelorMittal acquire land for their mills, delaying as much as $100 billion in investment.

Even after winning the most parliamentary seats of any party in two decades, Singh’s Indian National Congress has failed to implement economic changes sought by business leaders. His coalition lacks a parliamentary majority and is distracted by political scandals, rising inflation and a worsening Maoist insurgency in eastern India.

“There are a lot of very important reforms that need to be passed that won’t go through,” said Apurva Shah, Head of Research, Prabhudas Lilladher Pvt, which provides equity and brokerage services. “It’s frustrating. The government is struggling to assert its authority.”

Such Singh initiatives as opening up the $1.3-trillion economy to foreign insurers and retailers, including American International Group Inc. and Wal-Mart Stores Inc., are in jeopardy, Shah said.

Land Struggles

Singh’s main ally, Trinamool Congress Party leader Mamata Banerjee, says that the government must abandon a plan to help companies acquire as much as 30% of land for industrial projects. Luxembourg-based ArcelorMittal and Pohang, South-Korea based Posco are struggling to obtain land from farmers, stalling their plans to build plants worth $22 billion.

Banerjee also opposes a government offensive against Maoists, who control an area the size of Portugal and are blocking $80 billion of potential development.

The government was forced to surrender to demands from opposition politicians to extend liability protection to nuclear suppliers, and it needed the backing of regional power broker Mayawati, Head of the Bahujan Samaj Party, to win a key budget vote in April.

After Congress won 206 of the 545 lower-house seats last year, it was able to govern without the communists, who in the previous term had blocked overhauls in pensions, insurance, retail and banking and opposed civil nuclear cooperation with the US. Still, the coalition, with 265 seats, is seven seats short of a majority.

Investigations Sought

Parliament has been deadlocked for the last two weeks as opposition parties seek an investigation into allegations against former Telecommunications Minister Andimuthu Raja. A member of the Dravida Munnetra Kazhagam party and a Congress ally since 2004, Raja is said by the Comptroller and Auditor General of India to have sold mobile operator permits to “ineligible” companies at below-market rates. The revenue loss to the state may have reached $31 billion, the auditor said.

The government sold wireless airwaves in 2008 for Rs 12,390 crore ($2.7 billion) though they were worth as much as Rs 1.5 trillion, the auditor said in a report to parliament in New Delhi on Nov. 15. Raja denies any wrongdoing.

At the time the government was formed last year, the Dravida Munnetra Kazhagam party demanded the Telecommunications Ministry in return for its support. When the Central Bureau of Investigation announced it was looking into Raja’s decisions in selling phone permits, he initially refused to step down and Singh didn’t ask for his resignation. Raja resigned on Nov. 15.

Probe Request Rebuffed

Singh has rejected allegations that he had delayed responding to calls to prosecute the minister and pledged to punish the guilty. He has also rebuffed an opposition demand for a Joint Parliamentary Committee probe into the allegations.

The opposition parties also have halted more than 110 hours of parliament sessions as they demanded action to control inflation and called for investigations into alleged corruption involving cricket, the New Delhi Commonwealth Games and a real estate development in Mumbai.

“We expected more serious policy initiatives from this second-term government, and as you can see a huge amount of energy is going into firefighting and disaster management,” said Mahesh Rangarajan, a Politics Professor at Delhi University. “This is the worst crisis they have faced in the last six years.”

The benchmark Bombay Stock Exchange’s Sensitive Index surged a record 17% the first day after Singh’s re- election, as investors bet the resounding victory would allow the government to ease foreign investment rules. The rupee had its best month on record.

Index Falling

In the past month, the Sensex has fallen 4.9% while the MSCI Emerging Markets Index has fallen 1.6%.

In the current parliament, the government has passed the fewest number of laws since 2004, according to New Delhi-based PRS Legislative Research: 39 of 64 planned laws this year.

Congress’s plan to lift curbs that limit foreign retailers such as Bentonville, Arkansas-based-based Wal-Mart from selling to the country’s 1.2 billion consumers has languished for more than five years. A bill that seeks to raise the foreign-direct- investment ceiling for insurers such as New York-based AIG to 49% from 26% has been stuck in parliament since 2008.

Similarly, Singh’s ambitions to open pensions business to overseas companies are unrealized.

“Decision-making slows down because forging a consensus betwe