Hope flares

The last four weeks have been eventful. India's economy continues its downward spiral - highlighted by the S&P downgrade of India's investment rating to 'negative' watch. Demand, as reflected in consumption, may have registered a kind of bottoming out - passenger car/van sales picked up growth at 5.9% in May over April's zero gains; cement despatches grew 13.9% for the same time period and the IIP came at least into neutral territory in April after de-growing 3.5% in March. However, stress remains high. Inflation, particularly in food at a high 10.5%, is stubborn, driven also by a supply crunch as India's eating habits shift away from grains. Resultantly, despite expectations, the RBI refused to respond to a set of moderating WPI numbers (7.0-7.5% in May) with a rate cut in its mid-June monetary policy review. This reinforces its position on the management of inflation as its first priority. The RBI remains concerned over a weak global environment, as it recognises that the 50-bps rate cut in April did not result in cheaper corporate loans, and that deposit growth - and India's savings rate - is at a seven year low.

It is no surprise then that Finance Minister Pranab Mukherjee's eventful journey towards Rashtrapati Bhawan is viewed with keenness by the investor community. The politics - and politicking - that overwhelmed recent public discourse on the nominations process for India's highest ceremonial office is now behind us. Left in its wake is a weakened Mamata Banerjee of the TMC, whose bluff was called by the Congress, as master politician Mulayam Singh Yadav played his hand as the emerging 'king maker' at the Centre. Tacked up, the numbers indicate the certainty of Mr Mukherjee's ascension as the 13th President of the Republic of India. The big focus, however, is on the seat that he has vacated which has for now been assumed by Prime Minister Manmohan Singh. Many believe that Mr Singh and Mr Mukherjee did not see eye to eye, a hindrance to the government's decision-making process. Others point out that reformist Mr Singh may have been foiled on more than one occasion by populist Mr Mukherjee, to open up areas such as FDI in retail and pensions. The big bet, then, is on the fact that the Prime Minister will use this opportunity to finally call the shots in a Ministry that is crucial to India's growth prospects, and where he has expertise. And there is clearly much to be done, and much that can be accomplished - allowing greater ceilings in FDI, announcing landmark reforms in pensions, finally giving some push to the constantly reiterated focus on infrastructure, etc.

This bet is however difficult to call because it depends on the conjecture that the two Ministers did not view needed policy similarly, and that was the root of much of the indecision. The fact is, it's a larger issue. The UPA, and vast sections of the Congress within it, remain ideologically divided on critical issues. How much Mr Singh himself is resigned to living with the status quo or not is an additional 'open' question. Willy-nilly then, despite the odds, hope must be vested in Prime Minister Manmohan Singh to take decisions that will bring back investors and re-build confidence, kick-start over USD 100 billion of projects, the bulk of which are stuck not on account of funding challenges, but government indecision. There are still some tailwinds in the external environment - a slowing global economy, particularly China within it, can itself yield India some luck as commodity prices fall - already evident in the falling import numbers (and improved, albeit temporarily, trade deficit). Capital inflows could strengthen if the Euro crisis is resolved as investors shift their attention from low yielding US and German treasury bonds to emerging markets. But in the final count, it is not for the rest of the world to determine India's destiny but her own initiative. This can largely be led by the Government through right policies. Whilst we cannot set high expectations on the coming months, we could justifiably allow ourselves a flicker of hope that leadership shifts in the finance ministry may be for the better.