January 17, 2006	Tuesday	Zilhaj 16, 1426

NEW DELHI: India’s economic reforms will face increasing opposition from the government’s communist allies in 2006, keeping a brake on the pace of change, and any compromises will hurt growth and investment, analysts say.

The communists are not part of the Congress-led coalition but their votes are vital to the government in parliament.

Last year they made life difficult for reformist Prime Minister Manmohan Singh, rejecting the sale of stakes in profitable state-run firms, which cut off one source of funds for a costly jobs project for the poor.

Singh’s cabinet suffered its first setback of 2006 last week when a plan to cut food subsidies drew condemnation not only from the communists but also from within Congress itself.

The cash-strapped administration was forced to put the move on hold, waving goodbye to about $1.01 billion in budget savings.

Analysts say the reform agenda will face similar headwinds throughout the year, with the communists likely to wield even more influence if, as anticipated, they do well in important elections in two states.

“The evidence so far is that the ruling coalition will have a tough time in implementing critical economic reforms,” said Rajeev Malik, an analyst with JP Morgan Chase Bank in Singapore.

“The news flow on reforms in 2005 was disappointing, though that did not dent the upbeat India story because of the high growth and the consumer spending cycle.”

But Malik said the absence of critical reforms could hurt efforts to accelerate long-term investment.

Subsidies account for nearly 9 per cent of government spending. Analysts say the funds often fail to benefit those they are aimed at, leading to wasted resources — something the country can ill afford, with a fiscal deficit of some 8.3 per cent of gross domestic product.

Successive governments have talked about reining in subsidies but have shied away from action for fear of losing mass support.

But analysts say reforms like these are critical to speeding up economic growth, cutting the fiscal deficit and raising more than a quarter of India’s billion-plus population out of poverty.

“Even in the current upbeat growth trajectory, the Indian economy is still growing less than it is capable of,” Malik said.

The $700 billion Indian economy, Asia’s third-largest, is expected to grow 7.0-7.5 per cent in the fiscal year ending March 31 but analysts say India needs to grow at sustained double-digit levels to reduce mass poverty.

China’s economy has grown at about 9.0 per cent a year for the past decade while India’s economy has averaged about 6 per cent. Analysts calculate that tough reforms could give India trend growth of 9-10 per cent by the end of the decade.

But to make that happen India must plug gaps in its infrastructure.

“The three key reforms needed urgently are power sector reforms, improving India’s rickety physical infrastructure and revitalising agriculture,” said JP Morgan’s Malik.

T.K. Bhaumik, chief economist of conglomerate Reliance Industries Ltd., said the capacity of agriculture, a traditional growth driver, to fuel economic expansion was dwindling and sustained industrial growth required infrastructure development.

The government needs to power ahead on asset sales as it has promised huge spending on health, education and sanitation.—Reuters