FOR the United Progressive Alliance (UPA) government, tottering from one crisis to another over the past few weeks, the peak monsoon month of July has heralded bucketfuls of bad news, both on the political and economic fronts.

Politically, the Congress-led government is engaged in a do-or-die battle with its Communist backers; last week it was forced to swallow its pride and sup with bitter enemy Samajwadi Party, to ensure possible survival following the expected withdrawal of support by the Left parties over the Indo-US nuclear deal.

While the government has been able to wield some influence on the political front, it is helpless on the economic side as developments – both domestic and international – continue to spiral out of control. Ironically, this is happening to a government led by Dr Manmohan Singh, a political naivete, but an eminent economist – who has been ably assisted by two other practitioners of the dismal science, finance minister P. Chidambaram and deputy chairman of the Planning Commission, Montek Singh Ahluwalia.

The Singh-Chidambaram duo presided over an economy that witnessed four years of vibrant growth – with the GDP expanding by nine per cent every year – record tax collections, over-flowing foreign exchange reserves, a strong rupee, buoyant stock markets and inflation that was largely under control.

Unfortunately for them, the final year of the UPA government is turning out to be nightmarish, at least economically. The biggest party-pooper of all has been crude oil, whose price touched a record $145 a barrel last week. India imports about 70 per cent of its oil requirements, but consumers don’t feel the pinch, as the government sells them products at highly subsidised rates. Wastage is rampant and no efforts are being made to conserve the resource.

The Indian economy, which has become addicted to oil, is in for another huge shock, as the government will continue to subsidise the price of petrol, diesel, cooking gas and kerosene, destroying its own finances as well as those of state-owned oil marketing companies.

The recent insignificant hike in the retail price of petrol, diesel and cooking gas has sent inflation soaring to double-digit levels. Inflation touched 11.42 per cent for mid-June, the highest in over 13 years, and is expected to climb further for a few more weeks.

Even if the UPA government survives the present political crisis, it will have to call general elections by April or May next year. And before that, there will be elections to important state assemblies, including Delhi, Madhya Pradesh and Rajasthan, where the two main national parties, the Congress and the Bharatiya Janata Party, will be pitted directly against each other.

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MANY leading lights of the UPA government have always been uncomfortable with the excellent economic performance of the past four years. Some of them even chided the Singh-Chidambaram team for focusing too much on rapid economic growth, the soaring stock market indices, the explosive growth in infrastructure, real estate and retail sectors, the rush of foreign direct investments and the spectacular performance of the services and industrial sectors.

One reason for the discomfort with high growth rates is the fear that the electorate – especially the rural voters – might not be too impressed with such figures. The Congress believes that the BJP lost the general elections in 2004 because of its ‘India Shining’ campaign, when it boasted about the successful handling of the economy.

Prominent constituents of the UPA are now reluctant to shine the spotlight on ‘success stories,’ and highlighting a government’s track record of managing the economy has now become taboo in Indian politics.

Unfortunately for the government, the death wish of some of its members appears to be coming true as the economic gains of the past few years have suddenly started unravelling, thanks to both extraneous and domestic factors. The sub-prime mortgage crisis in the US and the slowing economies of the developed world, combined with the oil price hike, are hurting sentiments on the Indian capital markets.

The Indian rupee last week touched a new, 15-month low, dipping to 43.3 against the dollar on Thursday. It has fallen by nine per cent from the beginning of 2008. Stock markets have tumbled – market capitalisation last week dipped below the trillion-dollar mark – as foreign institutional investors dumped $6.5 billion worth of shares so far in 2008, as against net purchases of almost $17.5 billion worth of shares in the same period in 2007.

The trade deficit in May touched a record high of $10.77 billion, as exports slid, while the import bill soared on the back of rising global crude prices. The trade deficit for fiscal 2008-09 – ending March 31, 2009 – is expected to almost touch $125 billion, from a little over $90 billion last year.

Exports in May added up to $13.78 billion, a nearly 13 per cent growth over the May 2007 figure, but the slowest growth rate in 14 months. Imports, however, climbed by 27.1 per cent to touch $24.55 billion. Oil alone accounted for $8.47 billion worth of imports, growing by a hefty 50.8 per cent. India’s oil import burden is expected to touch $110 billion in the current fiscal, a nearly 50 per cent jump over the previous year.

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THE Indian economy is expected to slowdown this year, with GDP expanding by 7.5 per cent – as against nine per cent over the past few years. Of course, considering the anaemic, one and two per cent growths being witnessed by many developed economies, the 7.5 per cent growth is quite impressive.

Analysts expect the primary sector to perform better this year. The south-west monsoon, crucial for the farm sector, is expected to be normal this year. Most parts of India have already received significant rains, and demand for consumer and industrial products could pick up in the busy season starting October.

The Reserve Bank of India (RBI), the country’s central bank, worried about soaring inflation, has been taking steps to curb liquidity. Last week, it hiked the short-term lending rate (repo) by 50 basis points and also increased the statutory cash reserve ratio (CRR) – the amount banks have to deposit with it – also by 50 basis points.

Consumers have started feeling the pinch as banks last week began hiking their lending and deposit rates. State Bank of India (SBI), the country’s largest bank, and ICICI Bank, the largest, private sector lender, together with other banks, went in for a hike in both their lending and deposit rates.

Housing finance major, Housing Development Finance Corporation Ltd (HDFC), jacked up the rates on home loans – its retail prime lending rate – by 50 basis points. SBI also went in for a 50-basis point hike on its home and auto finance products. According to O.P. Bhatt, chairman, SBI, the bank has also raised the interest rate on fixed deposits by up to 75 basis points.

Others like ICICI Bank went in for a steeper hike, raising its floating reference rate (FRR) for consumer loans (including home loans) by 75 basis points. The revised FRR now adds up to 13.5 per cent per annum.

The worst hit by the economic crisis is the urban voter, who has to pay more for consumer goods, food grains, travel and transport, etc – thanks to the double-digit inflation – and will have to allocate more for mortgage and other repayments because of the interest hike.

One of the major factors contributing to the defeat of the BJP-led National Democratic Alliance government in 2004 was the alienation of urban voters; most metros and large cities voted for Congress and other UPA candidates. But Indian politicians and parties continue to ignore urban voters.

The UPA, for instance, has been showering rural India with goodies – in the form of write-off of farm loans, and a rural employment guarantee scheme – hoping to win the rural voter. And many in the alliance have been assiduously trying to play down whatever good it has done for the cities, not realising that India’s demographic profile is undergoing a major transformation, with rapid urbanisation.