(Reuters) - Returning to India from a summit in Bali last month, Manmohan Singh was cheerful and determined: once dubbed "the leader other leaders love", he'd enjoyed meeting Chinese Premier Wen Jiabao and U.S. President Barack Obama, one of his biggest admirers.With a host of long-stalled reforms ready for debate in the next parliamentary session, he told a close colleague he was ready to get down to business.
"He came back very buoyant and wanted to show that he was in command," said the political insider, asking not to be named.
But there was little bonhomie waiting for the mild-mannered leader at home, where his blundering, corruption-plagued government has drifted into paralysis and he has been all but written off as yesterday's man.
What unfolded next was testimony to the crisis gripping his party, Congress, which has dominated Indian politics for decades with Gandhi dynasty leaders its lifeblood but now faces an uncertain future.
Determined to salvage his fading reputation as the hero of India's economic miracle and alarmed by mounting signs of economic stress, Singh moved quickly to announce one of the boldest reforms since he became premier in 2004 -- opening the country's $450 billion retail market to foreign operators.
He and his cabinet hoped the move would unleash desperately needed flows of foreign investment and help ease supply-side pressures feeding inflation, which is stuck near double-digits.
"He was really focused on getting things moving, and knew he needed to act," said the political insider.
But Singh's green light for supermarket giants like Wal-Mart Stores Inc (WMT.N) and Carrefour (CARR.PA) to enter India provoked an immediate and ferocious backlash from his political opponents, and even some of the ruling coalition allies on whom Congress relies to remain in power.
The firebrand leader of one of those coalition partners, Mamata Banerjee of the Trinamool Congress party, was reportedly so incensed with Singh that when he telephoned her to make his case for the reform she refused to take the call.
Within a fortnight, the government had capitulated and suspended the plan indefinitely.
POLITICAL MISSTEPS
The bruising retreat is symptomatic of the flaws of a political system where, over 15 years, coalitions have become the norm. Now, increasingly potent regional parties that share power can hold the government hostage to their demands.
A bitter partisanship has also emerged between Congress and its main rival, the Bharatiya Janata Party, that mirrors the obstructive politicking between Democrats and Republicans in the United States.
The BJP thwarted another reform proposal at a parliamentary committee meeting this week, according to media reports, rejecting a proposal to raise the limit for foreign direct investment in insurance companies to 49 percent from 26 percent.
However, Singh's clumsy handling of the retail reform plan was as much to blame for his failure to get it off the ground.
The decree only needed cabinet approval, which came, but because he chose to push it through when parliament was in session opposition parties saw their chance. They held the government to ransom by stalling proceedings in both parliamentary houses for 10 days until it was put on hold.
"Manmohan Singh ... doesn't want to go down in history as a reformist prime minister who was helpless in the final conclusion." said Vinod Sharma, who is political editor of the Hindustan Times and close to the Congress party.
"But you have to use a lot of political savvy: they didn't do enough of their political homework, or political strategising."
Three years ago, Singh appeared more adroit, managing to push through a civil nuclear agreement with the United States despite initial defeat at the hands of allies and rivals that almost brought down his government.
The retail fiasco is a heavy blow for Singh, 79, and one that might have closed his window of opportunity for steps to liberalise the economy before state polls next year, a crucial staging post to general elections in 2014.
"Most people ... will conclude, and rightly, that we have zero expectation from this government," said Surjit Bhalla, chairman of Oxus Investments, a New Delhi-based consultancy. "The signals for domestic and foreign investors, which they have received for quite some time, is that this government is not going to do anything."
A PARTY IN TROUBLE
This week's about-turn is a stark demonstration of the drift of a party, which - with Singh as its finance minister - kicked off the reforms in 1991 that loosened the state's stifling grip on the economy and catapulted India from near-bankruptcy into a long period of stunning growth.
Since it won a second term in 2009, the Congress party has taken no major policy initiatives to further reform. Instead, an outcry over corruption that brought protests by millions of middle-class urban Indians earlier this year has frozen the government into inaction.
Since its re-election, Congress has seen its popularity decline. In addition to the widespread disgust with the corruption swirling around the government, Singh and his septuagenarian-packed cabinet are increasingly seen as out of touch with the needs of a globalising India.
Congress is now in danger of losing power in Andhra Pradesh, one of its biggest voting blocs, and it stands virtually no chance of winning next year's election in the political heartland state of Uttar Pradesh.
Sources with links to Congress say that part of the problem is the complacency that comes - not just in India - when a government settles into a second term.
But there is a more fundamental malaise within the party: a deep uncertainty over its future leadership and vision.
Singh is effectively the chief executive of a government managed from behind the scenes by Sonia Gandhi, who married into a long-revered dynasty that has essentially run India for two-thirds of the period since independence from Britain in 1947.
Party insiders and experts interviewed by Reuters, who asked not to be identified, said that during Singh's first term in office he managed to strike a fine balance between his modernising, reformist instincts and Gandhi's more pro-poor, populist inclinations.
While there has been no erosion of trust between Singh and Gandhi, that balance may be more difficult to achieve as an economic slowdown makes the need for market-oriented reform all the more urgent and the electoral challenges ahead incline Congress to a more cautious and welfarist approach to policy.
That tension may be coming to the surface already.
"There are conflicts within the Congress party," said Bhalla. "One side is liberal, technocratic, and the other side is feudal and old-fashioned - they do not want to see either new entrants in the political space or new ideas, and still believe playing politics according to the old rules of the game."
LEADERSHIP CRISIS
Underlying the crisis in the party is an anxiety about its leadership.
Sonia Gandhi, 65, suffers from an undisclosed illness widely reported to be cancer, but just how unwell she is remains a closely guarded secret.
This has focused minds on the presumed ascendancy of her 41-year-old son, Rahul, in a party where no other young cadres have been groomed for leadership, or would even dare to claim it ahead of a Gandhi.
However, Rahul Gandhi is untested in the cut-and-thrust of running a government and he has instead spent much of his time rebuilding the youth Congress wing. Recently, he has devoted himself to campaigning for the Uttar Pradesh elections, which many see as a lost cause that will only damage his image.
"Congressmen are very unhappy with Rahul. He's not been able to project himself at a national level," said one party expert.
"Everyone in the party is fed up with the drift, but no one is ready to stand up, challenge the system and try and change it. Rahul can't be the rebel - George Bush's son can't be a Barack Obama - this is a dynastic succession."
FROM GLOBAL INVESTING:
Retail volte face confirms India as BRIC that disappoints
Jim O'Neill, the Goldman Sachs banker who coined the term BRICs to capture the fast-growing emerging-markets quartet of Brazil, Russia, India and China, has fingered India as the BRIC that has disappointed the most over the past decade in terms of reforms, FDI and productivity. New Delhi's latest decision to put on hold a landmark reform of its retail sector will only confirm this view.
The government's backtracking on plans to allow foreign investment in supermarkets will not surprise those accustomed to New Delhi's record on key economic reforms. But it means India's weak performance on FDI receipts will continue and that's bad news for the worsening balance of payments deficit. Speaking of the retail volte face, O'Neill said: "They shouldn’t raise people's hopes of FDI and then in a week, say, 'we’re only joking'".
Various Indian lobby groups that oppose the reforms contend that foreign giants such as Wal-Mart and Tesco will kill off the livelihoods of millions of small traders.
Not so, according to a study by the Vale Columbia Centre for Sustainable Economic Development, a think-tank that studies FDI trends. The Centre's Nandita Dasgupta notes that many emerging economies that have allowed 100-percent foreign participation in retail since the early 1990s have seen encouraging results. These include Argentina, Brazil, Chile, Russia, China, Indonesia, Malaysia and Thailand. In China, FDI in retail was permitted 20 years ago. But there is no evidence the huge investments have hurt mom-and-pop operations or domestic retail chains, Dasgupta says. In fact, since 2004 the number of small Chinese outlets has increased to around 2.5 million from 1.9 million. Between 1992 and 2001, employment in retail and wholesale almost doubled to 54 million.
In Indonesia, where FDI to retail was liberalised 10 years ago, 90 percent of the business remains with small traders, Dasgupta points out.
At present, insufficient cold storage, poor transportation and distribution infrastructure allows half of India's fresh produce to rot. An organised retail sector can create a proper farm-to-fork infrastructure through direct purchase from farmers. India's 700 million poor are the ones bearing the brunt of double-digit food price inflation -- the status quo is the worst option for them.
Market Report
Govt Cuts Growth Forecast, Investors their St Exposure
Sensex loses 275 pts, but analysts say market overreacted to mid-year review
REUTERS MUMBAI
The BSE’s benchmark index Sensex extended losses to the second day and closed 1.7% lower on Friday as concerns over a slowdown in the economy intensified after the finance ministry cut the country’s growth forecast for the current fiscal year.
The economy is likely to grow by between 7.25% and 7.75% in the fiscal year ending March, sharply lower than the original estimate of 9%, a mid-year review of the economy tabled by the finance minister in parliament showed.
The 30-share BSE index fell 274.78 points to 16,213.46, with 27 of its components in the red. The benchmark fell as much as 2% during the day. The index lost 3.76% for the week. Shares of index heavyweight Reliance Industries led the losses and fell nearly 3% to end at . 755.70, their lowest close since November 25. Nomura downgraded the stock to “neutral” from “buy”, citing diminishing exploration and production possibilities, and declining refining margins.
“The market has over-reacted to the mid-term review. The lower GDP projections were already known and there is nothing new that you can derive from the review,” Kishor Ostwal, chairman and managing director, CNI Research, said.
“The market should bounce back next week before the RBI reviews its policy on Friday,” Ostwal said, adding he saw 5,100 as next support level for the Nifty. The Reserve Bank of India is widely expected to pause its rate tightening cycle next Friday at its monetary policy review as a slowing economy and a fragile global economic situation take centre stage. Appetite for riskier assets was hit further after India’s trade secretary Rahul Khullar said the country was facing a serious balance of trade problem. Private lender ICICI Bank and HDFC Bank fell 1.77 and 2.2%, respectively.
Industrial output likely shrank 0.5% in October from the same month a year ago, its first decline in over two years, hurt by a slowdown in export growth, a Reuters poll showed. The data is due on Monday. The 50-share NSE index Nifty fell 1.56% to 4,866.70.
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