India chooses president, reforms seen next on agenda

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Indian lawmakers voted for a new president on Thursday, ending weeks of wrangling and opening a much-hyped political window billed as the best chance for Prime Minister Manmohan Singh to launch a wave of reforms and reverse an economic slowdown.

India's markets are anticipating quick action to relax investment rules and cut subsidies once the voting for the ceremonial post is out of the way. Stocks and the rupee outperformed other Asian markets this month after Singh suggested he will act after the election.

Analysts warn of a slump in investor confidence if anticipated measures do not materialise.

"This is a make or break situation for the government," said Rupa Rege Nitsure, chief economist at the Bank of Baroda, Mumbai.

"They have to come up with one or two really solid reforms first, otherwise they will be blamed for having been responsible for having triggered the lowering of India's credit rating to junk grade."

Singh assumed the additional role as acting finance minister in June, replacing Pranab Mukherjee, who resigned to run for president, a race he is almost certain to win after gaining support of allies. The president is elected by 4,896 lawmakers in state assemblies and the national parliament in Delhi and results will be announced on Sunday.

Mukherjee has only one opponent who does not have much support.

Mukherjee's strength signals a political victory for his Congress party after a string of reverses in state polls earlier this year, and could provide the bedrock for the ruling coalition to at least start its reform programme.

Launching reforms is becoming increasingly crucial. Hampered by muddled policy and the global slowdown, India's economy grew at its slowest rate in nine years in the March quarter. Inflation is high and the rupee has slid some 20 percent against the dollar since last year as the current account deficit widened.

The government has indicated the period between the election and the start of parliament's monsoon session on Aug. 8 is a good time to implement rules allowing foreign investment in supermarkets -- a policy Singh introduced last year but quickly abandoned after protests in parliament and on the street.

Trade Minister Anand Sharma was due to travel to the farming states of Haryana and Punjab on Thursday to rally support for the policy, which the government says will help restore investor confidence and fix food supply problems. Critics say it will hurt farmers and destroy small shop-keepers' livelihoods.

Opposition from West Bengal chief minister Mamata Banerjee, the biggest partner in the Congress-led coalition, forced the U-turn on retail trade policy in December. But the government feels emboldened by the presidential vote and Singh may be less cowed this time round.

"The political environment right now is much more favourable," said a senior government official who works on economic policy.

One of India's leading businessmen, Ratan Tata, said in a Twitter message: "Now is the moment when our prime minister must break convention, restore government credibility, place the country on a growth path once again by implementing promised reforms."

Opposition within the party

The official said the new retail policy was likely to be adopted either before the parliamentary session, or in September, which is considered another political window before state elections in the western industrial hub of Gujarat at the end of the year.

Singh is famed for opening up India's socialist economy when he was finance minister 20 years ago and ushering in an era of growth, but to repeat the performance now he must overcome opposition from partners in the ruling coalition and from within his own Congress party

Congress sources said some powerful leaders in the party, with an eye on upcoming state elections in Gujarat and the opposition-ruled northern state of Himachal Pradesh, do not back more liberalisation they fear will cost jobs and raise prices.

A Congress party leader in Gujarat, which is ruled by the opposition Bharatiya Janata Party, told Reuters he would resist the entry of retailers like Walmart and Carrefour because the foreign supermarkets would take away business from local traders.

"The Congress Party is doing its best to support the government's reforms agenda," said Rashid Alvi, a party spokesman.

While retail reform would send a strong signal to investors, economists say the most urgent step is to lower subsidies for fuel because the government needs to cut the fiscal deficit. It is also the most unpopular, since Congress party support is largely drawn from farmers who rely on cheap diesel.

Government sources said this week the long-delayed cut might be pushed back further, despite the oil ministry suggesting last week it would happen soon.

Global ratings agencies Standard & Poor's and Fitch both cut their outlook to negative for India's sovereign debt this year -- raising the spectre of Asia's third largest economy being the first BRIC nation to lose its investment grade rating.

Singh has already taken steps to try to calm investor fears about new rules aimed at cracking down on tax evasion.

He is expected to name a new permanent finance minister in the next two months. After casting his vote in the presidential vote on Thursday, Rahul Gandhi, the scion of the Gandhi-Nehru dynasty and the son of Congress leader Sonia Gandhi, said he had decided to take a more prominent role in government, according to TV reports.

He did not say when or give more details but is considered unlikely to get a crucial portfolio like finance.

-Reuters