RISKY BUSINESS Recipe for disaster
By Jephraim P Gundzik
Rapidly deteriorating governance has created a political and social crisis in
India. The growing power of India's leftist parties has hamstrung the centrist
Manmohan Singh government, resulting in a policy vacuum that has in turn
produced an upsurge in domestic extremism and international terrorism.
The prognosis is bleak, with growing political and social instability
threatening to undermine economic stability in the months ahead.
Leftists shining
The most interesting feature of the 2004 general election was the resurgence of
India's far left political parties. These parties, grouped under the Left
Front, gained 21 seats in the Lok Sabha
(lower house) at the expense of the Bharatiya Janata Party (BJP), which led the
previous government. With its 63 seats, the Left Front became the third-largest
party in parliament after the Congress Party (145 seats) and the BJP (138
seats). The Left Front's gains reversed many years of political decline for
India's leftists.
The revitalized political power of the left became immediately apparent when
the United Progressive Alliance (UPA) enlisted the Left Front's support for
securing its coalition government. Rather than formally join the UPA and
receive an equitable share of cabinet positions, the Left Front opted to
support the UPA government from the outside by using its votes in the Lok Sabha
to selectively back the government of Manmohan.
With its 63 seats in the Lok Sabha, the Left Front can pull the plug on the
Manmohan government should it decide to abandon the UPA coalition. With this in
mind, the Congress-led UPA and the Left Front agreed on a common policy
platform known as the Common Minimum Program (CMP). Though the Manmohan
government failed to deliver on the promises embodied in the CMP, the Left
Front has so far opted to strengthen its political power rather than abandon
the UPA and force early elections.
The Left Front has organized numerous mass protests against the foreign and
economic policies of the Manmohan government over the past 18 months. The
Samajwadi Party, which also informally participates in the UPA government and
controls 36 seats in the Lok Sabha, joined the Left Front in many of these
protests.
The Left Front also used the state elections in West Bengal and Kerala in April
and May 2006, respectively, to fortify itself. The Left Front trounced its
opponents winning 235 seats out of 294 seats in West Bengal and 98 seats out of
140 seats in Kerala.
The Left Front is using its growing political strength to intensify pressure on
the Manmohan government. Leftist opposition to the government's privatization
plans scuppered the entire privatization program in early July. Also this
month, the Left Front called for a nationwide protest against the Manmohan
government's price policies to be held in mid-July. The intensifying political
pressure from the Left Front has created a policy vacuum in the Manmohan
government. In addition to aggravating social protests, this vacuum is fueling
extremism and terrorism.
Escalating extremism and terrorism
The Manmohan government has been unable to develop a coherent plan to tackle an
upsurge in violent extremism undertaken by Naxalite (communist)insurgents. In
2003, Naxalite violence was prevalent in only nine Indian states. By the third
quarter of 2005 Naxalites had spread their operations into 15 Indian states
including Andhra Pradesh, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh,
Maharashtra, Orissa, Uttar Pradesh and West Bengal.
According to India's Home Ministry, Naxalite violence killed nearly 800 people
in 2005, up from 323 in 2004. In the first quarter of 2006, Naxalite violence
claimed 157 lives, including 47 security personnel. In addition to more
sophisticated tactics such as using remote controlled landmines, Naxalites have
recently undertaken political assassinations. The Manmohan government appears
powerless to address this expanding domestic rebellion that has probably gained
traction with the help of Maoist insurgents in neighboring Nepal.
As tragic as this domestic extremism has become it is overshadowed by
escalating international terrorism. Tuesday's train bombings in Mumbai, in
which close to 200 people died and which bear the hallmark of Kashmiri
separatists, vividly illustrate the failure of the government's Kashmir policy.
In addition to this grievous attack, Kashmiri separatists have launched
numerous attacks in India-administered Kashmir this year, including a grenade
attack in Srinigar, which was timed to coincide with the train bombings in
Mumbai.
Taking a chapter from the Bush administration's book on how to appear
diplomatic without resorting to diplomacy, Manmohan has been unable to offer
anything substantive to advance the cause for peace in Kashmir. A tangled web
of entrenched interests among defense and intelligence cadres precludes the
possibility of autonomy for Kashmir.
Meanwhile, half-hearted efforts to start negotiations over Kashmir's fate have
conspicuously side-stepped one-on-one dialogue with the All-Party Hurriyat
Conference, the state's powerful umbrella separatist organization.
Just as the lack of diplomacy in Washington has predictably led to escalating
US tensions with Iran, North Korea, Venezuela, China, Russia and many other
countries, the government's diplomatic recession in Kashmir has sparked
escalating terrorism in India.
Over the next six to 12 months, the policy vacuum of the government will
heighten extremism and terrorism, further destabilizing India's political and
social environment. This instability could lead to the collapse of the
government as one or more parties in the UPA coalition withdraws its support.
Economic instability
Political and social instability have already begun to wear on India's economy.
The mountain of short-term foreign capital parked in the stock and bond markets
is taking flight as evidenced by recent dramatic declines in asset values.
Though minor reversals in this trend will appear from time to time, they will
be short-lived as India's investment fundamentals deteriorate further.
Rising international energy prices, government price adjustments and rupee
depreciation are pushing inflation higher. Inflation will probably exceed 7% by
the end of fiscal 2006 (March 2007). The Reserve Bank of India is gradually
pushing official interest rates higher, while capital flight is pushing market
interest rates up more rapidly.
Rupee depreciation is also widening India's trade and current account deficits,
which are likely to hit $70 billion and $45 billion, respectively, by the end
of fiscal 2006.
Increasing political and social instability will adversely impact domestic
consumption as well. Private consumption expenditure and investment could
decline sharply over the next several months, feeding a slowdown in overall
economic growth.
Adding further to economic instability will be rapidly tightening global
liquidity driven by rising official and market interest rates in the US,
Europe, Japan and China. A potentially rapid slowdown in global economic growth
in the second half of 2006 could slash India's industrial production and export
growth. India's intensifying political and social crises may be joined by an
economic crisis by the end of this year.
Jephraim P Gundzik is president of Condor Advisers. Condor Advisers
provides investment risk analysis to individuals and institutions worldwide.
For more information please visit www.condoradvisers.com
