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India: Stasis or crisis?

Why you should care about the plummeting Droopee.

India rupee falls historic low 2012 05 23Enlarge
A shopkeeper holds a 500 rupee note at a roadside food stall in Mumbai on May 7, 2012. (Indranil Mukherjee/AFP/Getty Images)

COIMBATORE, India — Combating charges of “policy paralysis,” Prime Minister Manmohan Singh raised India's gas prices by the steepest amount ever on Wednesday, in an effort to woo back foreign investors and slow the fall of the plummeting rupee.

But the sudden, bold, and much needed move could well put an end to hopes of a third term for his United Progressive Alliance coalition — and could also lead to a call for early polls.

By hiking the petrol prices charged by India's state-owned oil companies nearly eight rupees per liter — or more than 10 percent — the government will dramatically reduce fuel subsidies, and thus reduce the fiscal deficit. But even though that is exactly the move that economists and investors have demanded to signal that Singh is willing to make the hard choices needed to get India's economy, and the rupee, back on track, he is already facing demands that he reverse the decision from his coalition partners.

This could be the beleaguered prime minister's moment of truth. If he faces down his recalcitrant allies, Singh could once again emerge as the hero of reforms who averted a financial crisis and put India on the path to rapid growth in 1991.

If he caves to political pressure, he could erase any achievements he has made since taking office in 2004 and send India's flagging economy spiraling. Sticking to his guns might bring down the government, forcing snap polls. And rolling back yet another policy would virtually ensure his Congress Party's failure in the next scheduled election.

For now, however briefly, the prime minister appears to have snatched victory from the jaws of defeat. 

His most truculent ally, Mamata Banerjee of the West Bengal-based Trinamool Congress, has intimated that she has no plans to withdraw support for the government — despite her howls of protest over the petrol price hike. And though he has also criticized the petrol price hike, Mulayam Singh Yadav, the head of another powerful regional party that is not yet part of the UPA, was seated on the dais at a function celebrating the third anniversary of the coalition's second term on Tuesday, suggesting that Congress Party President Sonia Gandhi may already have secured Yadav's backup if Banerjee does pull out.

Still, the maneuver truly came at the eleventh hour. And it remains to be seen if it will be enough. The rupee continued to slide Thursday, setting a new record low of 56.4 against the dollar in intraday trading after closing at 55.98 the day before.

Meanwhile, unconfirmed reports speculated that a panel of government ministers will meet Friday to discuss a possible hike in diesel and kerosene prices — a move that would be even riskier politically.

How did we get here?

Since the UPA's second term began in 2009, economists and investors have been clamoring for new financial reforms that will reduce India's budget deficit and stimulate its now slowing growth. But corruption allegations that forced Singh to remove his former telecommunications minister and brought tens of thousands of protesters onto the streets weakened his Congress Party's mandate.

As a result, the prime minister was not able to push through any significant financial reforms during his government's two-year, post-election honeymoon period.

Meanwhile, despite concerns about a rising budget deficit, his government passed laws enshrining universal education as a basic right and expanding a government food subsidy to cover three-quarters of the rural population and half of city dwellers — which some estimates say will cost nearly $20 billion.

Singh's “Report to the People” at the UPA anniversary function on Tuesday heralded as achievements four bills aimed at curbing corruption by making the government more efficient and transparent — including one designed to create national- and state-level ombudsmen, which was demanded by anti-corruption activist Anna Hazare last year.

But all four are still far from being passed.

Worse, opposition from Banerjee's Trinamool Congress — a new coalition partner for the UPA in its second term — forced Singh to roll back a move to allow direct investments from big foreign retailers like Walmart through executive fiat in December, killing his only significant attempt at economic reform and sparking accusations of “policy paralysis.”

"Managing the economy has become almost synonymous with managing the coalition,” said Pai