End of economic miracles?

In just a month,the Italian-born politician who heads India’s most powerful family dynasty has also overruled ministers to widen a food subsidy bill and tried to push through a women’s rights bill languishing for more than a decade

Her appointment to head the reconstituted National Advisory Council (NAC) signals a move from party insider to government policymaker,with greater clout to pressure reformist Prime Minister Manmohan Singh to focus on social programmes,reinforcing the ruling Congress party’s weakened socialist roots.

It may also give her one more platform to help plan the succession to the elderly and frail 77-year-old Singh,who most expect will leave office before the next election,scheduled in 2014,to possibly clear the way for Gandhi’s son Rahul.

Underlying all this is a sense within the ruling Congress party that the governing coalition’s second term must ensure that accelerating economic growth trickles down more to millions of poor to help bolster the party’s voter base.

Sonia sees the government as obsessed with the priority of high growth,said Mani Shankar Aiyar,a senior Congress politician who has known Sonia Gandhi for decades.

NAC will precisely be the conscience of the government and institutionalise the party’s influence over the government.

RUNAWAY SPENDING UNLIKELY

Few,however,expect runaway spending or a return to the planned economy of two decades ago. India is getting used to nine percent growth and the middle class is enjoying its fruits with booming consumerism,malls and ever more lavish Indian weddings.

The February budget was praised for attempts to cut the fiscal deficit. Ministers recognise some ambitious programs,like a recent bill to widen access to education,can only be paid for if India grows at around nine percent a year.

But government gross borrowing is still planned at a record 4.57 trillion rupees (around $103 billion) this fiscal year,and the food bill is one example of the pressures to spend more.

In one of her first directives as NAC chairwoman,Gandhi told ministers to change the food bill to hike food subsidies from 25 kg to 35 kg per family,at an additional cost of $2 billion.

The food bill promises to deliver anything under the sun,said Jahangir Aziz,chief India economist at JP Morgan.

But if there is not some form of capping the bill’s spending,it could all help blow up … efforts to consolidate the (budget) deficit over the next three years.

Many analysts worry that subsidies on food and fuel will blast an ever bigger hole in government finances,even though government officials have indicated that subsidies should at least be capped at current levels and could even be reduced.

They will be present at the back of the mind of anyone who trades fixed income as developing scenarios which could have implications,said Nirav Dalal,head of debt capital markets at YES Bank in Mumbai.

BACKSEAT DRIVING

Gandhi,widow of assassinated former Prime Minister Rajiv Gandhi and self-styled champion of the aam admi,or common man,picked the reformist economist Singh as prime minister in 2004,aware that India could not turn its back on the global economy.

Since then Gandhi has left Singh to run one of Asia’s economic stars with near double digit growth rates,while from behind the scenes she pushed for social welfare schemes,like a rural guarantee job scheme that costs 1 percent of GDP.

Almost never giving interviews,the 63 year-old Gandhi was seen as a reluctant leader after her husband’s death in 1991. She now exerts enormous — if often hidden — influence,moulding policy from backroom meetings at her leafy house in New Delhi.

In the first term,her backseat role suited her. She enjoyed power but little responsibility when things went wrong. It also benefited Singh as he tried to show he was not a Sonia puppet.

Now Gandhi has a more ambitious agenda,including ensuring another election win over Hindu nationalists and regional parties that would return the party to the dominance it enjoyed in the decades after India’s independence in 1947.

She is really gearing the party up,said analyst Mahesh Rangarajan. She wants the party to return to be a majority.

With Singh risking becoming a lame duck prime minister as speculation grows he is on the way out,the clout of his main reformist backers,adviser Montek Singh Ahluwalia and Home Minister Palaniappan Chidambaram,may also recede,allowing the NAC to expand its influence.

There is now a platform which provides for a dialogue of equals between the NAC and the government,said a Congress politician,who asked to remain anonymous. She might have a perspective different from the gang of three.

But any new power for Gandhi will not come without risks.

Gandhi put her reputation on the line by pushing a bill to give a third of parliamentary seats to women. Now the opposition and some allies may block it,in a blow for her prestige.

When it comes finally to a decision that must stick,then the buck stops at Sonia Gandhi’s table,said the politician.

India’s major welfare schemes

India is projected to have a fiscal deficit of 5.5 percent in the year to March 2010,and government officials have said it needs to trim its welfare schemes to help cap this.

Here are the major welfare schemes that contribute to the fiscal deficit:

PUBLIC DISTRIBUTION SYSTEM FOR FOOD

India provides cheap foodgrains and pulses to nearly 180 million poor or low-income families,a scheme that will cost nearly $12.6 billion in the year to end-March 2011,about 1 percent lower than the previous year.

It accounts for about 5 percent of the budget.

The Public Distribution System is widely seen as inefficient,with food meant for the poor being sold off in the open market.

India has considered providing food coupons instead,to plug leakages,but it is unlikely that this proposal will be implemented in the near future.

The government is drafting a food security law that would provide the poor with even cheaper grain,estimated to cost an additional $2 billion each year.

India shelved a plan to raise the prices of some of the subsidised grains it provides,fearing political backlash at a time of high inflation.

CHEAP FERTILISERS

To help farmers and boost farm output,the government fixes the prices of some fertilisers and pays a subsidy to producers to compensate for selling below cost. The bill is pegged at $11.2 billion in the current fiscal year,an increase of 5.7 percent on the previous year.

It accounts for 4.5 percent of the budget.

A coupon system has been suggested here too,but the chances of it being implemented are slim. The government eased controls on pricing of some fertilisers,but said it reserved the right to intervene to protect farmers’ interests. ID:nSGE61I00O

Farmers constitute a core voter base,so any change in the subsidy scheme would almost certainly be minimal.

STATE SET FUEL PRICES

India sets the prices of motor and cooking fuels,and partially compensates oil marketing firms for their losses. The fuel subsidy is seen at $697 million this year,below last year’s $3.4 billion,due to controversial hikes in fuel prices and the government passing on the fiscal burden to oil firms.

A government-appointed panel has recommended dismantling of the administered price mechanism,but the government is unlikely to take this politically risky step.

INTEREST WAIVERS

The government subsidises the interest costs on some farm and housing loans and for some pension plans,at a cost of about $1 billion.

RURAL EMPLOYMENT

The government guarantees each rural household 100 days of work in a year,a scheme that costs it just under 1 percent of GDP,or 3.6 percent of the budget.

The scheme is credited with returning it to power in 2009,but critics say it is inefficient and has not reached much of the people it is meant for.

There is a plan to extend the scheme to include urban families as well,a proposal that might be part of the government’s agenda.

HOUSING FOR THE POOR

India has various programmes to build houses for the poor. The government has budgeted $224 million for these schemes in 2010/11.