How Singh Blew India's Moment

It must have been an unusually tense night for India's prime minister. While Manmohan Singh waited in New Delhi, his fate hung in the balance more than 4,800 km away in Vienna. There diplomats from the 45-nation Nuclear Suppliers Group were deciding whether India should be granted a waiver allowing it to purchase uranium and civilian nuclear technology abroad—even though India has never signed the nuclear Non-Proliferation Treaty. The dispensation, part of the nuclear deal hammered out between New Delhi and Washington in 2005, would provide India with much-needed energy, cement its new strategic partnership with Washington and enhance its international stature. Singh had staked his legacy on the deal and risked the collapse of his fragile coalition government if it was scotched.

As the clock ticked past midnight in Vienna, things looked grim, with six nations reportedly opposing the deal. Yet just a few hours later, after a flurry of last-minute U.S. diplomacy, the holdouts came around, and the news was announced Sept. 5: India had secured its exemption. Headlines hailed the agreement as a triumph for Singh and a remarkable rebound from lame-duck status.

Just three months earlier, Singh's government had been on the ropes, as its communist partners threatened to abandon the coalition if it moved forward on the deal. But after months of equivocating, Singh ditched the communists and put together a new coalition that survived a confidence vote by an unexpectedly wide margin. Now one might assume Singh's Congress Party is well positioned for the next election, which must be called before May. The nuclear deal is almost in hand, and with annual growth rates topping 9 percent, India's international star has never been brighter. Yet Singh's government remains stubbornly unpopular.

The disaffection stems from Singh's inability to deliver on promises and bridge India's rich and poor gap. His countrymen long for a leader who can marry the country's vast potential with a bold vision, and make that vision a reality. What they got instead was a caretaker. Thrust into power almost by chance, lacking a clear mandate and constrained by his own party and his allies, Singh has often seemed meek and indecisive. And he's been unable to seize a series of once-in-lifetime opportunities.

Behind India's headline-grabbing economic growth, dissatisfaction and malaise abound. The reforms that ignited India's boom in the early 1990s—and that Singh helped implement as Finance minister—have stalled. The wealth gap between rural and urban dwellers has grown. Spiraling inflation, well into the double digits, has begun to pinch the wallets of even middle-class Indians. The white-hot economy has begun to cool, with growth projected to slip below 8 percent this year. That still sounds brisk, but it's not enough to lift millions of Indians out of abject poverty. Meanwhile, government spending has outpaced surging tax revenues, leading to a fiscal deficit estimated at more than 8 percent of GDP and that's gotten India's debt downgraded to near junk-bond status. The sense of insecurity is also compounded by faltering peace talks with Pakistan, a recent series of terrorists attacks inside India and new unrest in Kashmir. And in the past month the government has been criticized for its sluggish response to catastrophic flooding along the Kosi River and anti-Christian violence in Orissa.

Congress may manage to cling to power—its archrival, the Hindu nationalist Bharatiya Janata Party (BJP), suffers from internal division and geriatric leadership. The last BJP government (1999 to 2004) presided over huge economic growth but the gains were mostly concentrated in a few sectors, such as information technology, and a few urban centers. Hundreds of millions of Indians believed they'd been passed by and responded eagerly to Congress's promise of "growth with equity."

But Congress's victory in 2004 came with only 27 percent of the vote and no clear mandate. The party was forced to court coalition partners and outside allies, including a block of far-left parties led by India's communists, who would become a yoke restraining Singh's every move.

The other enduring obstacle that emerged from 2004 was Sonia Gandhi. Congress had contested the election without announcing whom it would make prime minister. Many party faithful wanted Gandhi, the party leader and the widow of slain former prime minister Rajiv Gandhi—and thus the heiress to the Nehru-Gandhi dynasty. But the Italian-born former waitress had been reluctantly drafted into politics, and the BJP was up in arms over the idea that a woman of foreign origins might take the top job. Fearing such divisiveness—and with a nudge from India's president A.P.J. Kalam—Gandhi shocked the nation by passing the post to Singh, a highly regarded economist with a long history of government service. She remained party leader, however. Congress officials described her as the CEO while Singh would be the chief operating officer—a sign of the limits on his power.

Singh didn't help his authority by calling himself the "accidental prime minister." Yet to at first his selection seemed a happy accident. After all, he is the father of India's economic miracle. While serving as Finance minister in 1991, he'd begun dismantling the "license raj" that had promoted select businesses as national champions and severely limited entrepreneurship and foreign competition. When Singh became prime minister, there were high hopes he would extend liberalization to the moribund farm sector and the largely state-controlled financial industry. Given the strong economy, low interest rates, low inflation and the swarm of foreign investors, 2004 seemed the perfect moment to push for further change.

Four years later, however, remarkably little has been accomplished. "I can't think of many things Singh has done that have increased sustainable growth," says Seema Desai, an analyst with the Eurasia Group in London. India's agricultural productivity remains appallingly low. This sector employs 60 percent of the population, but contributes just 1 percent to the country's GDP growth. In finance, the government still controls 70 percent of all banking assets, most life-insurance companies and all pension providers. Foreign investment in banking remains highly restricted, and markets in currency, corporate debt, derivatives and commodity futures are underdeveloped or nonexistent. The nation's retail and industrial sectors also need further development, and its tax system remains arcane and punitive.

Singh's personal support for greater liberalization was not enough to sway his reluctant communist partners. Now that he's finally severed himself from the left, Congress is expected to take some limited stabs at banking, pension and insurance reforms. But Singh can't risk losing votes in the coming elections, and state banking employees are already threatening strikes if privatization and restructuring move forward. Agricultural reform is also off the table.

In retrospect, Singh should have broken with the communists far earlier, as many pundits urged. But the consummate technocrat—the first Indian prime minister never to have won a direct election—was too cautious and averse to confrontation for the strong-arming needed to keep a coalition in line. Nor were such moves his to make. For Singh doesn't control Congress—Gandhi does. And she favored social-welfare programs, not economic reform. Her agenda also fit the plans of Congress's political handlers, who thought it would be the best way to rebuild the party's deteriorating political base.

Thus the government under Singh focused mostly on costly programs designed to offer a "new deal to rural India." The result was what New Delhi political analyst Yogendra Yadav calls "some of the most progressive legislation" in Indian history. But the programs often fell short of their promise. The government's signature rural employment scheme, which guarantees 100 days of work to the country's poorest villagers, provided jobs to some 34 million Indians last year, but it has been dogged by corruption allegations. A crash program to electrify 50,000 rural villages in three years has reached only 6 percent of the households it targeted. And by connecting villages to a decrepit electrical grid without adding new power-generation and transmission capacity, it may actually reduce the number of hours of electricity many poor Indians receive. Plans for improved irrigation and access to clean drinking water are also woefully behind schedule. An $18 billion loan-waiver program for farmers was initially greeted with applause in a country where many heavily indebted farmers resort to suicide. But its ultimate impact will likely prove limited because it excludes loans from private lenders. "Have these programs put in place a virtuous circle of growth and incomes? No, they have not," says the Eurasia Group's Desai.

Nor have the social-welfare programs slowed Congress's decades-long decline in political support. Part of the problem, says Yadav, is that "this government seems happy just to enact things and not follow up." Implementation has often been left to India's 28 state governments, just eight of which Congress controls. Another problem is that Singh, by all accounts an honest official himself, has placed too much faith in India's ineffectual and often corrupt civil servants. G.V.L. Narasimha Rao, a political analyst with Development & Research Services, a New Delhi consulting firm, argues that vast amounts of money have been wasted on administration and siphoned off by dishonest officials. Congress lacks the kind of organization that could send loyalists to remote villages to ride herd on local officials, ensure programs are implemented correctly—and guarantee that Congress gets credit for them. "Not only do you need policies," Yadav says, "you need politics."

The division of power between Singh and Gandhi also created a leadership vacuum that let ministers pursue their own interests. Arjun Singh, the minister for Human Resource Development and an old-time Congress boss, dragged his feet on the prime minister's education reforms. Anbumani Ramadoss, the Health minister, engaged in an embarrassing public feud with the director of a top hospital while the government missed its health-care spending targets and the ruling coalition repeatedly broke its pledge to bring forward a bill designed to combat the rampant sale of counterfeit drugs. The Steel and Defense ministers have also been accused of following their own agendas at the expense of the government's.

Now double-digit inflation, the highest in 16 years, promises to undermine whatever limited good will Congress has bought with its social spending. Rising food costs have hit the poor particularly hard. Many expect the government to use the time it has left to take harsh steps to combat surging prices. But with India's central bank already having raised interest rates to a record-high 8.5 percent, the government has few arrows left in its quiver.

Singh's foreign-policy efforts seem similarly moribund. Even the recent nuclear breakthrough was years in the making, and Singh may have waited too long before forcing it past his domestic opponents. Now there may not be enough time to rush the deal through the U.S. Congress before George W. Bush leaves office in January. (Bush is pushing lawmakers to approve the deal this month.) And after an initial flurry of peace overtures to Pakistan, during which Singh and Pakistani President Pervez Musharraf met four times and the latter said Islamabad might be willing to relinquish claim on Kashmir, momentum stalled. Musharraf was distracted by his own problems at home, and terrorist attacks against Indian targets made it difficult for Singh to continue peace negotiations. Yet the prime minister himself deserves part of the blame. He became personally disengaged from the peace process and left it to the bureaucracy—with predictable results.

Singh's government doesn't have much time left to turn things around: it has seven months at the most before the next general election, and electoral law limits its ability to introduce new programs after January. In an ominous sign, Congress has lost all four state elections held so far this year. Relations between Congress and its new coalition partner—the scandal-prone Samajwadi Party (SP), which draws most of its support from lower-caste Hindus and Muslims in Uttar Pradesh—have already grown strained. Singh has pushed back the start of the next session of Parliament from Aug. 11 until October, perhaps in order to limit the time he must share power with the SP or in the hope that the U.S. Congress approves the nuclear deal before the session opens. Either way it will leave Singh less time to pass reforms. Some analysts expect Congress to call for early elections—perhaps as soon as December—in the hopes of catching the BJP off guard. Whenever it comes, however, the vote will be a referendum on Congress and Manmohan Singh. And if they lose, it certainly won't be by accident.