Andy Mukherjee: When will the fat lady Singh?

For all the pain it continues to inflict on investors, the crisis in the Indian stock market is a blessing in disguise for the country's economy.

The Bombay Stock Exchange Sensitive Index has slumped as much as 29 per cent since May 10, thanks to overseas institutional investors selling a net US$2.3 billion ($3.7 billion) of Indian stocks.

This money may not be coming back in a hurry.

A Merrill Lynch fund managers' survey released this month showed India's weighting among Asia-Pacific investors had collapsed to a record low.

The drop in the risk appetite for Indian stocks has a silver lining. Now that India has been pushed off the gravy train of easy money, Prime Minister Manmohan Singh will have a strong incentive to focus on steps needed to improve the country's business climate and competitive position.

In the two years it has been in power, Singh's Government has had to do little for the economy, which drew a large part of its strength from a 27-month-long acceleration in bank credit, the longest such spell in India since the early 1970s, according to Morgan Stanley.

This exceptional credit growth was fuelled by the US$20 billion of overseas money that went into the Indian stock markets from June 2004 to April 2006.

In May 2004, when Singh's Cabinet was being sworn in, a cyclical revival in manufacturing was under way in India after several years of an investment drought.

As demand for money rose, the new Government quickly receded into the background and made economic growth the responsibility of the central bank, which kept interest rates low to spur business expansion and consumer spending.

Equity investors, feeling flush with a 154 per cent, two-year surge in the Sensex and impressed by the 9.3 per cent expansion in GDP in the first quarter of 2006, have not complained as loudly as they should have about the lack of policy action to sustain the growth momentum.

In the past couple of years, I have heard very few investors rage about the stalled Indian state asset sale programme. Fewer still have ranted about the Government's continued tolerance for archaic labour laws that force employers to choose machines over men. The most draconian of these laws was supposed to be struck off the statute books five years ago.

There are many areas where Singh's Government has failed to deliver on its promises because its communist backers will not let it. One such proposal that has hung in limbo since at least February 2005 recommends throwing open the US$178 billion-a-year Indian consumer market to global retailers.

A January 2006 announcement that India was ready to receive "single-brand" global retailers was a half-hearted step. Big-ticket retail investments in India will come when multi-brand chain stores such as Wal-Mart and Carrefour SA are allowed in - and that is not even on the horizon.

Similarly, Finance Minister P. Chidambaram promised in July 2004 to allow overseas investors to raise their stakes in insurance joint ventures from 26 to 49 per cent.

Two years later, the plan is still stuck for lack of political consensus. Manulife Financial Corp, Canada's biggest insurer, this week flatly refused to look at India until it was allowed to control at least 49 per cent of the business.

The proposal for deregulating the pension industry, too, is mired in political opposition.

It isn't that the Indian Government is utterly helpless because it relies on communist parties for its survival. In areas where it has tried harder, it has met with greater success.

Singh overcame strong opposition from the Marxists to push for a civilian nuclear agreement with the Bush Administration.

The accord, if it is approved by the US Congress, would secure fissile material supplies for India and ease the country's chronic power shortages.

In the face of stiff opposition from labour unions, the Prime Minister stood his ground on the Government's decision to award contracts to private parties for upgrading the prehistoric New Delhi and Mumbai airports.

It is time the Singh Government took a bolder stance on a broader range of economic issues, including the rapid nationwide implementation of a 2003 law that will bring down the cost of electricity for businesses that currently pay twice as much as their competitors in China.

The previous Indian Government of Prime Minister Atal Bihari Vajpayee had to work hard for the US$2.9 billion it raised over four years from selling 22 hotels and 12 state-owned companies to strategic investors.

In most instances, workers protested against the passing of management control to private owners. In several cases, the ministers in charge of overseeing the management of these state companies were themselves opposed to the sales.

The present Government, by contrast, has been spoilt by easy money. It raised US$585 million in just one minute in October 2004 by selling a small stake in NTPC, India's biggest producer of electricity, on a stock market starving for Indian issuances.

No wonder then that Singh's Administration has not attempted outright asset sales even when its communist allies have sold - even shut down - unprofitable Government-owned companies in West Bengal, the eastern Indian state where communists are in power.

If a depressed stock market fires up Singh's Government, it will be a price worth paying.

* Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.