The fragmentation of Indian politics over the past two decades has meant that no party can govern alone and instead must depend on regionally based coalition partners, often with populist agendas.
“The composition of Parliament is such that real things that need to be done are just not getting attention,” said D.H. Pai Panandiker, president of RPG Foundation, a think tank. “Reform is very necessary. It was very much expected, but it is unlikely to come in the near future.”
Others blame Prime Minister Manmohan Singh for lacking leadership and vision. The ruling coalition has seemed paralyzed, beset by corruption allegations and not tackling promised reforms.
Higher interest rates are choking much-needed investment, which was almost flat in the first quarter of this year and grew just 4.1 percent year over year, as overall economic growth slipped to 7.8 percent.
The stock market is sliding — shares are down more than 14 percent this year, making India the worst-performing market in Asia. That in turn makes it more difficult for companies to raise the capital they need to invest.
Long-term borrowing rates of up to 8 percent are among the highest in the world, said Bhalla, who argued that last week’s monetary tightening seemed like overkill.
“There are important reforms which are needed,” said Kaushik Basu, chief economic adviser in the Finance Ministry. “There was a huge build-up [from 1991 to 1993] of really important reforms that took place then, and now there is a small build-up of reforms waiting to be undertaken, and I do believe we should take them.”
Basu said he expects growth to slow in the short term and inflation to abate, allowing the government to renew its focus on longer-term growth. But Mathur at RBS said stronger government action could lead to a “different growth and inflation mix.”
“In the absence of reform,” he said, “the risk is that growth gravitates towards 7 percent, which given India’s savings rate and labor force growth, is actually a pretty pathetic number.”