The current target for the fiscal deficit of 5.3 per cent is unlikely to be met., further fuelling inflationary pressures. The one bright spot is that industrial production has improved over recent months.
The Congress Party won only 28 of 403 seats in state elections in India’s largest state, Uttar Pradesh. Heir apparent Rahul Gandhi, who was at the vanguard of the electoral effort, suffered a loss of prestige and there is now a question mark over his readiness to lead the Party. Despite the fact that the Congress’ main national competitor, the Bharatiya Janata Party, continues to be fractious and directionless, this poor performance on the part of Congress, combined with continuing economic problems and corruption scandals, increases the probability that the Congress-led United Progressive Alliance (UPA) will lose next year’s national election, scheduled for mid-year.
Recently the UPA was again in crisis as key allies pulled support from the alliance over the issue of allowing 51 per cent foreign direct investment in retailing. Congress initially reneged on its policy, sparking fears of a back down on economic reform. However, under new Finance Minister Chidambaram, Congress stiffened its spine and the legislation has now passed through both houses. Chidambaram is also attempting to tackle the vast problem of corruption by phasing in a system of direct cash grants to recipients of state welfare, to be linked to a new biometric identity card.
Despite US Defense Secretary Panetta declaring India to be the ‘linchpin’ of Washington’s Asian pivot, there are some signs that the Obama administration is frustrated by the tardiness of New Delhi’s management of the nuclear agreement and defence purchases. Nevertheless, the US now appears to support a strategic role for India in post-ISAF Afghanistan, which it had previously opposed for fear of alienating Pakistan.
India’s relationship with China — a key factor in driving the US–India relationship — continued to be one of mutual watchfulness as the latest in a long line of border talks failed to make significant progress. The talks were, however, characterised by India’s external affairs minister, Salman Khurshid, as ‘moving in the right direction’.
India also continued to be wary of Pakistan, arguing that Islamabad had done too little to bring those responsible for the Mumbai attacks of 2008 to justice. On a brighter note, Pakistan finally agreed to grant Most Favoured Nation status to India and both sides agreed to liberalise their border visa regimes, including for business travellers. While these moves give cause for hope for expanded economic relations, particularly between the two Punjabs, resistances within the system are also likely to cause some continuing inertia.
Pakistan itself is struggling both economically and in terms of its efforts to turn back the growing tide of extremism. An estimated 400 Shi’ites have been killed by Sunni extremist groups like Lashkar-e-Jhangvi this year. Some worrying reports say these extremist groups have now linked up with the Pakistani Taliban (the Tehrik-e-Taliban Pakistan, or TTP) — thus creating a geographic loop of extremism between the tribal areas and Punjabi heartland. The government is reluctant to take on the TTP in North Waziristan and elsewhere, because it could detract from the strategic focus on India and also because North Waziristan is the location of some ‘friendly’ Afghan extremist groups such as the Haqqani Network. These groups provide Pakistan’s main bargaining chip to ensure both a seat at the table in negotiations about Afghanistan’s future and the possibility of on-going destabilisation of Afghanistan if developments don’t go Pakistan’s way.
Meanwhile, Bangladesh is shaping up for scheduled national elections next year in its usual fractious manner. The ruling Awami League has abolished the convention of handing over to a neutral caretaker prior to the election and the opposing Bangladesh Nationalist Party has hit the streets in force to protest. It promises to be a difficult election period.
As if seeking to emulate the example of the Asian ‘tiger’ economies, Sri Lanka continues to perform well economically while further tainting its democratic credentials. The Rajapaksa government is using its parliamentary majority to begin the process of sacking the chief justice of the Supreme Court, who is accused of corruption, but who has also opposed some key government legislation, thus attracting the government’s ire.
Finally, Nepal continues to be locked into a pattern of political instability. Four years of negotiations over a new constitution have failed over the issue of decentralisation. The nation will go to the polls in April or May in an attempt to break the deadlock. Meanwhile China continues to garner influence, including by undertaking major infrastructure projects no other country can afford.
Sandy Gordon is a visiting fellow at the College of Asia and the Pacific, Australian National University.
This is part of a special feature on 2012 in review and the year ahead.