A PLUNGING rupee and nose-diving stock market indices have brought back fears of a return of the economic crisis of 1991 in India.

Last week, the Indian currency dipped to a lifetime low of 54.85 against the dollar in intra-day trade on Friday morning.

Parallel to the rupee’s slide, the Sensex, the benchmark index on the Bombay Stock Exchange (BSE) has also taken a tumble, breaching the 16,000 mark and plunging to a four-month low. A nervous United Progressive Alliance (UPA) government, which has been battling crises since it was re-elected in 2009, is not only clueless, but appears rudderless.

While much of last year was spent battling serious charges of corruption in high places, this year the government has been crippled by a looming economic crisis that threatens to derail growth.

Prime minister Manmohan Singh, an economist-turned-politician, has proved largely ineffective both on the economic (his strongpoint) and political (where he is still a novice) fronts. Ironically, it was the same Manmohan Singh who had come to the rescue of the nation in 1991, when it faced a similar economic crisis.

As finance minister under Congress prime minister P.V. Narasimha Rao, he embarked on a bold economic reforms programme, that transformed the former pseudo-socialist republic and led to an all-round economic resurgence.

But eight years in power, Singh has presided over a government that has dragged India back to the bad old days of dirigisme, with mindless subsidies crippling its finances and threatening to pauperise several state-owned firms.

Sadly, the UPA government — which is being propped up by unreliable parties that are vehemently opposed to reforms — does not even have the pluck to take bold decisions that are called for in these tough times, unlike the Rao government of the early 1990s.

Last week, finance minister Pranab Mukherjee — who could likely end up as the nation’s president in a few weeks from now if Sonia Gandhi, the Congress president and UPA leader, agrees to relieve him of his duties as the de facto head of government — issued a timid warning in parliament that the government would be forced to come out with ‘austerity measures.’

“If we do not take corrective measures, we will have to face disastrous consequences,” said Mukherjee, warning allies such as the All-India Trinamool Congress led by Mamata Banerjee, the West Bengal chief minister, who has been a major stumbling block for the UPA government in its pursuit of economic reforms.

Banerjee has not only prevented hiking the price of petroleum products, she has even got the government to roll-back a marginal hike in railway fares, forcing Singh to replace her own railway minister — who had initiated the price hike — with another candidate.

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MUKHERJEE along with other UPA leaders and decision-makers have conveniently blamed the crisis in the Eurozone area, caused by uncertainties about Greece’s continuance in the European Union, for the woes of the Indian economy.

And like previous Greek leaders, who over the years perpetrated the economic crisis in the republic by failing to take corrective action against a ballooning deficit and rising subsidies, the UPA’s leaders are also turning a blind eye to the snowballing catastrophe in the country.

Besides bankrupting state-owned oil companies, who have not been allowed to hike the retail price of petroleum products for fear of alienating voters, the government has been rushing to the rescue of grossly mismanaged state-owned firms including Air India, the loss-making and debt-ridden national carrier. Last month, the government announced a massive Rs302 billion (about $5.5 billion) bail-out package — to be doled out over the next decade — for the airline that is groaning under a debt of Rs675 billion.

Subsidies on food, fuel and fertilisers are threatening to destroy the government’s finances, but ministers do not have any plans to slash these wasteful dole-outs. The fiscal deficit has shot up to 5.9 per cent, as against a promised two per cent. The current account deficit (CAD) has gone up to an astounding four per cent of the GDP, capital inflows (both FDI and FII) are shrinking and investors (both domestic and international) are reluctant to put their money in the country.

Last week, an expert panel set up by the Planning Commission warned the government that the economy could not sustain on a CAD of more than three per cent for long. “Considering the baseline scenario for capital inflows, anything above three per cent CAD will be unsustainable,” it said.

The biggest economic challenge before the government is on the fuel front. Though the government ‘dismantled’ the administered pricing mechanism for petroleum products — petrol, diesel, kerosene and liquefied petroleum gas (LPG) — many years ago, it has not had the courage to allow state-owned oil firms to decide on the pricing.

So even as international crude oil prices have risen over the past two years, petroleum refiners in the country — including Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum — are forced to sell products at artificially low prices. Without the pain of having to pay higher — and realistic — prices for petroleum products, consumers merrily indulge in wasteful practices.

The three oil marketing firms are supposed to review the retail price of petrol every fortnight and revise it in accordance with the global crude oil prices.

Diesel, kerosene and LPG are the sacred cows and the government is determined to bleed its finances to ensure consumers of these three fuels do not pay realistic prices. Much of the diesel produced in the country is consumed by the rich who drive luxury cars that run on it, or travel in comfortable coaches that are also fuelled by it. Likewise, the affluent have diesel-powered generators to run air-conditioners in their fancy bungalows and villas, even as the poor have to face eight to 10-hour long power cuts during the summer months.

State-owned oil firms have lost nearly Rs1.4 trillion in fiscal 2011-12 thanks to the government’s distorted pricing of petroleum products; diesel alone accounted for over Rs810 billion in losses. Oil companies are clamouring for a hike in petrol prices, as they are starved of funds for new investments. In fact, some officials have warned of a fuel shortage if the oil companies are deprived of funds.

Though international petroleum prices have started declining slightly, the sharp fall in the rupee has off-set the gains. Oil companies estimate that a fall of one rupee against the dollar raises its annual burden by Rs80 billion.

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FOR a lame-duck government that is now busy counting the days to the next general elections due in the summer of 2014, the prospects of raising the price of fuel (or fertiliser, or coal or other such commodities) is unnerving.

But India’s economic woes are unraveling at a fast pace. Inflation continues stubbornly at a high level of seven per cent. Food price inflation — which affects the poor severely — is once again in the double-digits.

Economic growth has slowed down to 6.9 per cent in fiscal 2011-12 and is unlikely to improve much in the current financial year. The government has not only shoved economic reforms into the deep freeze, it has also come out with regressive moves such as introducing retrospective tax measures for corporate deals such as Vodafone’s acquisition of Hutch’s equity stake in the Indian entity.

This has sent the wrong signals globally and both foreign leaders and businesses have slammed the Indian government for such retrograde moves.

The stock markets have also reacted negatively to such moves. The fall in the rupee will also hurt many Indian corporates who had in recent months opted to borrow funds abroad. Indian companies had raised about $30 billion through external commercial borrowings in 2011, but with the rupee having depreciated by nearly 25 per cent this year their burden will go up by an additional $6.5 billion.

Though India has a still healthy foreign exchange reserve of about $260 billion, it will be difficult for the government to stanch the outflow of dollars without initiating some dramatic reforms.