ECONOMY-INDIA: Market Reforms May Not...

ECONOMY-INDIA: Market Reforms May Not Materialise
By Paranjoy Guha Thakurta
http://ipsnews.net/news.asp?idnews=43458
NEW DELHI, Aug 6 (IPS) - Prime Minister Manmohan Singh’s coalition government is no longer dependent on communist parties to complete its term in office but it may yet fail to push through market-friendly, neo-liberal economic policies -- for lack of time and political consensus.

Since he took charge in May 2004, Singh’s United Progressive Alliance (UPA), that is led by the Congress party, had been crucially dependent on the outside support of Communist Party of India -Marxist (CPI-M) and three smaller Left parties for its survival.

After the Left withdrew support to Singh’s government for going ahead with a nuclear cooperation agreement with the United States, on Jul. 22, the ruling coalition won a confidence vote in Parliament amid allegations that opposition MPs had been ‘purchased’ and ‘persuaded’ by questionable means. The UPA managed to garner a majority thanks to the support of a regional political party, the Samajwadi Party, and other small political formations and independent lawmakers.

Singh and his finance mnister, the Harvard-educated lawyer Palaniappan Chidambaram are ardent votaries of neo-liberal economic policies. But their hands were tied because the Communist parties held ‘veto power’ over the government. Some important economic policy initiatives opposed by the Left parties are:

- raising the cap on foreign direct investment (FDI) in insurance companies from 26 per cent at present to 49 per cent;

- creating a new regulator for pension funds to break the monopoly of the government-owned Employees’ Provident Fund Organisation (EPFO) and allowing pension funds to be invested in stock markets;

- allowing the central government’s equity holding in public sector banks to come down below 50 percent;

- capping voting rights of foreign investors in Indian banks to 10 per cent irrespective of the size of their shareholding;

- allowing FDI in multi-brand retail outlets;

- changing labour laws, in particular, the Industrial Disputes Act;

- increasing the involvement of the private sector in mining, including coal mining;

- sale of equity shares in major public sector undertakings.

On July 31, speaking at a book release function, Chidambaram said: "I have no doubt in my mind that the leadership of parties will assert itself. And, we will take the legislative agenda forward in areas where we agree."

However, analysts believe that many of the policy changes that require legislative approval may not come through.

Although the principal opposition party, the right-wing, Hindu nationalist Bharatiya Janata Party (BJP) is ideologically inclined towards economic reforms, it is at present reluctant to support the government. Party spokesperson Ravi Shankar Prasad has gone on record saying: "We have serious reservations about the legitimacy of this government."

On Jul. 29, after the board of trustees of the EPFO inducted HSBC (formerly Hongkong & Shanghai Banking Corporation), ICICI (formerly Industrial Credit & Investment Corporation of India) Prudential and Reliance Capital as asset managers to break the monopoly of the government-owned State Bank of India, parties on both the left (CPI-M) and the right (BJP) cried foul.

The BJP and the CPI-M alleged that Reliance Capital had been included at a ‘late stage’ to ‘favour’ its head, Anil Ambani, who is supposed to be the world’s sixth largest man (according to ‘Forbes’ magazine) and who is close to Amar Singh, general secretary of the Samjawadi Party which bailed government out after the Left withdrew its support. However, the government denied the allegation.

"Even if one could expect some forward movement in policy changes for the insurance sector reforms, other policy initiatives such as higher foreign investment limits have less to do with what is perceived to be economic reforms and more to do with pressures exerted by lobbies within India and abroad," says Laveesh Bhandari, director of Indicus Analytics, an economic research firm based in New Delhi.

In an interview with IPS, Bhandari argued that the ‘left’ wing within the Congress can be expected to oppose policy changes that are seen to be a consequence of American influence. "The government is already under attack for the nuclear deal with the U.S. and may not do anything that will be seen as an outcome of lobbying by pressure groups such as American insurance companies," he added.

Concurring with Bhandari on the "strong reservations" to many of these reforms from the socialist section in the ruling coalition, A.K. Bhattacharya, group managing editor of the multi-edition ‘Business Standard’ newspaper told IPS that another important reason why many economic policy changes may not come through is simply lack of time. "The next general elections have to be held by April but could take place earlier," he said, adding that "the policy priorities of the government will be focused on containing inflation and little else since it is in election mode".

Amending labour laws and increasing the FDI cap for insurers require consensus across ideological lines which is currently lacking in India’s charged and fractious political atmosphere. Bhattacharya adds that the government is unlikely to sell shares of public sector companies at this juncture when stock market indices are low and volatile. "The government would be foolish to sell shares now and be accused by its political opponents of selling family silver at a cheap rate," he argued. Even if there is no consensus across political parties in India and within them on the benefits of liberalisation, privatisation and globalisation, there is a huge area of agreement on many economic issues, notably the need to improve both the country’s physical infrastructure (to ensure availability of electricity, water and improved roads) as well as its social infrastructure (basic health-care and elementary education).

In the run-up to the elections, supporters of the government will emphasise its ‘populist’ programmes such as a farm loan waiver scheme and an employment guarantee scheme in rural areas. Only time can tell whether these programmes will help the incumbent regime retain its support among India’s poor voters whose real incomes have rapidly shrunk in recent months because of high food prices.