Economy after the trust vote

NOW that the political thriller of confidence vote is over, there is a renewed focus on the daunting economic challenges facing the country and reform strategy that the government could adopt during the limited time at its disposal before the elections.

By Virendra Parekh (India Monitor)

Published: Tue 29 Jul 2008, 12:07 AM

Last updated: Sun 5 Apr 2015, 12:59 PM

The industry has submitted its wish list to the government, urging it to speed up reforms in agriculture, labour, insurance, pension funds, civil aviation and retail trade, among others. From housewives tormented by sky-high prices and small and medium businessmen squeezed by rising input costs and demand slowdown to high networth investors and FIIs-everyone wants quick result-oriented action.

The 838-point surge in BSE Sensex and the 65-paise appreciation of the rupee against the dollar that greeted the outcome of the confidence vote were signals of widespread expectations that the Prime Minister Manmohan Singh will now be able to deliver on his promise of faster reforms.

On economic front, the government's top priority is to control inflation. It knows that unless it manages to rein in prices, it is doomed in elections. In this context, the recent decline in oil prices has come as a major economic and political windfall to India, as also to other oil importing countries. It is too early to say which way oil prices will move from their present levels, but any decline can only bring cheer to the Indian government and economy.

Another factor that can have a major influence on price level is monsoon, with its implications for food output. The progress of monsoon so far has not been satisfactory, but the season has about two months to go and there is a chance that the current deficiency may be made up.

Meanwhile, the government is willing to go along with reformers and has promised to move fast. A dose of meaningful reforms would also be an antidote to the general sluggish sentiments and may help in tackling inflation and other issues concerning common people.

So what reforms can one realistically expect? Disinvestment is one area that could see some action. With the Left off its back, the government is planning to go full steam with the Initial Public Offerings (IPO) of NHPC Limited and Damodar Valley Corporation (DVC). They have done all or most of their groundwork on small equity sale.

However, the reforms that are most talked about are in the financial sector, covering insurance, banking and pensions. These could spur investments and add as much as 1.5 per cent of the country's growth. That, in turn, would give the government the opportunity to address issues of welfare and distress.

The main reform in insurance is to raise the foreign direct investment cap from 26 per cent to 49 per cent. This hike had in fact been proposed by Finance Minister P. Chidambaram long ago, but had to be dropped in the face of the Left's total opposition. Once the cap is relaxed, a lot more foreign money is expected to flow in and help to expand the insurance sector.

The Indian pensions sector is totally unreformed. At present, the government and the private sector companies have to park their pension money with the Employees Provident Fund Organisation (EPFO), which has a pathetic record in terms of service as well as returns. The government wishes to create a statutory regulator for the sector, which will set the scene for breaking the monopoly of EPFO. The regulator can permit new pension funds and create the framework for them to operate in an open and transparent environment.

Finally, the banking sector reforms that have been hanging fire entail allowing the government's stake in public sector banks to come down below 50 per cent and raising the current 10 per cent cap on voting rights in private sector banks. Currently, foreign investors can buy up to 74 per cent of a private Indian bank but their voting rights are capped at 10 per cent - a major deterrent for investors trying to gain management control.

The bill is crucial as the second phase of opening up of Indian banking sector would commence in April 2009. As per this plan, foreign investors will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government-owned banks. Reformers believe that this will bring in megabucks and enhance banks' capital adequacy ratio.

The list is long and expectations run high on these and other reforms. However, they may have to be tempered with ground realities. The question is not what the Government should do but what it can and will do with a fragile majority in Parliament and a few months before the election season.

Having survived in office by craftily engineered cross voting, the ruling combination would not like to test again its majority in the house; and passing a bill would require such a test. Therefore the pension, banking and insurance FDI bills, as well as the less-mentioned coal private mining bill and amendments to forward contracts regulation, will have to be assessed in terms of the UPA's risk appetite, which is unlikely to be high.

Time is another factor that can place serious limitations on the government's zeal for reforms. The Lok Sabha elections are due only early next year, but the 'window of opportunity' to push through major reforms exists only till around October, after which Assembly elections would take off in six States. Therefore, any bill to be passed would have to be taken up in the monsoon session, starting next month. While there is also the Winter session after that, it would be politically difficult to enact any big-ticket legislation then.

Permitting FDI in multi-brand retail - that is allowing not just Gucci stores but also Walmart stores - is a policy many senior Congressmen find appallingly radical. The SP may not think any differently. So that's probably out.

A victory over inflation is the only thing that can earn the government brownie points with the voters. But, so far, its policy options have had little success, though the RBI is likely once again to reach for the interest rate switch on July 29.

Finance Minister P. Chidambaram will certainly hope that the recent drop in oil prices from the $147 a barrel level continues since imported fuel has contributed significantly to overall price spikes. With the drop in oil prices, other commodity prices globally are softening, although the farm economy is still waiting for the truant monsoon to resume its normal course. In other words, the government has a lot to hope for.

Besides keeping its fingers crossed, what else can it do? It could be adventurous and bold: at the risk of failing, the government must pilot all those pieces of legislation that will enable the next round of industrial and financial growth, relying on judicious lobbying and self-confidence in its purpose. Even if these are not passed, they may just get it the goodwill of the people.

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