Focus shifts to economic reforms
While the Communist Party of India (Marxist) pushed ahead with reforms in states like West Bengal – where it is in power – the party stonewalled all attempts by the Manmohan Singh-led government to pursue economic liberalisation.
But the humiliating defeat suffered by the Left parties last week in the lower house of the Indian Parliament – it joined hands with its bitter enemy the Bharatiya Janata Party in a futile bid to derail the Indo-US civilian nuclear deal – where the UPA government won a confidence vote by an absolute majority, has abruptly brought the focus on economic reforms.
The UPA government – especially Prime Minister Singh and finance minister P. Chidambaram – are now expected to fast-forward the reforms process, and accomplish in eight months what could not be done in four years.
“We will now try to take the reform process forward,” a confident Chidambaram declared a day after the UPA government sailed through the trust vote in the Indian Parliament. Singh, Chidambaram and deputy chairman of the Planning Commission, Montek Singh Ahluwalia – all three are western-educated economists and committed reformers – had been targeted by the leftists all these years.
Their efforts to bring about much-needed changes in several key sectors of the economy, and to pursue second-generation reforms, which could have propelled India to the double-digit growth category along with China, were vociferously opposed by the leftists.
And considering the vital support that the four Left parties offered to the UPA government, Singh and other reformers in government had to swallow their pride and suffer the humiliation of seeing all their proposals being vetoed.
In fact, on several occasions Singh and other ministerial colleagues of his had to approach pragmatic Communist leaders, including West Bengal veteran Jyoti Basu and his successor as chief minister of the state, Buddhadeb Bhattachajee, for help in convincing the CPM leadership, headed by Prakash Karat, the general secretary.
The Left supporters of the government, however, steadfastly refused to allow the government to move ahead with reforms, despite West Bengal – and even China – pursuing similar changes.
*****
THE most significant reforms that Singh and Chidambaram wanted to pursue, and which the Left parties stalled, related to the financial services sector. Chidambaram had announced on several occasions that the government was determined to raise the ceiling on foreign direct investment (FDI) in the insurance sector from 26 per cent to 49 per cent.
But the Communists saw red and stoutly opposed the move to raise the ceiling. In fact, the Leftists, who controlled most of the trade unions in the insurance sector, had objected to the opening up of the insurance sector.
The National Democratic Alliance (NDA) government had opened up both general and life insurance sectors, allowing even foreign players to set up joint ventures. The insurance industry in India has seen remarkable growth after the opening up of the sector.
But foreign insurers have been urging the Indian government to raise the ceiling to at least 49 per cent. Even the US government had been bringing pressure on India, seeking a hike in the cap on FDI.
But for some strange reason, the Communists vehemently opposed the government move and succeeded in blocking attempts to up the FDI limit. With the Left parties out of the way, the government is now free to quickly get the insurance act changed, enabling international insurance companies to raise their stake in the joint ventures.
Another important legislation that the UPA government is sure to press ahead with relations to pensions. The Pension Fund Regulatory and Development Authority bill has been stalled in Parliament, again because of the refusal of the Left parties to see reason.
Again, the Left has been opposing pension reforms, or even the entry of private fund managers, because of the control of white- and blue-collar employees’ unions. The Leftists have in the past pressurised the government to direct its Provident Fund to pay higher-than-market interest rates to employees, despite the fund being forced to dip into its reserves.
The international pension fund industry has been eagerly waiting the passage of the bill, but the Left has successfully stalled it. For a start, the government may allow foreign pension funds to set up joint ventures with a 26 per cent stake.
The Banking Regulation (Amendment) Bill, which was also introduced in Parliament about three years ago, has also been stalled by the Communists. The bill aims to give foreign investors voting rights in proportion to their equity holding in banks, instead of capping it at 10 per cent. So even if an international investor owns up to 74 per cent in an Indian bank, the voting right is restricted to just 10 per cent. This clause defeats the very purpose of encouraging foreign investments in banks.
The government also wants the country’s largest commercial bank, the public sector State Bank of India, to go in for a merger with its subsidiaries and associates. But powerful Left-controlled trade unions have been opposed to this move, and the Communists had blocked the government’s attempts to bring about consolidation in the industry.
The UPA is also keen to reduce the government holding in nationalised banks, but the Leftists were always opposed to this. Chidambaram can be expected to steer many such bills that would bring about dramatic transformation in the Indian financial services sector.
*****
THERE are several other areas that are desperately in need of reforms. While the government succeeded in bringing about some changes relating to FDI in retail and real estate, there are still a lot of restrictions that need to be diluted.
FDI is allowed in retail only in single-brand stores, or in wholesale operations. Many global retail giants are keen to enter the lucrative Indian market, but the Leftists have prevented the government from pursuing a pragmatic policy.
The Leftists could not, however, prevent the government from opening the real estate sector; today, billions of dollars have entered the sector, thanks to 100 per cent FDI in major real estate development projects.
Similarly, the Manmohan Singh government managed to privatise the Mumbai and Delhi airports, allowing private Indian players – who have set up joint ventures with foreign partners – to modernise and expand the two busiest airports in the country.
However, the government could not get the other two major airports – Chennai and Kolkata – out of its clutch. The Leftists insisted that their modernisation be taken up by the state-owned Airports Authority of India.
Another contentious area relates to labour laws. The Leftists prevented the government from initiating any changes in the antiquated labour laws of the country, preventing generation of new jobs. The UPA government is now expected to take a new look at labour laws and even exit routes for companies.
But the most interesting step to be observed is in the area of disinvestment of public sector units. The NDA government had launched an ambitious privatisation programme, which was bitterly opposed not just by the Communists, but even by right-wing supporters of the Bharatiya Janata Party, and even by ‘left’ elements within the Congress.
When the UPA government came to power in 2004, it abandoned the privatisation – or disinvestment – programme of the previous government. Many Congress leaders (in fact, politicians from most parties) were opposed to privatisation.
The reasons of course, are not ideological in the case of most political parties – except perhaps the Leftists. Indian politicians have mastered the art of mismanaging public sector units, exploiting the resources of the cash-rich companies for their own petty gains.
Politicians heading Soviet-era ministries – like Coal, Steel, Oil and Petroleum, Pharmaceuticals, Fertilisers, Information and Broadcasting, Tourism and Civil Aviation – are loath to give up control of such lucrative positions, from where they can manipulate billions of rupees in funds and a vast army of bureaucrats.
So despite the unceremonious departure of the Leftists, privatisation of public sector units is unlikely to be on the agenda of the UPA government, especially since it will have to accommodate many of its new supporters, who will be eagerly wanting to occupy ‘lucrative’ ministries, or public sector units.