Reforms on track?

The victory of the Congress-led United Progressive Alliance government eliminates what the markets hate most —uncertainty and instability. The decisive nature of the victory will usher in continuity, consolidation and confidence—the three Cs that have eluded Indian businesses for the last 12 months, if not more. And these have been critical months given the devastating impact the global financial crisis has inflicted on most economies across the world.
With the UPA now unshackled of the Left’s stranglehold and ideological baggage, the stage seems set for far reaching reforms. “People have put a huge onus on this government by removing the shackles and giving the UPA a clear majority. The mandate is a clear signal for the Congress and the UPA for taking bold decisions when it comes to reforms,” said Nandan Nilekani, co-Chairman, Infosys Technologies. The unfolding of the crisis that revealed the excesses of the financial system in the US and other European countries may, however, prompt the government to exercise self-restraint.But, given the clear mandate, Prime Minister Manmohan Singh —the original reformer—may take courage and chalk out a definite roadmap for such reforms. What can, however, be said with certainty is the enactment of the long-pending PFRDA (Pension Fund Regulatory and Development Authority) Bill and the three insurance bills that will make available long-term finance to the corporate sector. The PFRDA has already opened up the new pension scheme to all private citizens, but the Bill is yet to see the light of the day. After the gradual metamorphosis of development financial institutions such as ICICI and IDBI into banks, long-tenure funding has remained inadequate for India’s corporate sector.Further opening up of the insurance and pension sectors are aimed at filling this gap. Three bills relating to the insurance sector proposed to hike the foreign direct investment limit in the business to 49 per cent from 26 per cent now, strengthen the regulator (Insurance Regulatory and Development Authority) and allow foreign insurers to open branches in India.
This will give a boost to the insurance companies and help them penetrate further into the huge domestic market. Disinvestment and privatization that were abandoned by the UPA given the Left’s recalcitrance will gain currency now, more so given the need for substantial financial resources to further boost demand. “This is more of a necessity now, given the fund crunch. The money should be used to refinance large infrastructure projects,” says Jahangir Aziz, Chief Econ omist, JP Morgan. The gross fiscal deficit at 10 per cent of the gross domestic product (GDP) puts major constraints on the exchequer and even if the government wants to spend more to stimulate the economy, it will come with a cost. Selling government stake partly in navratnas and privatizing loss-making and non-strategic public sector undertakings will not only unlock value, but also provide the much-needed funds to continue the big-ticket programmes. Further liberalisation of foreign direct investment (FDI) norms, reforms in the labour market i.e. the Contract Labour Act, letting the private sector participate in defence production and opening up organised retail trade were all held hostage to the Left ideologies. All these will spur large-scale investment, increase jobs and boost demand —so vital for catapulting the economy to the double digit growth orbit.