Indian policy sails through sea of
red By Indrajit Basu
KOLKATA
- The basic framework for India's new administration to
begin the job of governing was put in place on Thursday,
when the coalition and the Left Front that is providing
support to the Congress-led government from the outside
agreed on a common minimum program (CMP).
The
program was released from Indian Prime Minister Manmohan
Singh's residence without the anticipated public
left-initiated row erupting over contentious issues such
as the divestment of government shares from companies
owned by it, and liberal pro-labor and pro-farmer
policies.
"We are satisfied by the final CMP,"
said the Communist Party of India-Marxist's politburo
member and spokesperson Sitaram Yechuri, "and if it is
implemented in its present form, I see no reason why
this government shouldn't last for five years."
Termed as "broadly positive" and "broadly
negative-less" by experts, the policy agenda that the
CMP laid down for the Congress-led United Progressive
Alliance (UPA) government "is business like, and to
please the left simultaneously, it is pro-poor and
pro-farmer as well". In its broad perspective the
program lays out six principles of governance: Preserve,
protect and promote social harmony; ensure 7 to 8
percent economic growth while creating jobs; enhance
farmer and worker welfare; fully empower women; provide
equal opportunity to backward classes and minorities and
unleash the creative energies of businessmen and
professionals.
But between the lines, it calmed
the fear that reforms - in order to don a "human face" -
would take a back seat. There will be no blanket ban on
the privatization of state-owned companies (or public
sector units - PSUs - in Indian parlance) and the
private sector will have a say in reviving sick PSUs and
creating infrastructure. In other words, although the
divestment ministry goes, divestment stays. "Chronically
sick PSUs will be sold off or shut down after workers
have been paid off and proceeds from divestment will be
ploughed into social sector schemes instead of funding
the federal fiscal deposit," the CMP document said, "but
there should be a clear commitment not to privatize
profitable PSUs, navratnas [PSUs that were
categorized as "nine jewels" by the state] and those in
the infrastructure sector. However, the UPA will induct
private industry to turn around companies that have a
potential for revival."
According to Vincent
Duhamel, chief executive officer of the Hong Kong-based
foreign institutional investor (FII) State Street Global
Advisors, "the CMP contains nothing that was not
expected and there is no surprise here." Indeed, despite
six changes since the first draft CMP was crafted, the
24-page document says mostly what the Congress has been
talking about since it won the elections two weeks back.
It asserts that the new government will have stable
pro-growth and pro-investment tax and investment
policies and recognize the role of the FIIs in
development of India's capital markets and economy.
"FII's will be continued to be encouraged. The country
needs at least two to three times the present level of
FDI inflows," CMP said.
The commitment to
eliminate revenue and fiscal deficit and to gradually
reduce the fiscal deficit, which will be done by 2009,
is part of the law of the land, the CMP said. It added
that to undertake a plan to increase the tax-to-gross
domestic product (GDP) ratio, the government would
undertake major tax reforms to expand the taxpayer base,
increase tax compliance and make the tax administration
more efficient. The tax rates, it said, would be stable
and conducive to growth, compliance and investment. It
promised enhanced public investment in the
infrastructure sector and said subsidies would be made
explicit and provided through the budget.
And,
in what could be music to the Indian business sector's
ears, the CMP said that for reviving industrial growth,
the new government would provide incentives to boost
private investment and encouragement of foreign direct
investment. A National Manufacturing Competitiveness
Council would be set up to provide a continuing forum
for policy dialogue to energize and sustain the growth
of sectors like food processing, textiles and garments,
engineering, consumer goods, pharmaceuticals, capital
goods and IT hardware.
However, to appease its
coalition partners, primarily the left parties, it has
also put on the backburner at least two crucial areas of
reforms: labor law changes and privatization of power
utilities.
The changes on labor are particularly
interesting. The fifth draft of last week stated that
while rejecting the "hire and fire" principle, there was
a need to recognize that "some flexibility had to be
provided to industry in the matter of labor policy but
such flexibility must ensure that workers and their
families are fully protected". But according to the
final CMP document, "some changes in labor laws may be
required".
Apart from this, there is a
commitment to scrap the Prevention of Terrorism Act
2002, a significant demand of the left parties. On the
left-sensitive issue of reforms of the power utility
sector, the CMP called for a review of the Electricity
Act 2003, and decided to extend the June 10 deadline for
the unbundling of state electricity boards which was a
precursor to their privatization.
The CMP also
promises that a "nutritious" mid-day meal scheme, funded
"mainly" by the federal government, be introduced
nationally in state-run schools and an excess on all
central taxes to finance the coalition's pledge to
universalize quality basic education be imposed. "This
measure," said Singh, "would raise public expenditure in
education from less than 2 percent of GDP now to 6
percent over the next five years."
It has
promised a roadmap in 90 days to ensure that all
subsidies were targeted sharply at the poor, such as
small farmers, farm labor and the urban poor. For
pension earners and senior citizens, the CMP promised
higher interest rates and said that the
(federal-managed) employees' pension fund would not be
changed without prior consultation and approval of the
Employees' Pension Fund Board.
However, the CMP
has resisted left pressure on a "sensitive" foreign
policy issue that called for dropping of the "closer
engagements and relations with the United States", but
said instead: "The UPA government will pursue an
independent foreign-policy keeping in mind past
traditions. This policy will seek to promote
multi-polarity in world relations and oppose all attempt
at unilateralism."
Many may not find the CMP
shocking, but it does spring a few surprises of sorts.
Chief among these is a new scheme to unearth black money
(which is the unaccounted earnings hidden from tax
officials). The other two are: a promise to stop misuse
of double taxation avoidance agreements in relation to
capital markets and a promise to implement value-added
tax (VAT): after detailed groundwork has been laid,
including integration of services into the VAT chain.
"The new scheme [unearthing black money] will be
outlined by the finance ministry and will be tougher on
tax evaders," said finance minister Palaniappan
Chidambaram in his post-CMP address, "and stopping of
misuse of double taxation avoidance agreements is meant
to discourage local tax evaders and not foreign
institutional investors."
Nonetheless, even as
the FIIs, Indian stockbrokers and business leaders have
termed the CMP as "encouraging" and "not so harmful", it
seems to have spooked the country's retail investors.
The Bombay Stock Exchange's (BSE) benchmark index Sensex
fell by 237 points on Friday to close at 4,822, while
National Stock Exchange's (NSE) Nifty (index of 50
shares) fell by 78 points to close at 1,480.
"The stock markets turned nervous primarily on
the CMP putting issues like disinvestment and
privatization of the power utilities on the backburner,"
said Rajiv Prasad a BSE and NSE broker, "but selling was
pressed mainly by operators [punters] and large ticket
investors who had bought stocks in anticipation. FIIs
and large Indian funds were largely inactive [Friday]."
The FIIs, meanwhile, are willing to wait and
watch. "Valuations are not compelling enough ... it is
time to wait and see what the new government does," said
Spencer White, a Merrill Lynch Asia Pacific strategist.
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