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Economy Oct 4, 2012

Second wave of reforms: Govt bets big, but can it deliver?

By Venky Vembu

Like an agnostic who has found religion anew, the UPA government has become borderline evangelical in making the case for 'economic reforms' - such as it is - and has gone all-in to paint itself in reformist hues.

Quite uncharacteristically, and against the grain of its own conduct of the economic discourse of recent years, the party's leaders, from Sonia Gandhi downwards, have actually been going out on a limb to "own up" to the government's recent policy measures - from the diesel price hike to the contentious proposal to permit FDI in retail - even though they could prove politically unpopular. It certainly marks a refreshing change from the past, when leaders typically maintained radio silence and allowed controversial policy decisions to be sneaked through, giving themselves possible deniability in the event of a political backlash.

The Union Cabinet is to meet on Thursday to approve yet more big-ticket policy initiatives that have been pending for long. Indicatively, the government will likely clear a proposal to raise foreign direct investment (FDI) in the insurance sector and open up the pension sector to FDI. Also under consideration are proposals to set up a National Investment Board ( that will provide single-window clearance for mega infrastructure projects), give statutory powers to the interim pension regulator and clear the Companies Bill 2011.

P Chidambaram is asking India Inc to persuade the Opposition to support the reforms. AFP

Yet, for all the bravado that characterises the UPA government's approach, it's not very clear that it has the numbers to deliver on all these policy initiatives, some of which need to formalised through legislation. Even if it manages to rustle up a majority in the Lok Sabha, with the help of the Congress' new-found allies that have administered it the kiss of life after Mamata Banerjee pulled the plug, the numbers look very iffy in the Rajya Sabha.

The problem arises primarily from the BJP's stand. The principal Opposition party had said in the past that it would back the proposal to allow FDI in the pension sector, but has consistently opposed a similar proposal in the insurance sector. Additionally, the parliamentary standing committee headed by former Finance Minister and BJP leader Yashwant Sinha, had recommended that the FDI in the insurance sector be capped at 26 percent.

The proposal now to raise it to 49 percent in insurance effectively risks torpedoing the political consensus on FDI in the pension space as well. Coming on top of the trenchant opposition to the proposal for FDI in multi-brand retail from the BJP and even from some of the parties propping up the UPA - such as the Samajwadi Party and the DMK - it's something of a hard grind for the UPA to muscle up adequate support in the Rajya Sabha.

Even senior government functionaries acknowledge the scale of the problem, but reckon that the bridge can be crossed at a later date. A senior minister told the Indian Express thatthe government had undertaken these proposals merely to "bury perceptions of a policy paralysis."

"When these (Bills) reach Parliament, let us see what happens," he said.

Knowing that the parliamentary numbers are not on its side, the UPA government it appears is counting on corporate entities, who have a stake in these 'reforms' going through, to bat on its behalf, and is asking them to persuade the Opposition parties, including the BJP, of the merits of backing these proposals.

Indicatively, on Wednesday, Finance Minister P Chidambaram met a cross-section of industry leaders and urged them to "convince" the Opposition parties to support the economic reform measures that it proposed to initiate. CII president Adi Godrej said that at the meeting, Chidambaram had "requested industry to speak to and convince the Opposition to support economic reforms, which are important for the country."

At that meeting with industry leaders, Chidambaram received some enthusiastic approbation over the government's recent policy initiatives, which, however painful in the short term, had at least ended the policy paralysis of recent years. Given that the UPA government had received much stinging criticism from much the same industry leaders in recent years for having lost the plot on the India growth story, the positive feedback must have been more than a little gratifying.

And although not everything about the recent policy initiatives counts as 'reforms' in the true sense of the word, the manifest effort at fiscal cons0lidation, which is important from a sovereign rating perspective and in terms of taming inflation and providing the RBI some head room to perhaps lower interest rates, marks a significant initiative.

Industry leaders are now leaning on the government to deliver yet more tangible 'reforms' - in terms of clearing the hurdles to investments. "There is a lot that needs to be done for the economy and the industry," Godrej said. The National Investment Board is aimed at addressing just those corporate concerns.

The UPA government is manifestly looking to change its bad karma of recent years. In that endeavour, it has found a new-found ally in India Inc, which had practically given up on any policy initiatives. But given that so much of the problems of recent years came about because of a too-cosy relationship between government and industry, the red flags should go up when they cosy up yet again.

by Venky Vembu

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