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Will new govt push economic reforms?
Rediff Business Desk |
May 13, 2004 17:03 IST
Last Updated: May 13, 2004 18:05 IST
With a Congress-led alliance of 'secular, democratic forces' set to take over the reins of power at the Centre with the ouster of the NDA government, it still is not clear what shape the new government will take.
The stock markets, which dropped like a stone early on Thursday when they thought that India may be heading for a hung Parliament, recovered on the hopes of stability at the Centre. But foreign investors are keeping their cards close to their chest and adopting a wait-and-watch policy.
Foreign funds cautious
Some analysts say that a Congress-led, Left-supported government may not be very good news for the reforms process, no matter what the new regime says.
The National Democratic Alliance was believed to be reforms- and development-friendly and had managed to create a positive image of India across the globe. This led to foreign institutional investors pouring money into the Indian markets and foreign direct investment started to look up.
However, with the NDA having been voted out of power, analysts feel that foreign investors may pull out of India partially, despite the fact that the economic fundamentals of the country remain strong.
Foreign funds, which bought heavily from January to April this year, turned jittery as soon as the exit polls started to indicate that the NDA may not get a clear mandate. FIIs turned net sellers in May on fears of looming political uncertainty.
However, with the Congress and its allies garnering enough numbers to form a stable coalition government, much of the uncertainty has gone out, but foreign funds are still cautious and unwilling to commit anything.
Another fear that looms in the minds of the investors is that a Left-supported government may not be able to push through the reforms process at the pace which is needed to keep the India story flying.
Divestment, say analysts, will be the first casualty as the communists' view on public sector units' selloff is very well known. Analysts feel the new government may struggle to provide impetus to the privatisation process.
This could, fund managers fear, lead FIIs to reduce their exposure to India, Asia's fastest-growing economy.
With divestment suffering, so will labour reforms, say analysts. This might send out a wrong message to the world on India's sincerity and determination to accelerate its economic reforms process, they say.
The issues of allowing greater foreign direct investment in the telecom and other sectors too may assume significance as the Leftists will most likely not want to push through these policies.
If there is a flight of foreign capital on account of the fears aired by some analysts, the India story could be seriously hurt. Development will slow down, infrastructure may suffer due to lack of funds, and unemployment will rise as lesser investment will mean fewer jobs, feel analysts.
Most analysts feel that India needs to give more impetus to the privatisation process; banking and financial reforms, lower interest rate regime, attracting more foreign investment by allowing more FDI into telecom, insurance and retail sectors; usher in labour reforms; exercise better fiscal discipline; promote pension plans and cut pension costs; introduce value-added tax regime; promote more private investment into the agriculture sectors; liberalise its aviation policy; develop and modernise its infrastructure; and woo investment into the power sector so as to emerge prosperous and more strong in the years to come.
But wasn't it the Congress that ushered in reforms?
However, considering that it was the Congress that ushered in the liberalisation process and opened up India for economic reforms, some believe that the Congress may not fall prey to these dangers.
Some market observers feel that the new government at the Centre will not let the pace of the ongoing economic reforms process decelerate so as to ensure the long-term stability and economic prosperity of the country.
Global investors, governments, institutions, trade bodies and companies have been hankering for the further opening up of the Indian markets so that it gives them a feeling of comfort while doing business in India. However, a coalition leaning to the Left may not be an ideal setting for foreign investors to look at India in a big way.
India's determined strides on the path to liberalisation, strong economic growth, privatisation thrust, and power, banking, financial and other reforms, saw foreign investors pumping in more $10 billion into the Indian capital markets in the last one.
India Inc hopes that the new government will continue with the process of reforms. The Federation of Indian Chambers of Commerce and Industry on Thursday said it was not averse to a change of guard at the Centre but wanted the new government to continue the reforms process and provide stability.
The Confederation of Indian Industry on Thursday expressed confidence that the economic reforms would continue to be a focal point whichever party forms the next government.
The CII praised the ousted Vajpayee government on the economic front, saying, "The next government will be on a very strong wicket as the economy is doing so well. If a Congress-led coalition comes to power, the next government will have to ensure that it does not play loose shots."
The Ficci meanwhile said, "The public wants quality of life to be improved and basic amenities like roads and electricity, and this is where the NDA government failed. Also, the government could not create adequate employment in sectors where there could have been large-scale jobs."
The new government will inherit power when the Indian economy is on an upswing and has a great chance to build on it. Now all eyes are on who forms the new government and whether it gives priority to the economic reforms process.