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The battery of reformist decisions
taken by Prime Minister Manmohan Singh's government in the past
month not just alter the perception of policy inaction in India,
but will also go a long way in reviving the country's slowing
economy and stabilise state finances.
There is a flip side as well, which is equally important. Had
these decisions been kept in abeyance any longer, the negative
impact on account of that would have damaged the economy and
India's image in a manner that would have taken a long time to
mend.
Among them, at the top was a threat of ratings downgrades by
agencies such as Standard and Poor's and Moody's. A downgrade
would not just have assigned junk status to Indian bonds and
rendered them untouchable, but also frozen inflow of foreign
funds.
Both foreign institutional and capital investors would have
compulsorily stopped their money flow to India. There would have
also been a flight of capital to the extent that the country's
external debt situation would have fallen into bad times - like in
1991.
Also, with the rupee already dancing in a range of around Rs.51
and Rs.55 to a dollar, a downgrade would have depreciated the
value of the currency even further, making not just the import of
crude oil dearer but also fanned inflation further - a political
disaster!
In fact, the global ratings agencies had said that some action on
insurance, pension and other areas like foreign equity in
multi-brand retail trade is what will may make them re-think on
not downgrading India's rating, having put the country on watch.
But with these big bang actions since Sep 13 with as many as 21
decisions taken Thursday alone, the United Progressive Alliance (UPA)
government has ensured some of the ominous reactions are staved
off -- at least in the medium term.
Not that these decisions will result in immediate flow of capital
from overseas into the insurance and pension sectors. What the
federal cabinet cleared and approved were some legislative actions
that are needed to give these decisions effect.
But what one can surely now expect is a step up in investments by
foreign institutional investors, that have already pumped $21.3
billion into India's equity and debt markets during this year, and
helped nurse the indices to a 15-month high.
Even the harshest decisions yet, of hiking the diesel prices and
limiting the subsidy on domestic cooking gas to six cylinders per
annum, send a message that the government will no longer
compromise on fiscal stabilty.
Politically, the decisions on pension and insurance have the
possibility of support from the opposition Bharatiya Janata Party.
The cabinet accepted most of the recommendations made by the
Parliamentary Standing Committee on Finance under BJP's Yashwant
Sinha.
The only point real point of contention is: The committee wanted
the 26 percent cap on foreign investment in insurance business
retained, while the cabinet proposed a 49 percent. In the least,
this only ensures the entry of foreign capital into pension.
These two industries have been crying for reforms. By making it
clear that the state-run companies in these two areas will remain
under government control, the cabinet also sought to assuaged the
feelings of the powerful trade unions in these companies.
India's insurance industry is valued at $41 billion with 24
companies in life insurance business and 27 in the general
insurance category. The penetration of insurance cover is poor at
just 4.4 percent of the population in life, and 0.71 in non-life
business.
In pension, official data shows that a mere 12 percent of India's
working population has some form of a retirement benefit. Only
recently was this industry opened to domestic players with the
regulator allowing seven fund managers to seek fresh investments.
If and when parliament approves the relevant legislations, Indian
insurance and pension industries will not just get fresh doses of
capital, so vital to cushion against risks and spur growth, but
people can also expect new schemes that suit their needs.
According to some insiders, Thursday's cabinet meeting, like the
one on Sep 13, had one striking feature. Prime Minister Manmohan
Singh left little room for debate -- 21 policy approvals over two
hours translates into less than six minutes per decision.
The Supreme Court too in a recent decision did its bit to clear
the path of reforms by saying policy-making was the executive's
prerogative. Judiciary had no role in that.
These are signals that one hasn't yet heard the last word on
economic reforms in India.
Arvind Padmanabhan is Executive Editor - Business
with IANS. The views expressed are personal. He can be reached at
arvind.p@ians.in
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