Pranab Mukharjee

Congress 'left' will not allow economic reform

Prashun Bhaumik |

P Chidambaram

At a time of rising inflation and high oil prices, the left-wing faction within the Congress is unlikely to allow any market-friendly economic reforms before the general elections, writes Paranjoy Guha Thakurta.

By Paranjoy Guha Thakurta

Prime Minister Manmohan Singh and his Finance Minister Palaniappan Chidambaram are rather keen on introducing a slew of market-friendly economic policies now that the Left is no longer in a position to ‘veto’ these initiatives. The UPA government will, however, find it difficult (if not impossible) to implement most of these economic reforms primarily because of the opposition of the left-wing faction within the Congress party.

In this faction are a group of veterans such as Union Minister for Human Resource Develop-ment Arjun Singh and Defence Minister A.K. Antony, not to mention the ardent votary of Nehruvian socialism, Minister for Panchayati Raj and the Development of the North-Eastern Region Mani Shankar Aiyar, besides Rajya Sabha MP Arjun Sengupta who heads an official commission on unorganised labour. Adding weight to the clout of this group is External Affairs Minister Pranab Mukherjee who (unlike some of the others named) is canny enough not to openly criticise the PM and the FM although he too is reportedly sceptical about the efficacy of ‘neo-liberal’ economic reforms at a time when general elections are not very far away.

The left wing in the Congress has repeatedly urged party president and UPA chairperson Sonia Gandhi not to let the government lose its focus on fighting inflation. The members of this faction point out that the nuclear agreement with the US or the nation’s ‘energy security’ cannot become a major election issue. On the contrary, the impact of inflation (especially the increase in food prices) on the poor would become the single most effective slogan against the UPA government that would be deployed by both the political right (that is, the BJP and the NDA) as well as the Left (led by the CPI-M).

The PM has set up a monitoring committee of some of the seniormost bureaucrats in the government to closely track prices of edible oils and sugar before the festive season. Among other things, this committee will try to ensure that the subsidies being given on imported palm oil distributed through the public distribution system reach the really needy. This is an especially sensitive issue since the price of palm oil has doubled in international markets over the last year and India imports some 60 per cent of the country’s total requirements of edible oils.

With world prices of crude oil having come down substantially from over $145 a barrel to just over $110 a barrel over the last month or so, there is a move to bring down slightly the retail prices of diesel, petrol and cooking gas. This proposed move would aim at sending a message that the government is responding to popular aspirations, even if public sector companies like Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum are far from enthusiastic about reducing the administered prices of petroleum products, having barely recovered a bit of the huge losses incurred in recent months.

The need to contain inflationary expectations has become all the more important since a huge amount of over Rs 13,000 crore is going to reach 5.5 million government employees in the form of wage arrears at one go. This is because the government decided to provide government employees more than what the Sixth Central Pay Commission had recommended. After this money reaches individuals, there could be a spurt in buying, leading to what economists call ‘demand-pull’ pressures on prices.

Given the fact that the growth rate of the Indian economy has slowed down – the Prime Minister’s Economic Advisory Council pegs the growth rate of the country’s gross domestic product at 7.7 per cent during the current financial year against nearly 9 per cent in the previous four years – the socialists in the Congress seem determined not to let the PM and the FM have their way in implementing economic reforms. They point out that these policies proved pretty disastrous for the Congress in 1996 and could prove to be equally disastrous for the party in the months ahead.

Moreover, the leftists in the Congress point out that the BJP is no mood to support the government in Parliament even on policy changes that are ideologically compatible with the saffron party’s right-wing views. In other words, ‘opposition for the sake of opposition’ could dominate the thinking of the BJP and the NDA. One such policy change that the BJP may have supported in different times is the move to increase the foreign direct investment (FDI) cap on insurance companies from 26 per cent to 49 per cent.

Pranab Mukharjee

The socialists in the Congress argue that insurance sector reforms would be perceived as having been implemented at the behest of the powerful American insurance lobby – that includes former US Ambassador to India Robert Blackwill – at a time when the government is being attacked for its pro-American tilt after the nuclear deal. Initiating policy changes for the insurance sector may not be that simple because changes in the law (as well as Parliamentary approval for the amendments) are required.

Two other proposals for financial sector reforms – namely, allowing the central government’s equity holding in public sector banks to come down below 50 per cent and removing the cap on the voting rights of foreign investors in Indian banks that is currently at 10 per cent irrespective of the size of their shareholding – may not also come through. Interestingly, the left lobby in the Congress claims it has received tacit support on these issues from none other than K.V. Kamath, managing director and chief executive officer, ICICI Bank, India’s largest private sector bank, who is also the current president of the Confederation of Indian Industry (CII), one of the country’s most influential business associations.

Kamath had recently remarked that the Indian banking sector is at present one of the most dynamic and open sectors of its kind anywhere in the world, including in developed countries. His remarks are being interpreted to mean that more banking sector reforms are not immediately required in the country, especially in the context of the ongoing economic crisis in the US that started in the housing loans segment and thereafter spread to the entire financial sector. The Congress socialists argue that when there is talk of the need for greater regulation in the bastion of free market capitalism, we in India should not be thinking of de-regulation and further liberalisation of the financial sector.

N.K. Singh, member of the Rajya Sabha and former Member, Planning Commission, writing in the Indian Express (July 25), pointed out that the bill to reduce government equity in nationalised banks to 33 per cent by the NDA government had been “given a quiet burial since there was no consensus within the Congress party” and that the decision to cap foreign equity in insurance companies at 26 per cent was “at the insistence of the Congress”.

The other contentious issue is divestment of shares of public sector undertakings. The UPA government’s new ally, the Samajwadi Party, is clearly not in favour of divestment. The SP’s general secretary Amar Singh has said so categorically in his interview to CURRENT (August 15). If the government goes in for divestment at this juncture, its political opponents are certainly to point out that ‘family silver’ is being sold cheaply at a time when stock markets are depressed and volatile. Moreover, there would be resistance to divestment of PSU equity from within the UPA itself — the DMK was particularly strident in opposing the divestment of government holdings in Neyveli Lignite Corporation two years ago.

On July 31, speaking at a book release function, Chidambaram said: “I have no doubt in my mind that the leadership of parties will assert itself. And we will take the legislative agenda forward in areas where we agree.”

Certain policy changes that did not entail legislative amendments have been rushed through. A week after the government won the confidence vote on July 29, the board of trustees of the Employees Provident Fund Organization inducted HSBC, ICICI Prudential and Reliance Capital as asset managers to break the monopoly of the government-owned State Bank of India. The objections to the move from representatives of Left trade unions on the board were over-ruled.

Both the CPI-M and the BJP were upset with the government and alleged that Reliance Capital had been included at a ‘late stage’ to ‘favour’ Anil Ambani, whose proximity to Amar Singh is hardly a secret. Minister for Labour and Employment Oscar Fernandes and Congress spokesperson Abhishek Manu Singhvi both denied the allegation, arguing that the decision to induct private asset managers for the EPFO had been under the EPFO’s consideration for years.

Despite this important decision, the government may not be able to move further in liberalising the working of the financial sector, in particular, creating a new regulator for pension funds to break the monopoly of the EPFO and allowing pension funds to be invested in stock markets. These moves are likely to be opposed by the Indian National Trade Union Congress (INTUC), the labour union affiliate of the Congress party.

The PM and the FM would also not be able to make major economic policy changes such as allowing FDI in multi-brand retail outlets, increasing the involvement of the private sector in mining, including coal mining and changing labour laws, in particular, the Industrial Disputes Act that is opposed by all trade unions including the INTUC.

Amending labour laws requires consensus across ideological lines which is lacking in the country at present. It will be recalled that when Yashwant Sinha, then finance minister in the BJP-led NDA government, suggested in his February 2001 budget speech that the Act be applicable only to industrial establishments employing up to 1,000 workers (against 100 at present), a huge controversy was created in the Sangh Parivar. In response, the leader of the BJP’s own trade union wing, the Bharatiya Mazdoor Sangh, the late Dattopant Thengadi, publicly called Sinha an anarth mantri (literally, a minister who is useless) instead of an arth mantri (or finance minister).

Enacting the Regulation of Foreign University Entry and Operation (Maintenance of Quality and Prevention of Commercialization) Bill could also prove difficult although HRD Minister Arjun Singh is said to favour the proposed legislation. It seems unlikely that Parliament will be able to function normally in the highly charged political atmosphere prevailing at present.

Even as the government harps on its populist initiatives such as the farm loan waiver scheme and the employment guarantee programme in the run-up to the elections, other economic policy changes will have to wait for the time being.