News: Indian economic reforms show signs of revival

(RTR 29/06/2006) New Delhi - India's decision to sell stakes in two state-run firms could mark a revival in the government's reform agenda as the ruling communist-backed coalition seeks funds for projects to aid the poor.

When the Congress party-led government came to power in 2004, it promised to spend billions of dollars on the poor to secure a parliamentary alliance with communist parties.

But the communists have balked at the coalition's efforts to fund projects for the poor by selling stakes in government firms to private investors for fear of job losses.

Now, some analysts suspect the decision last Thursday to sell 10 percent stakes in two state firms indicated the communists had tacitly accepted sales like these were needed if the projects for the poor were to be funded.

"I think there has been prolonged negotiations with the left. The stake sales have the left's approval although their public position may be different," said Abheek Barua, chief economist with ABN AMRO Bank.

"And I think this is the beginning of a process by which stake sales would be revived otherwise it is difficult to get the money."

The government under Prime Minister Manmohan Singh see reform as vital for the economy because it struggles to attract foreign investment to help sustain strong economic growth and cut poverty. The stake sales, including in India's second-largest aluminium maker National Aluminium Co. Ltd. (NALCO), are expected to net about $543 million.

Proceeds from such sales are supposed to end up in a new national investment fund, and returns from the fund would then be used to finance projects for the poor.

The government is in a hurry to build up a large pool of cash but has not set a target for the year.

HELPING THE MASSES

The government agreed a policy blue-print with the left when it came to power that called for increased spending on health and education, as well as cheap credit for poor farmers and a job guarantee scheme for the rural unemployed.

The deal allowed for the limited privatisation of state firms, and Barua said selling small chunks of both NALCO and Neyveli Lignite Corp. was probably the result of horse-trading centred on that original programme.

He said the coalition has probably agreed to meet leftist demands not to sell stakes in profit-making state firms nor to sell strategic stakes, in exchange for being able to sell small stakes in other state firms.

"We make social-sector spending, stay off the crown jewels, stay off the profit-making firms, no strategic sales in state firms but sales of reasonably small percentages would continue -- that's the way I read it," he said.

The shift in the left's stance may have resulted from election wins by the communists in stronghold states in May, political commentator Mahesh Rangarajan said.

That has eased pressure on leftist parties from supporters keen to see Congress regularly challenged on the pro-poor agenda, he said.

"They will of course continue to organise protests to address their cadres, but it will be more of posturing," Rangarajan said.

Rangarajan said the privatisation of smaller airports and ports would soon be on the agenda.

"Once these two sales go through there will be more reforms. Whatever reforms they can get through executive decisions, they will do it," he said.

The government earlier this year forced through a plan to modernise the country's two largest airports in the capital, New Delhi, and the main financial hub, Mumbai, using private capital.

But the move triggered protests from the left and a four-day strike by airport workers.

INSURANCE, PENSIONS, RETAIL

Analysts say that once the two stake sales go through, the coalition will look to test the waters in other areas of its reform agenda.

This includes raising the threshold for foreign ownership of insurance firms to 49 percent from 26 percent; allowing overseas investors to own 26 percent in pension fund management firms; and opening up the tightly-controlled retail sector.

But some analysts had doubts that last week's decision to sell the stakes marked a significant leap forward for economic reform.

"I think that's just the bare minimum. Maybe there is some life there. I don't think it's going to be any strong life," said Rajeev Malik, an economist with JP Morgan Chase in Singapore.

"At best I would say it is marginally positive. The issue is whether or not they can sustain it."

The government plans to spend about $15 billion on the poor in the fiscal year to March 2007 -- including on a job guarantee scheme that offers 100 days of paid work each year to hard-off families in selected areas -- and is averse to raising money from financial markets or imposing a greater tax burden.

T.K. Bhaumik, chief economist at conglomerate Reliance Industries, said the stake sales would help the government raise vital resources, but they also raised another issue.

"The broader question is why should the government be in the business of making steel and aluminium?" he said.