India’s reforms go beyond face value
8 Oct 2012 9:31 PM GMT
The battery of reformist decisions taken by the Prime Minister Manmohan Singh 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 13 September 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. [IANS]
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 13 September 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. [IANS]
Next Story
