India election paves way for economic reform
MUMBAI: India Inc. breathed a huge sigh of relief after the ruling Congress Party won one of the most definitive electoral victories in nearly two decades of fractious coalition politics.
Congress' victory - and the near-collapse of India's once-powerful communist parties - means key reforms in insurance, pension funds, banking and retail are now likely to get enacted.
But that doesn't translate into a mandate for sweeping pro-market liberalization, analysts say.
The global financial crisis has tempered India's appetite for deeper foreign investment and looser regulation. Moreover, Congress, which oversaw an unprecedented four-year boom, has cast itself as the party of "inclusive growth," a policy approach aimed at helping India's vast underclass while also pushing free-market reforms. It is unlikely to roll back costly social welfare programs that helped the party win the election - but also added to the nation's burgeoning fiscal deficit.
With the Congress-led coalition capturing 261 seats in India's 543-seat Parliament, Congress officials were in talks Sunday to finalize their political alliance - seeking the 11 additional spots needed to nudge them over the halfway mark in Parliament.
The party's strong showing put to rest pre-election fears of an unwieldy coalition.
Nandan Nilekani, co-chairman of Infosys, one of India's largest information technology companies, called the result "very positive for India's economic policy and reform." "This is a very wise signal from the voters that they want a government which is stable," he said in an interview Sunday.
"Any reform in India will be a combination of reform that leads to economic growth and reform that helps create a safety net for poor people. The Congress will try to find the golden mean between economic growth and redistribution," he added.
Jubilation reigned on the pages of India's major business papers Sunday, with predictions of a bright future of rising stock markets, surging foreign investment, rebounding growth and fast-tracked economic reform.
Industry groups and business leaders quickly trotted out lists of hoped-for policy changes, urging the government to make good on its electoral mandate through tax reform and greater investment in technology and infrastructure.
They are likely to get some of what they want, but not all of it.
As Finance Minister in the early 1990s, Manmohan Singh started the country on its path to greater economic openness, shifting away from decades of socialist-style policies.
But over the past five years, many additional market reforms that Congress backed were blocked by the communists, which saw its seats more than halved in the monthlong election.
Now, India will likely open its insurance, retail and banking sectors to greater foreign investment. The nation's pension regulator could also get proper legal standing, which would encourage greater investment. And some steps might be taken to loosen hidebound labor laws, like allowing contract labor.
Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry, a business group, said pension and insurance reform would bring India much-needed long-term investment.
"A huge amount of equity will come in," he said. "This is a very lucrative market relative to other markets in the world today." He said scuttled initiatives to open the defense sector to private investment and give research scientists intellectual property rights could also re-emerge.
The Congress Party, however, is keenly aware that a third of India's 1.1 billion people live in extreme poverty and more than 90 percent work in the informal, unorganized sector.
In his last term, Prime Minister Manmohan Singh oversaw a costly initiative to guarantee employment to the poor in rural India and alleviate farmer debt. But those programs have added to the nation's already onerous fiscal deficit and antagonized factory owners who say workers have grown lazy on government aid.
India's total deficit this fiscal year could hit 11.4 percent of GDP, up from 5.7 percent last year, according to ratings agency Standard & Poor's, which has threatened to downgrade India's country rating to junk.
Some analysts say such social spending could grow.
"Government spending on employment, health and education programs will remain high and in some cases intensified. Moreover, there is a significant segment of the party that is suspicious of sweeping pro-market reforms and as a result economic liberalization will be selective and gradual," Eurasia Group analyst Seema Desai said in a Sunday e-mail.
Indeed, the global financial crisis has already led India to reconsider the timing and nature of some financial market liberalization.
Today, the very policies that industrialists decried as hampering growth during the boom - restrictions on foreign investment, state ownership, and tight regulation - are now praised by many for insulating India from the worst of the global financial meltdown.
"For the last 18 years, there have been certain reforms welcomed by most reasonable people in the system. And there are certain regulatory reforms that have been suspect," said Saumitra Chaudhuri, a member of the Prime Minister's Economic Advisory Council.
Going forward, the government may dilute its ownership in banks, refineries and fertilizer companies but outright privatization is unlikely. Financial market oversight is also unlikely to be loosened, Chaudhuri said.
"There are no buyers for that," he said. "We have been quite cautious." --- Associated Press writers Gavin Rabinowitz in New Delhi and Manik Banerjee in Calcutta contributed to this report.