Economic, Insurance Reforms Possible in India Following Parliament Vote

July 24, 2008

India’s government has regained political momentum after surviving a confidence vote in parliament, but optimistic talk about restarting stalled economic reforms could be overblown, analysts said.

Economists say the government’s top priority will be to bring inflation down before national elections due in 2009, meaning the reforms may take second place on the agenda, and in any case they may need more time than is available to get off the blocks.

Following are reforms which may come up in the next few months.

INFLATION: Government to keep inflation management a top priority and expected to pull out all stops to ensure it comes down to acceptable levels ahead of national elections, from 12 percent at the moment.

INSURANCE: Government may move ahead with proposal to raise foreign equity in insurance to 49 percent from 26 percent, a proposal stalled due to opposition from leftist former allies.

This may need support of the opposition Bharatiya Janata Party (BJP) to ensure safe passage for this legislation as the communists are likely to vote against it.

PENSION REFORMS: May have room to push for this long-pending reform to allow 26 percent foreign equity in pension fund management companies.

The decision to open up sector has been staunchly opposed by the communists. Again, government may need to get BJP lawmakers on side to approve this legislation in parliament, but getting it through is seen as possible.

PRIVATIZATION: May sell stakes in at least 3-4 state firms, which could boost the flagging stock market as it would show reforms have resumed. While market conditions are not easy at the moment, stake sales could bring back foreign investors.

Stake sales may also bring in much-needed cash to fund costly schemes for poor and farmers and bridge part of fiscal deficit. But time will be tight to push sales through ahead of elections.

BANKING REFORMS: Progress seen in legislation to allow foreign banks voting rights equal to the stakes they hold in private sector banks. The move has been opposed by the leftists and the government may need to convince the BJP and other groups to ensure approval of this legislation. This reform is possible.

RETAIL: Government could take up opening of retail to foreign players but nothing dramatic can be expected as most parties, including the BJP, would oppose major reform in a sector seen as a voter base for parties such as the BJP.

(Compiled by Surojit Gupta in NEW DELHI; Editing by Charlotte Cooper and Alex Richardson)

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