The stock market has zoomed 20% hoping that the Congress victory will usher in radical economic reforms that were earlier thwarted by the Left Front. This is a serious error. The Congress sees its victory as a vote for continuity, not radical change. Having won despite a global recession, its policy will surely be more of the same.
To be sure there will be some economic reforms, too. But these will be modest, not game-changing, like the reforms of the early 1990s. The main thrust of policy will be to strengthen existing approaches — rural development, employment generation, infrastructure, and skill development.
The Congress is by instinct a left-of-centre party. Foreign investors may think of the Congress as the party that ushered in market-friendly reforms in the early 1990s, but was an exceptional phase after a balance of payments crisis. The collapse of the Soviet Union and success of Deng in China helped change the old socialist mindset, but only grudgingly and gradually. When in 2004 the Left Front made support for Congress conditional on emphasizing rural development, social spending and poverty, Congress agreed out of conviction no less than compulsion.
The Common Minimum Programme promised huge increases in spending on education, health, employment guarantees and rural development. Congress went well beyond this with its own Bharat Nirman programme. It will now build on the Common Minimum Programme even without the Left Front.
Its election pledge of 25 kilos of grain at Rs 3/kilo for poor families will be a prominent part of its new agenda. Its manifesto promised affirmative action for scheduled castes and tribes in the private sector. Thankfully, this stops short of job reservation that Mayawati and Co demanded. But some additional obligations will probably be imposed on the private sector, hopefully obligations the private sector itself welcomes — training and skill development programmes for historically handicapped sections.
Montek Singh Ahluwalia’s vision for the next five year plan emphasized infrastructure and skill development. So, too, will the new government agenda. Hopefully, ministries like telecom and roads will no longer be entrusted to ministers of dubious reputation. Human Resources Development has an added importance today because of the need for skill development.
The Left Front vetoed legislation on a few issues. One was fuller pensions reform via the PFRDA bill. Legislation to permit private sector entry into coal mining has been hanging fire for over a decade, so the Left alone can be blamed for this delay. The Left Front stymied the bill allowing foreign investment in insurance to rise from 26% to 49%, as well as entry for branches of foreign re-insurers and Lloyds of London. Another stalled bill would have abolished the 10% cap on voting rights of foreigners in banks even when they have a larger shareholding. Bills for disinvestments in sick units like the Tyre Corporation and NEPA were stalled. Even if all these bills now go through, they will amount to just marginal reform.
More reform can come from executive action. The government is expected to relax price controls on petroleum products, enabling oil companies to change the price of diesel and petrol in line with global prices, but this flexibility will probably be limited. Massive underpricing of kerosene and cooking gas will continue. FDI in retail may be gradually liberalized. Foreign airlines will finally be allowed to invest directly in Indian counterparts, ending the crazy rule that only foreigners who have nothing to do with airlines can invest in the Indian airline business. The sale of minority stakes in some public sector units will begin again. Foreign investment may be allowed in managing pension funds.
All this put together adds up to no more than modest reform. The government has no intention of reforming labour laws to permit easy retrenchment. Nor is it keen to liberalise operating norms for foreign banks. Many of the reforms mentioned in the last two paras could have been implemented after Congress and Left Front parted company in August 2008, but Congress desisted because of the low priority it accords to such reforms. It was and is much keener on populist moves like loan waivers, subsidized grain for consumers, and higher support prices for farmers.
The global economic picture has brightened recently. Indian companies have dramatically improved access to global finance, and have raised $2 billion in the last few days. Almost $5 billion of global money has flowed into stock markets this year, reversing last year’s outflow. While the Congress agenda may be mainly one of continuity, it will not contain the nasty surprises that would have come with an unstable, populist Third Front government. So, there are indeed reasons for cautious optimism on the economic front. But radical economic reform is not one of them.