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June 17, 2009

Same (leftist) baggage in a new package?

In a recent Business Standard column, former Chief Economic Adviser Shankar Acharya has expressed unease - from the perspective of the economy - at the way the new UPA government has started off. Given the kind of expectation for reform the stock markets have built up from the new government, it might be well worth watching out for the signals that Acharya points to in the Union Budget.
Economic reforms were not a serious campaign platform for the Congress or UPA...The crucial finance portfolio went to Pranab Mukherjee, undoubtedly the most experienced cabinet minister in the current firmament (he first held a cabinet portfolio thirty years ago), but not renowned for a stellar track record in economic reforms...Does this mean we will have another five years of near stasis on economic reforms?

...With exports falling and public investment sluggish, a failure to revive private investment would make it very difficult to attain the implicit growth requirements outlined above. My suggested minimum reform package (calibrated then for a much more “unwieldy coalition” than the one delivered by the electorate) comprised the following elements: holding the centre’s fiscal deficit to Mukherjee’s Interim Budget target of 5.5 per cent of GDP (implying a combined, centre plus states, deficit of 9 per cent of GDP); implementing the UPA’s commitment to usher in an integrated Goods and Services Tax (GST) by April 2010; an early shift to market-based pricing of petrol and diesel; and a legal amendment to reduce the minimum government share in public banks to 33 per cent, so that they can raise capital in the market and thus expand their services to under-served areas and communities. For the medium term, I had suggested a strong focus on reform of education and urban development, especially infrastructure and municipal finance.

...I would certainly look for all these elements as a “minimum package” in Mukherjee’s full budget slated for July. If several of these are absent, then the prospects for a successful stimulus to private investment would be correspondingly dim. Indeed, with a relatively strong electoral mandate for the Congress and UPA and the absence of vetoes by the Left, we should expect a substantially stronger reform stimulus from the forthcoming budget. Fairly obvious additional items would include: raising of the foreign investment limit in the insurance sector from 26 to 49 percent; a liberalisation of foreign investment in retail trade; a fresh bill for denationalisation of the coal industry and resumption of the disinvestment programme.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at