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So Coy At The Altar

The spirit is willing for reform but the foot isn’t off the brakes

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So Coy At The Altar
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UPA-II’s Reforms Scorecard

Key PromisesReality Check
New deadline for GST is April 2011“Active engagement” on, but states yet to agree
Disinvestment target to raise Rs 40,000 crorePoor retail response to stake sales a concern
Direct Tax Code to be implemented in April 2011Clear signal that it is on schedule to meet deadline
Nutrient fertiliser subsidy policy comes into playDirect transfer of subsidy to farmers also signalled
Petrol/diesel pricing reforms “in due course”Fuel hike protests have stalled the reform
Allow the private sector to get more banking licencesThere may be restrictions on entry into rural markets
Setting up a financial super-regulatorStructure not clear, concerns on autonomy
Veiled reference to benefits of retail tradeOpposition within UPA has put FDI in retail on hold
New coal sector regulator, mines will be auctionedAccountability, land rehabilitation issues remain

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‘Baby steps’, ‘small-bang’, ‘alternative’, ‘consolidating’. The first post-election budget from Union finance minister Pranab Mukherjee was immediately marked out as an appetite-suppressant for an industry waiting for big-bang reforms. Not that the social sector is happy either, but Pranab’s message is loud and clear—sweeping gestures, whether for business or the aam aadmi, have taken the backseat. As the government shies away from large announcements, the focus has shifted to fiscal consolidation.

Luckily for Pranab, even the disappointment isn’t overt. In fact, there is much relief things aren’t worse. Beginning with the global financial crisis in late 2008 and ending with part-withdrawal of the ‘stimulus package’ in budget 2010, vocal advocates of India-must-open-up-or-perish have learned not to be so open. Why, even the new three-year roadmap to reduce fiscal deficit is being feted as an instance of ‘reform’.

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There is good reason behind this upbeat sentiment. “In July (2009), when the UPA returned with a bigger political mandate, expectations were higher for reforms. Those did not happen. So this time, expectations for pronounced reforms were lower. The expectations were also less because of high inflation and deficit,” says Ajit Ranade, chief economist, Aditya Birla Group. With a spiralling deficit as the backdrop to a gradual rise in growth, whatever Pranab announced came as a pleasant surprise for analysts and industry.

While the budget is now clearly positioned as a “vision” statement, it also highlights a selective approach to the reform strategy. Some measures are built into the budget, such as the move towards the direct tax code, or the assurance that efforts will be made to migrate to the goods & services tax (GST) by April 2011. For others, details are not mentioned specifically in the speech, though the reform is on full pelt; for instance, the Rs 35,000 crore expected from 3G auctions wasn’t in the speech.

In the fertiliser sector, the signal is that subsidies will go directly to farmers over time—a definite reform, many say—while in the budget’s fine print, the assumption is there will be far lower spending on major subsidies such as petroleum, edible oil, fertilisers and food during the next financial year.

Indeed, many of Pranab’s announcements, such as a new super-regulator for the financial sector, and structural reforms in coal mining, underpin a longer-term vision. Ditto for the changes in banking: private sector and non-banking finance companies (NBFCs) would now be considered for full banking licences. This step is being welcomed, albeit cautiously.

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“Typically the banking regulator (RBI) has been cautious in its approach related to licences,” says Ashvin Parekh of Ernst & Young. The caution stems from the “highly leveraged” bank balance-sheets. “Risks to the corporate owner of a bank can be detrimental to the risks associated with the bank,” Parkeh explains. If they get under way, Pranab’s moves on banking could spell an immediate boom for financial service providers.

The trouble with the budget’s reform agenda, however, is that many see it as “unorthodox”. According to a former bank chairman, the reference to expanding licences in banking “has no relevance to the financial statement of the country and it infringes on RBI territory”. He says India still needs to answer if it needs “more banks for geographical expansion or more branches”. Abheek Barua, chief economist, HDFC Bank, also acknowledges that this approach is new. “The finance minister has presented an alternative blueprint to open the sector as we have seen stagnation in this sector,” he says.

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Of course, it can be safely expected that reforms in ‘sensitive’ sectors such as insurance will not make it to the budget. Why, the UPA is finding it tough to clear a bill pending in Parliament to raise the limit for foreign investment in insurance firms from 26 to 49 per cent. But chipping away at “tough” reforms ultimately reaps rewards. Look at disinvestments, which presented similar difficulties to the UPA when it came to power in 2004, and even had to be put on hold for a while.

Even after strategic sales have been ruled out, the overwhelming sentiment is optimistic. Not only is the target huge; around 60 public sector companies are scheduled to hit the board over the next few years. “Even in the best of times, the government got into hot water with strategic sales. Now, it is just setting the momentum by small steps and will announce the actual things in due course,” says Ranade.

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Pranab himself acknowledges in an interview (see page 26) that significant reform is hard to push because of political opposition. This is particularly true of liberalising FDI in retail. The finance minister clearly supports the PM’s view that opening up retail will help reduce prices, but stopped short of announcing actual relaxation. Perhaps with elections in states slated for next year, the government “does not want to take too many steps at the same time,” says Ranade. But more likely, it just keeps retail reforms in the picture.

With ambitious targets for non-tax receipts (3G auctions, divestment) and lower expenditure forecasts (cuts in subsidy, gradual increases in social sector expenditure), economists hope the government will collect higher revenues for later years. But there are some roadblocks: high revenue expectations and political considerations. “Political viewpoints should reconcile to the idea that revenues are largely used for specific purposes. Revenue expectations should be balanced by the need for efficient infrastructure for development,” says Shashanka Bhide, a senior economist with ncaer, an economics think-tank. Besides, no one is sure if many of the ongoing reforms, such as those on the taxes front, will actually pull through. “There is a lot of intent. Direct tax code and GST are significant measures but I am still not sure if we can implement GST by April 1, 2011. The finance minister has made a commitment. Whether he can honour it is a different issue,” says Barua.

There is similar speculation on other fronts: that the new bank licences may restrict new players to rural areas and no-frills accounts. Or the new financial stability council will jeopardise other regulators’ functions. There is lack of clarity on social schemes too. A National Social Security Fund for unorganised workers worth Rs 1,000 crore has been announced, but its purpose is not clear. Also unclear is whether subsidies for unorganised workers applying to the New Pension Scheme will kickstart pension reforms. “It’s a back-breaking task getting people to understand NPS, and to part with their money not just for one year but for each year for 30 years,” warns Gautam Bhardwaj, director, Invest India Economic Foundation.

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Then there’s the issue of small reforms announced outside the budget. The Economic Survey strongly pitches for a coupons system to deliver subsidised grain and that ‘ward inspectors’ for income tax will be done away with—both reform measures that don’t find mention in the budget. In the end, many may notice the missed opportunities, but, perhaps, the finance minister has a roadmap in mind.

By Pragya Singh, Arindam Mukherjee, Arti Sharma

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