Why doesnt the UPA strategise

Updated: Nov 24 2005, 05:30am hrs
In the 18 months since the Congress-led United Progressive Alliance (UPA) came to power at the Centre, there has been little semblance of a concrete strategy to push India strongly on the reform path. The Cabinet is studded with economic ratnas, starting right from Prime Minister Manmohan Singh to finance minister P Chidambaram and deputy chairman Planning Commission Montek Singh Ahluwalia. But, unfortunately, many moves of the government appear ad hoc, with almost all of them attempting to first gauge the Left parties reaction. And in more than one instance, despite the UPA-Left coordination committee meetings, the impression one gets is of elaborate discussions followed by a confused outcome.

In informal chats, management pundits, corporate honchos and seasoned political managers give the impression that the current government is not pushing reforms hard enough. For a minute, lets give the government the benefit of doubt. The governments intention could well be to introduce big-ticket and comprehensive reforms in many areas. But, what should be its response if it is hamstrung by, say for one, Leftist ideology The Left, after all, is very crucial for this government to stay in power. Given that decisions cannot be taken without the Left on board, why push for comprehensive reforms Why not do it in a piecemeal fashion Examples will follow.

Randomly, if one studies the abortive attempts by the government to be liberal on sticky issues like disinvestment, interest rate on employee provident fund and financial sector reforms or FDI/ FII policy, it appears there is very little of strategising and more of adhocism. The intent may be genuine, but the gambit is far too bold to pass Left muster. On the contrary, utopian demands of the Left like employment guarantee and electrification for allrequiring unlimited resourceshave found their space in the policy books.

Let us consider the examples, one at a time.

Many reform measures initiated by the government appear ad hoc
Reforms can be piecemeal and not necessarily comprehensive
Left-UPA meetings are elaborate but result in confused outcomes
In his very first Budget, Chidambaram announced a proposal to hike FDI in insurance to 49% from the 26% now. Its yet to fructify. His ministry plans to undertake a comprehensive overhaul of the Insurance Act. The Left, obviously, is up in arms. So, the next best option should be to push for incremental reforms in the sector. Why not halve the paid-up capital requirement for health insurers from Rs 100 crore now, or even allow higher FDI just in health insurance Given the negligible penetration of health insurance in India, it makes immense sense for the government to push for piecemeal amendments to the Act, than attempt a complete overhaul.

The government wanted to cut the EPF interest rate to 8.5% from 9.5% for the last fiscal and also for 2005-06. The Left had its way and has forced the 9.5% rate for the last two years. Now, it wants the rate to prevail even for the current fiscal. For this, the trade unions have demanded that the interest rate on the special deposit scheme (where close to three-fourths of the EPF corpus is invested) be increased from 8%. What the government could have done right in the beginning was to start converting the special deposit scheme into dated government securities, which would yield it market-linked returns.

The government is also yet to make up its mind on the FDI/ FII policy, which is far too complicated now. We have composite foreign investment limits in many sectors, specific FDI limits in some, and restricted FII ceilings in others. Ironically, it was Manmohan Singh as finance minister in 1991-92 who said FII investments should be distinct from FDI. Chidambaram said in London a year ago that FII and FDI must be treated differently. Unfortunately, a similar recommendation by the Ashok Lahiri committee is not finding favour now. In the retail sector, which the government wants to open up to FDI, up to 20% FII holding is already allowed. If the government opts for a composite foreign investment regime, which is the case in many sectors including civil aviation and telecom anyway, the policy should be so drafted that instead of allowing 20% holding by FIIs in retail companies, both FDI and FII are allowed upto 20%.

Even in disinvestment, instead of zeroing in on Bhel, it would have helped the reform cause had the government started with non-navratna profit-making PSUs. By planning to offload a part of its equity, the government only played into the Lefts hands. And naturally, disinvestment had to be put on the backburner, with the Left boycotting the coordination committee meetings for almost five months.