In Indian Election Results, Market Sees Mandate for Further Economic Reforms
Thursday, May 21, 2009
NEW DELHI, May 20 -- Two days after India's Congress party was returned to power with a strengthened mandate, the country's sagging stock market experienced a record surge Monday amid such euphoria that trading had to be suspended.
The joy in the market, which has barely abated since, was due not just to the surprise verdict, which defied exit-poll predictions of a period of fractious coalition-building. Business leaders and investors were also celebrating the fact that the new government would no longer have to lean on India's communist parties for support and would be able to try again to launch far-reaching economic reforms that they had opposed.
"We now have the mandate for a renewed push for economic reforms," said Kamal Nath, a senior leader of the Congress party who served as commerce minister in the previous government. "We have to open up more and take some hard steps to spur the economy because of the global recession."
In 1991, after more than four decades of following a planned, socialist economic model, India began to cautiously restructure, embracing free-market reforms aimed at attracting foreign investment. That first stage, popularly known as the dismantling of the License Raj, and India's subsequent emergence as a global technology hub generated a boom slowed only by the ongoing financial crisis.
"The new government is likely to introduce the second stage of reforms in the financial sector, retail and land and labor laws. We can take these tough measures now," Nath said in an interview Wednesday.
For the first time since 1996, India will have a coalition government that is not fragile and unwieldy and that has a relatively strong center. The outgoing coalition government, led by the Congress party's Manmohan Singh, 76, was sustained by a handful of communist parties that eventually withdrew support over a controversial civilian nuclear agreement concluded last year between India and the United States. Singh's new government is scheduled to be sworn in Friday.
During Singh's previous term as prime minister, the mild-mannered, Oxford-educated economist's plans for further reforms were stalled by the communists' bitter opposition to several economic measures, including proposals to privatize pension funds and encourage foreign investment in retail and insurance firms. Before the financial meltdown unfolded last year, many U.S. companies had lobbied for passage of some of those bills.
In the month-long national elections, Congress and its allies won 261 of the 543 lower house parliamentary seats. The party won 206 seats on its own, its highest tally in 18 years. The communists, however, saw their representation drop from 59 lawmakers to 24.
"Manmohan Singh will no longer be troubled by the pulls and pressures of smaller parties. The communists are out," said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry. "The new government will have no excuse anymore. It has to go for the big-ticket reforms that will bring our annual economic growth back to 9 percent and bring long-term foreign money into India."
"We urgently need this money for our large infrastructure projects," added Mitra, who has prepared a wish list for the new government's first 100 days. "The easy, low-hanging fruits are the banking, pension-funds and insurance-reform bills that the communists held back for years."
Despite the weakening of the communists, Singh's party could still find it difficult to pass the new measures. Many Indians, for example, continue to prefer government management of their savings and pension funds even if that means lower returns.
When the economic crisis surfaced last fall, almost every communist lawmaker said to Singh, "We told you so."
"In the last government, we played a very important role in safeguarding social security measures and arresting the erosion of government regulation in the financial sector," D. Raja, a senior leader of the Communist Party of India, said in an interview Wednesday. "That saved us when the global economy came crashing down. If the government goes forward with these bills now, people will not be happy."
Singh faces another challenge, as well. One of his new coalition allies is the All India Trinamool Congress, a party from the state of West Bengal with a reputation for being anti-business. Last year, its leaders battled on behalf of farmers against the company that manufactures the Nano, the world's cheapest new car. The factory was forced to shut down and move out of the state.
Analysts agree, however, that India desperately needs the political will to decentralize its slothful, flabby bureaucracy and restructure some of its archaic laws.
"There is a dire need for police, judicial, tax and other administrative reforms that do not make attention-grabbing headlines," said Pratap Bhanu Mehta, president of the New Delhi-based Center for Policy Research. "This is the right time for it, because the new government's energy will not be distracted in managing difficult coalition partners."