Govt Goes For Broke; Continues Big Bang Reforms

04 Oct,2012 14:12 IST

Govt Goes For Broke; Continues Big Bang Reforms

Government clears pension, insurance FDI; passes Cos' Bill and FCRA Bill. But may falter at Parliament

BW Online Bureau


In a last desperate push for reforms, the Union Cabinet approved bills for foreign investment in insurance and pensions on October 4 as Prime Minister Manmohan Singh sought to restore confidence in the flagging economy. The Cabinet also approved the Companies Bill 2011 as well as the Forward Contract Regulation Amendment Bill allowing options.
As per former ally TMC's earlier request, the Haldia Petrochemical project was also scrapped by the government, a step unlikely to win much brownie point with the estranged ally.

Addressing the media after the Cabinet meeting, finance minister P Chidambaram also announced the construction of five new airports. The Cabinet also approved draft of the 12th five year plan and the scheme to extend subsidised pulses and edible oil to BPL card-holders.
But the reforms are expected to face a tough fight in Parliament with erstwhile ally Trinamool Congress threatening to push a no-confidence motion in Parliament against the UPA government and most major parties opposing the Cabinet clearances.
Under the Bills cleared by the Cabinet, the cap on foreign money in insurance companies would rise to 49 per cent subject to Parliament approval. Addressing the media after the Cabinet meeting, Finance Minister P Chidambaram said that the cap on FDI in pension will follow that of insurance and if 49 per cent FDI is allowed in insurance by Parliament, it will be the same in pension as well.
The pension and insurance Bills have been proposed for nearly a decade. Unlike last month's measures, they need to be approved by Parliament, where the coalition government is in a minority after its largest partner pulled out in anger at last month's reforms.
The Cabinet also signed off on a shareholder-friendly bill to make corporate management more accountable, which would overturn a half-century old law.
Union Cabinet met to discuss raising the FDI cap in insurance sector to 49 per cent and opening the pension sector to foreign investment besides creation of a National Investment Board.  The Cabinet also considered a number of other crucial measures like giving more powers to commodity market regulator FMC, Competition Bill to bring all sectors under Companies Act, and model tripartite agreement for operationalising the Infrastructure Development Fund (IDF), sources said.

This is the second time within a month that the Cabinet considered such major proposals to push reform initiative. On the eve of the cabinet meet, RBI said on October 3 that the government must tackle growing subsidy burden to contain fiscal deficit, highlighting the tension among the country's policymakers amidst fears of a downgrade.

The markets were in an expectant mood throughout the day with the Sensex crossing the 19,000-mark to a 15 -month high and the Nifty jumping to a 17-month high on expectations of further reforms. (Read: Markets On A High)
Hard To Push Through
Good intentions apart, it is going to be next to impossible for the government to get Parliament to approve the pension and insurance FDI moves. With Mamata Banerjee giving a call for ousting UPA government and BJP as well as Left parties opposing the moves, the government seems to be skating on thin ice.

BJP had appeared more malleable as BJP spokesperson Prakash Javadekar said "“We have told the government that if you address our concerns then we will back your decisions on pension and insurance.” The BJP had earlier indicated that it may back the reform if the government fixes the limit on FDI in its legislation. This ensures that in future, if there is a move to increase the cap on FDI, Parliament's approval is necessary. However, in the existing political climate, BJP is unlikely to be malleable and more likely to go with the tide and oppose the move.

Once the amendments to the current guidelines are brought to Parliament, the government will have to depend on the external support of Samajwadi Party's Mulayam Singh Yadav who has 22 Lok Sabha MPs and could help the government pass the Bill. In the Rajya Sabha, however, the government is in a minority, and it could trip there.

Insurance reform is widely seen as crucial because the sector needs a capital infusion of over Rs 62,000 crore or $12 billion over the next five years. Domestic and foreign insurers, who have invested much money in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 per cent from 26 per cent.  Along with raising the FDI limit, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market. Reinsurance is the insurance that is purchased by an insurance company to insure the assets that it is covering.
While pension and insurance decisions were in focus, the Cabinet on October 4 also discussed a range of legislation including the Companies Bill, giving statutory powers to the interim pension regulator and giving the forwards market regulator more power.
Parekh Panel For Big-ticket Reforms
A high-level committee on financing of infrastructure, headed by HDFC Chairman Deepak Parekh on October 3, meanwhile  suggested big-ticket reforms to attract investment in the infrastructure sector and recommended increasing electricity charges and rail fares.
The Parekh committee also pitched for 100 per cent foreign direct investment (FDI) in the telecom sector. The limit at present is 74 per cent. The panel also suggested raising prices of natural gas.
Fiscal Precipice
Last week a government panel, led by former finance secretary Vijay Kelkar, warned of a "fiscal precipice" if the government does not urgently slash fuel, food and fertilizer subsidies to curb a deficit that could hit 6.1 percent of gross domestic product this fiscal year.
The first set of reforms announced last month have boosted the rupee, which partly recovered from a sharp drop in value this year, but the RBI says more action is needed to save the budget and reduce inflation.
"The diesel price hike barely scratched the surface. The more important signal will be to act on the Kelkar committee recommendations and have a fiscal roadmap," A Prasanna, chief economist at ICICI Securities Primary Dealership told a news agency.

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