The Congress is counting on issue-based support from the BJP to push through significant financial sector reforms. Not without reason. The liberalisation of insurance and pensions was initiated by the BJP when in office and it has indicated approval for the broad direction in which the Congress is moving. With Mamata Banerjee walking out of the UPA, the ideological opposition to higher foreign investment in these sectors has dissipated. It is logical now for the Congress to seek support from the principal opposition party. If the bills get through Parliament, India will be displaying a rare bipartisanship on a critical area holding back its development.
But it’s not a cinch. The BJP had managed to extract two concessions from the draft pensions bill that was put up for parliamentary scrutiny a year ago. One, an explicit cap on the foreign holdings in pension funds at 26%. Two, fund managers will be required to offer at least one assured-return scheme among their bouquet of products. Now with the Cabinet proposing a foreign investment ceiling benchmarked to the 49% of the insurance sector, the Congress will have to negotiate hard. Assured pension benefits work so long as more people are joining the labour pool than are leaving it and India will eventually have to make the transition to a defined contribution system with a regulator in place. This must be done before slowing population growth increases the costs of switching over. The bill to raise the FDI cap in private insurance companies to 49% from the current 26%, too, will have to be resold to the BJP. The case that India needs a big injection of foreign capital if it wants to insure its entire population will have to contest fears that higher foreign holdings increase the scope for capital flight, particularly after an epidemic of sickness among international insurers.
The second burst of reforms announced since September contains a bagful of less contentious policies that should help revive investor sentiment, a stated objective of both Prime Minister Manmohan Singh and finance minister P Chidambaram. Increased boardroom oversight, tighter scrutiny of company acquisitions, a dedicated fund for financing infrastructure, a watchdog for commodity trading and online tracking of cheap rations should all work towards toning up the economy. The stock markets have reacted positively to the government’s policy intent, it will now await the execution. The government cannot afford to lose the initiative again. Most of the policy changes have been works in progress for far too long. The dealmakers must now roll up their sleeves.