Chidambaram's race to reform Indian economy runs into political hurdles

Two long-stalled reforms are to lift FDI cap in insurance and to simplify land acquisition for factories.

An Indian Parliament deadlocked yet again over corruption scandals threatens Finance Minister P Chidambaram's ambitious reform agenda, dealing a harsh dose of political reality on the heels of his North American roadshow to sell the India story.

Two long-stalled reforms - one to lift the foreign ownership cap in insurance to 49 per cent from 26 per cent and another that would simplify land acquisition for factories - were due to be introduced in the legislature during the past week ended up being side-tracked by the political ruckus.

With opposition parties disrupting parliamentary proceedings, questioning investigations into multi-billion-dollar scandals related to allocations of telecoms airwaves and coal mines, there is no guarantee the bills will be passed during this parliamentary session, which ends on May 10.

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Chidambaram promised investors during his roadshow in Boston, New York, Ottawa and Toronto to get the bills on insurance and land reform passed in the current session, hoping their passage will boost investment from eight-year low growth and help spark an economy growing at its slowest in a decade.

"If we can pass the land bill, if we can pass the insurance bill and if we can pass the Goods and Services Tax bill, that will be an accomplishment of this parliament," Chidambaram said last week, appealing for bipartisanship on economic issues.

Chidambaram is increasingly spoken of as a future prime minister if the Congress party retains power, although he denies any such ambition.

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While the main opposition Bharatiya Janata Party (BJP) has agreed in principle on land reform, it has refused to back the insurance bill, and with national elections due by May 2014, it is not in a mood to compromise.

"Chidambaram is misleading. The government is in its last days of office. They cannot bring the economy back to health," BJP spokesman Prakash Javadekar told Reuters.

New Delhi's poor record of delivering on promises, coupled with myriad regulatory hurdles - including high-profile tax battles with foreign companies such as Vodafone and Royal Dutch Shell - has driven investors away.

Foreign direct investment into the country fell 38 per cent in the 11 months through February. The Center for Monitoring Indian Economy, a think tank, reckons new capital investment announcements in the March quarter dropped 75 per cent from the same period last year.

Meanwhile, Indian companies are looking for greener pastures. A government body expects outbound corporate investment to rise about 45 per cent in the fiscal year that started this month.

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Don't write me off

Chidambaram warns sceptics against underestimating his ability to deliver, pointing to his success in reining in a bloated fiscal deficit and carrying out fuel, retail and aviation industry reforms.

No one had thought fractious coalition politics would let him drive through those reforms, but the benefits are already evident.

Abu Dhabi-based Etihad Airways last week made a $379 million investment in India's Jet Airways, a deal that was made possible by the rule change and was helped along by the government. Swedish retail chain Hennes & Mauritz said it will spend about $130 million to open an initial 50 stores in India.

The cabinet committee on investment, which Chidambaram had pushed to speed clearances for big infrastructure projects, has approved $27 billion worth since January.

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His success in controlling the fiscal deficit has also pulled the country back from the brink of a ratings downgrade.

Luck also seems to be favouring Chidambaram, with India getting a boost from the correction in global oil and gold prices, easing its import bill and current account deficit.

But with the election fast approaching, the din in parliament is getting shriller by the day, making it difficult to carry out meaningful legislative business. Even colleagues within Prime Minister Manmohan Singh's cabinet oppose some of the reforms Chidambaram wants to make.

His plan to set up a coal regulator to decide the allocation of coal mines and pricing of the fuel has run into trouble as the coal ministry is not willing to cede its power.

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Providing fuel supply linkages to utilities has become a victim of a feud between the coal and power ministries. Plans to free up prices of oil and gas drilled locally have been put on the back-burner following a disagreement among ministries.

Similar opposition from his cabinet colleagues forced the finance minister to boost public spending for welfare programmes in this year's budget and accept a watered-down version of a plan to fast-track major infrastructure projects.

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Chidambaram, who has also courted investors on visits to Asia and Europe, is planning to take his roadshows to Australia and Qatar next month.

A failure to honour his commitments could not only dent hopes for India's economic revival ahead of next year's election, but could also take the shine off the Harvard-trained Chidambaram's reputation as an investor-friendly "doer".

"The issue is that the roadshows have to be followed by actions," said Sandeep Aneja, managing director at Kaizen Private Equity. "Unless we show consistent reforms, we will not see significant investment coming in."