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India's economy hostage to politics

India's reform-oriented budget may have won parliamentary approval but its economy is unlikely to get the shot-in-the-arm it needs as a slew of critical legislation remains on ice because of a political row.

More than two dozen bills, mostly economic, are in limbo, hostage to an arms bribery scandal which all but paralysed Parliament in the session that ended last week.

Critical among these are bills aimed at containing the union government's expenditure and reining in its stubbornly high fiscal deficit and reforms to the labour and power sectors.

"The arms scandal has changed things and I expect the pace of reforms to be slower than intended in the budget," said D H Pai Panandikar, economist with corporate think-tank RPG Foundation.

The budget, which contains key measures to usher in the so-called second generation of reforms, seeks to simplify labour laws, streamline the tax structure and press ahead with privatisation of state-run firms.

Panandikar said that the scandal has weakened the ability of the Bharatiya Janata Party, which heads the ruling coalition, to resist pressures within and outside the government.

The scandal erupted in March after a secretly-filmed video showed politicians, military officers and bureaucrats apparently accepting money to promote a fictitious arms deal.

Analysts said the first legislative casualty could be a measure allowing easier layoffs. This bill has been a long-standing demand from business, who say current laws, the legacy of decades of socialist thinking, hinder them from exiting ventures which may have become unviable.

Even if the legislation is taken up for discussion, Finance Minister Yashwant Sinha can expect stiff opposition. "We'll oppose the legislation tooth-and-nail. The finance ministry has no business to decide on labour issues," A N Dogra, national secretary of Bharatiya Mazdoor Sangh, said.

BMS is one of the largest trade unions in India and owes allegiance to the Rashtriya Swayamsevak Sangh, the ideological parent of the BJP.

The most likely scenario is that some watered-down version of the labour measure will be passed, Sanjeet Singh at Mumbai-based brokerage I-Sec said. The budget had proposed allowing firms with fewer than 1,000 workers to lay off staff without seeking government approval. The previous limit was 100 workers.

India's GDP is estimated to have grown by six per cent in 2000-01, down from 6.4 per cent and 6.8 per cent in the two preceding years.

These levels are far below the 10 per cent analysts say is needed to cut poverty levels in the world's second most populous country where hundreds of millions live on less than a dollar a day.

Elections loom

Elections to five states this month will also weigh heavily on the government's decisions, analysts said.

"If the (coalition) allies do not fare well...the government may go slow on hard decisions especially in the power sector like the contentious issue of raising power tariffs," Panandikar said.

One of the budget proposals was to ensure 100 percent metering of power distributed by December 2001. It also proposed increased allocation of power from central state-run utilities and more investment by these utilities in reforming states.

With the government looking increasingly to get out of business and the private sector unable to stump up the huge sums needed for infrastructure projects, India badly needs to attract foreign investment.

And that is unlikely without power sector reforms.

Of equal importance is the fate of the fiscal responsibility bill, which aims to eliminate the revenue deficit of the government within five years and cut the fiscal deficit to two percent of GDP in the same time. The bill was introduced in December last year and is pending before parliamentary panel.

It also envisages a ban on government borrowings from the central Reserve Bank of India but only after three years. But temporary borrowings or advances in response to cash shortages would be allowed under certain circumstances.

The fiscal deficit for 2000-01 is estimated at 5.1 per cent of GDP, but along with the fiscal deficits of state governments and losses of public sector firms, the figure is over 10 per cent.

Without a reduction in its fiscal deficit, there is little hope that international rating agencies, which look at the combined fiscal deficit figure, will improve India's rating from its current junk bond status, analysts say.

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