Govt back at BJP's mercy, but still does some more
Though the government won’t find it easy to move on the Vijay Kelkar prescription of reducing half the subsidy on LPG/diesel subsidies in the next 18 months, much less Deepak Parekh’s wish-list of sustainable energy pricing and large-scale reforms in Railways, it unleashed a barrage of reforms yesterday. This included hiking the FDI limits in insurance and pensions from 26% right now to 49%, and clearing the Companies Bill. While the insurance and pension bills will give companies the much-needed funds to expand—the decision to put an assured returns clause in the Pension Bill, however, is retrograde—the Companies Bill will bring in a lot more transparency in how companies are run by limiting the number of layers of subsidiaries, by allowing class action suits, by quickening the pace of M&As and even allowing shareholders to vote out auditors if need be. The change in the Forward Contracts Regulation Act is an important change in allowing farmers to make use of forward markets.
While Thursday’s big bang reforms were expected by the markets, the problem is that they once again bring the reforms process to where it has been for a long time: against the great wall of Parliament, where the Opposition seems to have decided not to allow major Bills to go through. Indeed, if you leave out some announcements like the clearing of 5 new international airports—which, in itself, is a big move—none of the others are worth anything unless passed by Parliament. And the BJP, for its part, has already made it clear it is not in favour of hiking FDI limits.
The Cabinet also cleared the 12th Plan which has an ambitious 8.2% growth target and what’s important is that it is based on a capital formation level of 37% and a savings level of 34.2% of GDP. Since current capital formation is around 35% and savings 31%, the significant step up depends on a sharp fall in government dissavings—overall savings in the country rose when government dissavings fell and fell when the dissavings started rising after 2008-09. Though the government is armed with two big reports in recent weeks with a large reforms agenda, what’s important is not to let this get too daunting. After the R5 hike in diesel prices and capping the LPG subsidy, the government is moving in the right direction with its plans to start delivering scholarships and LPG subsidies through Aadhar soon—removing 1-2 crore fake/duplicate LPG connections, for instance, will cut subsidies by R2,000-4,000 crore. The next important step is to remain focussed on clearing some big, stuck projects through the National Investment Board. Needless to say, with the markets still sweet, fast-tracking disinvestment is a low-hanging fruit.