Walking the Left tightrope

Bereft of a honeymoon, the UPA government has spent much of its first year in an edgy balancing act between its mandate, the pressure to pus...

Bereft of a honeymoon, the UPA government has spent much of its first year in an edgy balancing act between its mandate, the pressure to push forward reforms, and the ever-hostile presence of the Left Parties.

There has indeed been effort in getting the Left on board to push banking reforms; patents bill; some FDI successes in telecom, aviation and real estate; tax reforms, the SEZ bill; and the review of the dreaded Press Note 18. But all this has come at a cost.

There has been no movement on review of outdated labour and pension sector laws, disinvestment is totally on the backburner, and basic principles are ignored in agreeing to a high return of 9.5 per cent on EPF.

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Says Surjit Bhalla, MD, Oxus Fund Management, ‘‘There have been pro-reforms steps in the form of VAT, personal tax reforms and FDI, but the negatives are much more — fringe benefit tax, employment guarantee scheme, education cess, to name a few. The negatives add up to more than positives.’’

Thanks to Left pressure, disinvestment has suffered a body blow. Sure, as expected, the government has assumed zero proceeds from the sale of public sector units in 2005-06. But by seeking to put previous selloffs in the spotlight, the government is attacking the heart of privatisation.

The pension sector — crying out for reforms — is another touchy area for the Left. The Centre is going slow here. The about PFRDA Bill is far from taking off. Though some relaxations were allowed for exempt funds by increasing their exposure to equity investments, the bulk of the sector was untouched keeping in mind the Left unions.

Taxes: Mixed Scorecard

The government has, however, scored some points on tax reform. Apart from pushing through state value-added tax (VAT), the government seems to be on the path for a general goods and services tax (GST). Tax procedures have been simplified both on the direct and indirect tax fronts. However, experts agree that the service tax net still needs to be widened and effective steps are awaited to tackle ‘black money’.

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Be that as it may, two new taxes — fringe benefit tax and cash withdrawal tax — have been perceived to be anti-reforms by one and all. Says Surjit Bhalla: ‘‘Among the most anti-reforms steps since 1991, I can count fringe benefit tax as one.’’

Then there’s the national rural employment guarantee scheme, announced in the Budget, which has a huge allocation of Rs 11,000 crore. Though it’s part of the CMP mandate, experts see little economic rationale for going in for an employment guarantee scheme in the age of fiscal consolidation (FRBM) rather than generation the jobs required by investing the money in required projects.

FDI: Some Successes

A few proactive steps have indeed been taken on the FDI front. Besides reviewing Press Note 18, the government did enhance the FDI equity cap in domestic airline sector from 40 to 49 per cent. Cent per cent FDI under automatic route has been allowed for the development of townships, housing, built-up infrastructure and construction development projects. Further, simplification of procedures for FDI has also been announced.

However, the fact remains that these steps alone at present are insufficient to attract foreign investment at a time China is leaping ahead as an attractive destination. Good infrastructure and flexible labour laws are a must for FDI.

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The bourses too have got a hang of it now. Though, earlier the government tried to ‘talk up the market’, the bourses are gradually having their feet well-entrenched on ground realities. As Pratip Bhavani, NSE dealer says, ‘‘The government needs to accelerate reforms and spend heavily in infrastructure . Otherwise, the market will stagnate and investors will keep away.’’

(TOMORROW: The Sectors)