India: The Challenge Lies in Separating Economics from Politics


Jayanthi Iyengar

With the induction of a new Federal government, India is reverberating with new aspirations. The new Congress-led government, which spearheaded the opening up of the India economy in 1991, is once again in power, this time lead by Prime Minister, Dr Manmohan Singh.

The new Prime Minister has made it clear that he would like to actively woo foreign direct investment (FDI) in order to bridge the gap between domestic savings and investment to notch a 7 to 8 per cent growth annually. At present, India's savings rate is around 24 per cent, while the investment level needed to meet the targets set for growth would be in the vicinity of 32 per cent. As Singh and P Chidambaram, India's Finance Minister, have repeatedly stressed on assuming office, the only way to bridge this gap is through FDI.

In keeping with this line, both Singh and Chidambaram have been actively wooing foreign investors on their recent trips abroad. However, the atmosphere at home has not been as congenial to FDI as is being made out. Unlike the Congress' almost unchallenged tenure in the past, Singh now heads a coalition government. He is a reformer and an economist, but his greatest challenge lies in his being able to ensure the cooperation of the Left parties in the coalition, which are crucial to the continuation of this government, if not Singh's survival as the Indian prime minister.

The Congress, with its left-of-centre ideologies, shares some commonalities with the Communists, but there are also several grounds for dissent. For instance, both are committed to the revival of loss-making public sector undertakings (PSUs), before consideration is given to either selling them off or closing them down. Both are averse to selling profit-making PSUs, though the Left does not like privatisation in general, while the Congress is disinclined to sell management and ownership control in strategic sectors like oil and defence. Both agree that FDI in infrastructure is desirable, but not necessarily in non-core sectors like retail. However, differences prevail over what are core and non-core sectors. For the Congress, insurance-where Chidarambaram has promised in his budget speech to raise FDI from 26 to 49 per cent-is a core sector. For the Left, this is not so. Similar differences in approach also exist in relation to privatisation of the 23 nationalised banks, which provide a livelihood for a large number of people. However, having said that, it also has to be stated that the current Indian Union cabinet has recently approved an increase in foreign investment in civil aviation from 40 to 49 per cent, thereby raising the possibility that internal, populist politics will not impact upon the interests of foreign investors.

WATCHPOINT: The test for this government lies in raising FDI in insurance from 26 to 49 per cent. If that happens, it could mean that India, like China, is learning to separate its economics from politics.


About our company:

AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.

Go to top