Friday, May 28, 2004

Geopolitics Edition: India Rolls Back Privatization

Despite calm and hopeful words this past week from luminary publications such as The Economist, the BBC reports that India's government is bent on pursuing an agenda of rolling back privatization plans and increasing spending.

India goes cool on privatisation
Mrs Gandhi heads the alliance; Mr Singh is the prime minister
India's new government has scrapped key elements of its predecessor's privatisation programme.

The communist-backed coalition, led by the Congress party, said in a policy statement that it would not sell off profitable state-run firms.

Privatisations of loss-making firms would be decided "case-by-case".

Last week, Indian share prices posted a near-record slump amid fears that the new coalition would reverse the BJP government's economic reforms.

The prospect of slower progress on reform has also spooked foreign investors, who have sold some $800m worth of Indian shares so far this month.

Privatising some of India's profitable state enterprises in the energy and heavy engineering industries formed a central plank of the BJP government's economic agenda.

Fiscal pressure

The new government's policy document pledged to raise spending on education to 6% of gross domestic product, and to encourage more foreign investment in the oil and energy sector.

It also set a target for annual growth of between 7 and 8%.

Economists said the new coalition's economic blueprint could put India's already overstretched public finances under added pressure.

"How will the increased spending on education be funded?" said Kishlaya Pathak, economist at Standard Chartered Bank.

"This is crucial because our fiscal situation is a matter of concern."

India's central government deficit stands at about 5% of gross domestic product, prompting warnings that the country must do more to balance its books.

There are fears that without the proceeds of further privatisations, or deep public spending cuts, the budget black hole could widen sharply.

Cutting public spending - much of it in the form of politically sensitive subsidies and non-negotiable interest payments on public debt - has proved an unpalatable option for most Indian governments.

Despite reassuring words from those that would consider India's progress as a new service outsourcing center of the world to continue apace without interruption, it now seems more likely that the prosaic reality of popular democracy may interrupt their bucolic dreams of free-market hegemony. I am not against free-trade per se but the arguments in India about how it was "shining" proved insufficient to console average Indians that the free-market was fair to them. Similar poll results on Bush's claims about the economy (since Bush is the one touting the economy) seem to reflect that most Americans similarly feel that the last few years of economic market-led development haven't been particularly good to them either.

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