India's budget: Too good to be true?

Indi'a budget is designed to speed up the pace of the often sluggish economy

By Mark Tully

(CNN) -- In spite of the compromises Indian Prime Minister Atal Bihari Vajpayee has made to hold his diverse coalition together, this year's budget shows he is still determined to push ahead with reforms to India's over-regulated and under-performing economy,

Such reforms, he hopes, will attract the international investment needed to put his country on the same growth trajectory as that other Asian giant, China.

Even members of Vajpayee's own Bharatiya Janata Party (BJP) protest that exposing Indian industry to the stiff winds of foreign competition is "anti-national."

Some of his coalition partners believe that market economics are "anti-poor." The leader of the opposition, Rajiv Gandhi's widow Sonia, has gone back on the Congress party's commitment to reform.

In spite of these pressures, the budget has been welcomed by all those who believe in an open deregulated economy. A commentator in the daily Business Standard, which is committed to market economics, gave the Finance Minister, Yashwant Sinha, "very high marks for vision, consistency, and a sense of proportion."

The budget is clearly intended to accelerate growth and make India a more attractive destination for foreign investors.

The figures reveal that for once the government didn't pay for last year's running expenses by cutting back on its own investment in development, and it has promised not to do so this year.

Demand is not to be dampened by increases in taxes either, as was feared in the wake of the Gujarat earthquake, and there are new tax incentives for investors in certain industries too.

Some interest rates have been pruned. Investors complain that Indian employees have all the rights and management is only left with the duty to go on paying them, come what may.

Prime Ministter Vajpayee is keen to court foreign investment

The budget promises to change all that also with labor law reforms.

But it's just here that the potential snag comes. The government had hoped that the signals the budget was sending to investors would be strengthened by its first success in privatization, the sale of a majority of its shares in Balco, a nationalized aluminum manufacturing company.

But the pavlovian response of the workers and the opposition will make many investors wonder whether this isn't going to be the last privatization too.

The labor force went on strike, eagerly supported by the Congress Chief Minister of the state where Balco is situated.

Every opposition member of parliament became an instant expert in assessing the value of the company, and without taking any time to investigate decided that the purchaser had got a bargain by bribing the Minister for Disinvestment.

The first and only substantial international investment in electricity generation by the American company Enron is also in trouble. It is threatened by a nationalized electricity board's refusal to pay for power.

The share market has slumped, instead of soaring on the back of a growth-oriented investor-friendly budget, and the air is thick with allegations of market rigging.

So Yashwant Sinha's budget still leaves the question open, the question investors have been asking ever since the reform of the economy started ten years ago -- are Indian politicians, bureaucrats workers, and indeed many businessmen ready to pay the price for an open economy?

That price is the loss of controls which empower and enrich bureaucrats and politicians, the end of job security for labor and transparency in financial markets.

If Vajpayee and his Finance Minister deliver on the promises in this budget, and in particular if they get the labor reforms through parliament, then at last Indian and international investors may answer that question in the affirmative.

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