Commies vs. Capitalists; Manmohan Singh's Economic Ambitions Could Be Strangled by the Leftists in His Governing Coalition

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Byline: Jason Overdorf

In a pitch at the New York Stock Exchange in September, Indian Prime Minister Manmohan Singh asked U.S. investors for $150 billion in foreign direct investment. His country desperately needs the money for infrastructure improvements over the next 10 years. While India's recent economic growth has been strong, Singh argued, his country has barely scratched the surface of its potential. An economist credited with helping to launch India on the path of economic reform in 1991, Singh claimed that annual GDP growth over the next five years could average 8 percent a year--up from a 6 percent average over the last decade--if the country stuck with its reform agenda. Added the prime minister: "No power on earth can stop an idea whose time has come."

Except maybe his own ruling coalition. Bound by his Congress party's weak showing in the most recent elections (a mere 145 seats in Parliament out of 542) to an alliance with the communists and other leftist parties, Singh's reform ambitions are fragile, to say the least. Shortly after his NYSE appearance, communist M.P.s attacked Singh over the presence of so-called foreign experts in consultancies working with the national Planning Commission, the government agency that determines India's long-term strategic priorities. (All of the supposed foreigners were Indian nationals, but the leftists argued that their ties to foreign companies and organizations--including McKinsey & Co. and the World Bank--made their intentions suspect.) In the end, Singh disbanded the consultancies altogether, sending the pro-business "foreigners" and more leftist compatriots packing.

The tiff is a microcosm of the challenges facing Singh as he tries to accelerate economic growth while mollifying millions of voters, many of whom felt left behind by the liberalization policies of the former Bharatiya Janata Party government. On the one hand he has new allies among India's business elite, who are now influencing not just local but national politics and policies; on the other, he is hemmed in by his coalition partners, whose rhetoric and actions are themselves often at odds. It's not quite the capitalists vs. the communists, but the tug of war is real--and potentially the greatest drag on India's growth.

The economic-policy skirmishes have already started. Singh's reform plan has three key components: selling stakes in upwards of 35 state companies, raising the caps on foreign investment in key industries like telecommunications and insurance, and loosening the country's inflexible labor laws. Already, Singh's cabinet has approved an increase in the limit on foreign investment in India's aviation sector from 40 to 49 percent. But the left has so far blocked a proposed 25 percent increase in the FDI cap on the telecommunications and insurance sectors. In late October, Finance Minister P. Chidambaram told a meeting of business leaders that political pressures from coalition leftists would not stop the government's march to a market-oriented economy. He announced that a "reconstruction board" to advise the government on the sales of loss-making public companies would be set up soon, adding: "Some [state] companies will be closed down or sold."

The privatization issue is extremely sensitive. "Let privatization go to hell," Communist Party of India chief A. B. Bardhan said after last May's national election. On Oct. 27, the day before they were to meet with the prime minister, Bardhan and the Communist Party of India Marxist General-Secretary Har-kishen Singh Surjeet told reporters that they were aware of government efforts to sell stakes in state companies such as Power Grid Corp. and Power Finance, both profitable last year. The Communists oppose the move, calling it "privatization through the back door."

The political left particularly opposes selling off parts of India's navratnas , or nine jewels, which are major state-owned industrial and energy companies. …