India’s new government continues to walk a political and economic tightrope, eagerly welcoming in foreign investors while promising to financially help the very population hurt by the liberalization program. On Thursday, Finance Minister Palaniappan Chidambaram unveiled a new budget that allows foreign direct investors to carry unprecedented stakes in Indian companies, but also pledges a significant amount of money to India’s poor.
Among the notable points in the budget:
On the farming side, Chidambaram said the government has established an 80 billion rupee ($1.7 billion) fund to develop the rural infrastructure. Also, the government will provide food subsidies for the year worth 252 billion rupees ($5.5 billion). (Given India’s infamously lousy food and subsidy distribution program, skepticism is more than appropriate).
On the other hand, foreign investors can now own up to 74 percent of equity in Indian telecommunications companies, up significantly from the current 49 percent. Also, the cap on foreign equity in insurance companies was raised to 49 percent from 26 percent and foreign investors can now increase their equity stakes in civilian aviation companies to 49 percent from 40 percent.
How long can this balancing act work? The Indian government has preached fiscal conservatism, which has at its heart a hatred for spending on social programs, in order to lure Western investment. The larger the fiscal deficit gets, the more antsy investors will get. India’s stated dedication to liberalization will require it to coddle and encourage foreign investors to continue pouring money into India’s government coffers. What happens when there is so much American, British and other international money in India that the scales of attention tip towards investors at the expense of farmers?
A senior official in India’s finance ministry very tellingly described the issue being played out in India right now: “This will be a ‘talk left, act right’ government.”
