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Asia-PacificJune 1 2004

India’s new government promises to continue economic reform

India’s Congress Party will lead an alliance of political parties that will form the next government after it emerged the surprise victor in the country’s national elections in early May. Voters shunned the previous regime led by the Bharatiya Janata Party whose economic reforms appear to have left a large majority of rural Indians unmoved.Manmohan Singh, the former finance minister, will be the new prime minister after Congress party president Sonia Gandhi turned the job down.
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Mr Singh said the party had initiated India’s economic reforms and the new government would pursue them. However, to what extent the coalition partners and other parties that support the Congress party-led government will dilute its focus on continued reforms is uncertain.

The composition of the new government could have an impact on fiscal reform and privatisation. The Congress party must seek support from India’s communist party, and two other regional parties from the northern state of Uttar Pradesh, in order to get 272 seats that will give the new government a majority in parliament. As The Banker went to press, reports said that these parties were likely to support the government from outside but they might not join it.

Bankers said that the budget that would be announced by the new government soon would give the first indication of the new government’s commitment to reform. “We will look closely for signs of fiscal deterioration. India has a high level of debt at over 90% of GDP,” said Ping Chew, director, sovereign and international public finance ratings, at Standard & Poor’s (S&P). The combined annual deficit of state and central government is currently over 10% of GDP. S&P had revised the outlook on India’s foreign currency sovereign rating to stable because of a strong external payments position.

Jaspal Bindra, head of wholesale banking at Standard Chartered, said that foreign banks would look for possible changes to the moves made by the previous government to give more freedom to foreign banks, including allowing them to acquire private Indian banks and giving them the freedom to set up subsidiaries in India, a move that will remove all restrictions on the number of branches a foreign bank can have in India.

“Foreign banks in India are looking at these options and will wait for a clear signal from the new government before they make a move,” he said. A move was also on the cards to amend the banking regulation law that would relax the present limit on voting rights in a private bank to 10%.

It is unlikely that the new government will give up control of the 27 state banks, but might move to consolidate some of them, bankers said. At present, foreign ownershipis capped at 20% for the state banks.

Shares of state companies, including the state banks, fell heavily on the fear that a Congress party-led government would not be aggressive on privatisation. State Bank of India chairman A K Purwar, however, said it was unlikely that the government would compromise the financial position of state banks by, for instance, persuading them to write off loans to poor farmers.

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Read more about:  Analysis & opinion , Asia-Pacific , India