With the UPA-2 completing six months in office and two full sessions of Parliament, the governments resolve to further economic reforms comes into question. In the early years of UPA-1, of course, many of the reformist Bills faced opposition from the Left parties and were not passed in that five-year period.
The need for significant reforms across sectors is well understood. Committees have been formed and recommendations received across sectors; for example, Rajan and Mistry committees on financial reforms, Irani on company law, Kelkar and Shome on taxation law, Yash Pal and Knowledge Commission on higher education. The Presidents address in June listed a number of areas important to the corporate sector where the government planned to prioritise action. These included recapitalisation of public sector banks, establishing a pension regulator, and reforms in higher education and judiciary.
Despite these statements, the status of legislative action is disappointing. There were five broad areas of financial sector reform: banking, pension, commodities markets, insurance and micro-finance. The Banking Regulation Amendment Bill, introduced in 2005, included changes in the conditions for acquiring banks and for related-party lending. This Bill lapsed in 2009 and has not been re-introduced. Ditto for the Pension Bill. This sector provides a classic study in regulatory adventurism. In brief, in the absence of legislation, the regulator has been appointed through government notification. The regulator has, in turn, appointed various intermediaries, including fund managers by signing contracts with them. The regulator has no statutory power and if it needs to take action against an intermediary, presumably it would have to file a case in a civil court for breach of contract.
The Bill to strengthen the forward markets regulator has also gone through several tortuous paths. Introduced in 2006, it had three broad features. It elevated the role of the Forward Markets Commission to an independent regulator for commodities markets, similar to Sebi. It required commodities exchanges to be corporatised and demutualised. And it permitted commodities derivatives, including option contracts, to be traded. The Bill faced opposition from the Left parties, so it was brought in as an ordinance in January 2008, which lapsed as the government was unable to get it ratified. This Bill was originally listed to be reintroduced and passed in the current session; the plan has been jettisoned.
There were two Bills related to insurance. The Insurance Amendment Bill increases the maximum foreign holding to 49%, raises capital requirements and permits nationalised general insurance companies to raise funds in the capital markets. The LIC Amendment Bill raises the capital of LIC and permits the government to set the level of sovereign guarantee on policies written by LIC. Both these Bills are still pending with the Parliament.
The Micro-Finance Bill introduced in 2007 specified that Nabard would regulate the sector. It permitted micro-finance organisations to accept savings deposits and required them to file annual returns. The Bill lapsed in 2009 and has not been re-introduced.
For the corporate sector as a whole, four important Bills are on the anvil. The Companies Bill was introduced last year and has been re-introduced in the new Lok Sabha. It will replace Companies Act, 1956. On a number of issues, it substitutes government oversight on management by shareholder oversight. It gives greater say to creditors in cases of financial distress. It has new provisions for independent directors and auditors. The Satyam case highlights the urgent need for better governance of corporate entities.
Much has been written about the two Bills related to land acquisition and rehabilitation of displaced persons. For sustained industrial growth, it is necessary to enact a fair and balanced law that provides adequate compensation in case land is acquired and helps them resettle. The cardinal principle, also one that any person supportive of property rights would endorse, is that the seller must be satisfied by the price and benefits offered. These Bills lapsed in 2009 and figured on the 100-day agenda of the UPA-2 government but have not been re-introduced.
The draft version of the Direct Taxes Code has received much criticism. In particular, the issue of MAT based on assets implies that even loss-making entities need to pay tax. The finance minister has promised to revisit several contentious clauses, and this Bill could be introduced early next year. At a broader level, both education reform and judicial reforms are critical to smooth functioning and growth of the economy. The education minister has indicated his intent to introduce Bills to allow foreign universities and to reform higher education. The Law minister has talked about the need to provide speedy justice and clear pending cases and to improve accountability of judges. There has not yet been any legislative action on these fronts.
The BJP has openly expressed support for many of the economic reform measures. The ball is squarely in the Congress court. If the Congress-led government wants to be seen as liberalising the economic landscape, it needs to back up its words with action.
The author works for PRS Legislative Research, New Delhi