People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 38

September 28 , 2008


Finance Minister Sticks To Neo-liberal Dogma

Prakash Karat

IT is a sign of wisdom when a leader or a policy maker reviews his own stand in the light of experience and realities. The finance minister, P Chidambaram, obviously does not fall in this category.

Since the UPA government assumed office, in the last four years, he has been the most consistent and single-minded in the pursuit of financial sector liberalisation. Equally consistent has been the CPI(M) and the Left in opposing the opening up of the financial sector to speculative finance capital. After the bursting of the real estate bubble and the financial crisis in the United States, one would have expected this ardent advocate of financial sector reforms to rethink. But that has not happened.

In his first response to the US financial crisis after the collapse of Lehman Brothers, the takeover of Merrill Lynch and the government bailout of the insurance firm American International Group (AIG), the finance minister declared that he saw no reason to halt financial sector reforms. After assuring that there is no cause for alarm as Indian banks are not exposed or vulnerable like a couple of banks in the United States, Chidambaram asserted that the government would pursue reforms “having regard to context, having regard to international situation and having regard to our ability to keep regulations one step ahead of innovation”.

From the outset, the finance minister and the Congress-led government were determined to increase the FDI cap in insurance sector from 26 to 49 per cent. They wanted to facilitate the takeover of Indian private banks by foreign banks by allowing them upto 74 per cent stake in Indian banks and for that to amend the Banking Regulation Act to lift the voting rights cap of 10 per cent. The finance minister was also spearheading the move to put in place the New Pension Scheme which would allow pension funds to be privatised and invested in the stock market. The Pension Fund Regulatory Development Authority (PFRDA) Bill is pending in parliament for the last two years. On top of all this, the prime minister had declared that India would go in for full capital account convertibility.


The Left parties had strongly opposed all these measures. In 2005, it had conveyed to the UPA government that if such legislations are brought to parliament, the Left would vote against them. In the UPA-Left coordination committee, repeated rounds of discussions were held on the opening up of financial sector, especially banking and insurance.

By the end of 2007, all the efforts to pressurise the Left to give up its stand against financial sector liberalisation failed. The finance minister could not hide his impatience at the blocking of the liberalisation moves. “If India has to grow at 9 per cent plus continuously, its financial sector has to be modernised with the slew of reforms in the banking, insurance and pension sectors”, Chidambaram declared on December 29, 2007. Referring to the delays in increasing the FDI limit to 49 per cent from 26 per cent in the insurance sector, giving statutory powers to the interim pension regulator and more voting rights for foreign banks, the minister said: “The UPA government is keen to push ahead with the financial sector reforms as it has only 15 months left in power”.

The Left parties had put up cogent arguments against deregulation of the financial sector and further opening up of the insurance sector to foreign capital. In its note to the UPA-Left coordination committee ‘On FDI in the Insurance Sector’, it warned:

Events over the decade of the 1990s have borne out the fact that financial liberalisation does not contribute positively to investment and economic growth. Countries which enthusiastically opened up their financial sectors in order to attract capital inflows often experienced enhanced volatility in their financial markets and speculative attacks on their currency. Further opening up of the insurance sector to foreign capital, which serves as a vital financial intermediary of the national economy, is therefore not warranted.”

On opening up of the banking sector, in another note, the Left parties had opposed the raising of foreign equity to 74 per cent and any move to dilute the government’s stakes in the public sector banks. It had concluded the note by stating:

The Left believes that the job of the government is well cut out as far as the banking sector is concerned; increasing the efficiency of the banking system within the existing regulatory framework and gear it up for much increased flows of credit to the credit-starved rural areas, particularly into agriculture. There is no justifiable case for another fresh dose of bank deregulation at the present juncture, especially vis-à-vis raising the foreign equity and voting rights cap in private banks.”

The finance minister in his recent remarks was prompt in assuring that the Tata-AIG enterprise was on a sound financial basis. The AIG has been in the forefront in lobbying for raising the FDI limit to 49 per cent in the insurance sector. Frank Wisner, the former US ambassador to India, is currently the vice chairman of the AIG. He has been instrumental in lobbying with the Indian government to open up the insurance sector further. Wisner was ambassador to India when the agreement with Enron for the Dabhol project was finalised. He played a key role in pushing through this controversial project and joined the Board of Directors of the Enron Corporation in 1997. Both in the case of Enron and the opening up of the insurance sector, those at the helm of affairs – whether it be the finance minister, or, the then finance secretary Montek Singh Ahluwalia, now the deputy chairman of the Planning Commission – were working in concert with the American lobbies.

The Left parties had pointed out in their note cited above, as early as in 2005, the record of companies like AIG, under the caption `Questionable Reputation of the Foreign Partners’. The note said:

The record of some of the foreign companies who have started operating in India is being questioned abroad. A recent article published in The Economist (May 4, 2004) on ‘AIG’s Accounting Lessons’ (AIG is Tata’s partner in India) came with the screaming headline which said it all: “The world’s largest insurance company shows how to polish profits statement”.”

Chidambaram would also know that Maurice Greenberg, the chairman of the AIG, was removed in 2005 for accounting fraud. It is this company which has now got a $85 billion bailout from the Bush administration!


Deregulation of the financial sector in the US began from the time of president Reagan and has continued apace since then. Subsequently, in 1999, the US Congress adopted the Financial Services Modernisation Act which scrapped all regulatory restraints on financial services. Financial deregulation in the United States also exerted a decisive influence on the global financial system. It unleashed the forces of financialisation of the economy and the concentration and centralisation of power in the hands of a small group of financial companies. The investment banks and hedge funds played a key role in the restructuring of the financial system which consisted of the use of derivative instruments like options, futures etc. It is this unbridled financial speculation through the use of dubious instruments driven by greed for quick profits which has led to the current financial meltdown.

The finance minister is well aware of these developments in the financial sector in the United States. Yet he insists that financial sector reforms are the key to growth and investment.

Now with hundreds of billions of dollars being mobilised by the US government to bailout the losses suffered by the big financial companies and banks, the stock markets around the world have, as the Financial Times headlined, “roared in approval”. This will mean the biggest transfer of wealth at the expense of the taxpayers to help the fatcats and the speculators recoup their losses. This will be cited by the neo-liberal circles in India to argue that financial sector liberalisation will not harm the country in the long term as long as, in Chidambaram’s words, “regulation remains a step ahead of innovation”.

We have seen what innovations have taken place and are being proposed in India’s financial sector. In an illuminating address, V Leeladhar, deputy governor of the Reserve Bank of India, showed how India actually favours foreign banks (, December 8, 2007). He points out that India issues a single category of banking licence to foreign banks that does not require them to graduate from a lower to a higher category of banking licence. This places them virtually on the same footing as an Indian bank which is in contrast to the practice in many other countries. Further, no restrictions are placed on the non-banking financial subsidiaries of foreign banks in India, or, by their group companies. He further points out that unlike in the case of Indian banks, the sub-ceiling in respect of agricultural advance is also not applicable to foreign banks. While the export credit granted by foreign banks can be shown towards priority sector lending obligations, these are not permitted for Indian banks.

The prime minister had mooted the idea of introducing full capital account convertibility in March 2006. On the prime minister’s initiative, the Reserve Bank of India set up the Tarapore Committee to recommend steps to make the capital account convertible. Incidentally, the Tarapore Committee also recommended that government stake in the public sector banks be brought down to 33 per cent. The 1997-98 financial crisis in South East Asia was directly attributable to their capital account convertibility. India could avoid such a problem then because of capital controls. Far from ensuring “regulation ahead of innovation”, bringing in companies like AIG into insurance and Citibank and other multinational banks into the banking sector alongwith capital account convertibility would ensure complete deregulation of the financial sector.


The finance minister had hoped that with the Left parties’ withdrawal of support to the government in July 2008, the way would be opened for pushing ahead with the Banking Regulation Amendment Bill, the PFRDA Bill and the Insurance Amendment Bill. The entire corporate media were in a celebratory mode urging the government to push ahead with financial sector reforms now that “the Left is not around to exercise a veto”. On the eve of the trust vote, the finance minister expressed the hope that the Bills could be pushed through and stated that the BJP is “obliged to support the measures”. He said, “I think they are obliged to support because the BJP member is the chairman of the Standing Committee on Finance. I think the BJP is obliged to support the Bill which it had supported in the Standing Committee.”

The global financial crisis must open the eyes of all the political parties who have uncritically supported financial sector liberalisation. Can they be unconcerned about the pension rights of millions of central and state government employees? The New Pension Scheme initiated by the centre and backed by the BJP state governments, if implemented, would lead to thousands of crores of rupees of the employees going into the stock markets. No regulatory authority can stop the wild fluctuations in the stock markets. The New Pension Scheme does not assure a minimum return to employees. The net result would be that the employees would get pension less than what they are getting in the earlier scheme, i.e. 50 per cent of their last salary.

The finance minister and the ruling establishment are not concerned about what would happen to the savings of ordinary people, or, the pensions of the working people, or, how public investment would be affected if India gets subjected to the rapacious deregulated financial system prevalent in the United States. But all other non-Left political parties should ponder over the course which has been adopted in the name of pushing through reforms. It is time that the prattle about financial sector reforms is put an end to. Let there be a serious effort to put in place measures to strengthen the financial sector of the country in a manner which would safeguard the country’s economy and contribute to sustained development.