Call the Left's bluff

One of the "positive surprises" offered in the Budget is now in danger of being watered down or even rolled back. The Left has not taken kindly to the finance minister's announcement of a hike in foreign direct investment (FDI) for telecommunications, insurance and civil aviation.

They have threatened to oppose the hikes, both inside Parliament and outside. Should Chidambaram get into negotiation mode with the Left on this? Talking to the Left can't do any harm, but succumbing to its pressure tactics can. The economic argument for higher FDI limits is obvious.

Insurance and telecom are capital guzzling sectors. Relying on domestic capital alone is not a wise option for everybody, including the strongest private sector players.

If the FDI cap is raised, companies in these sectors can garner the extra resources needed to grow faster, improve their balance sheets and emerge stronger and more competitive.

The Left is perfectly aware of this, which is why it is so anxious to oppose the policy. It believes that a higher FDI limit will make the state-owned players in these sectors more vulnerable to competition.

In other words, the intention is to hobble the competition in the interests of the state-owned companies. The argument against increasing FDI ceilings therefore needs to be dismissed as one lacking substance. More importantly, it may be time for the Congress to show the Left its place. Investors, especially foreign investors, have been very wary about the dependence of the UPA government on communist support, and they have repeatedly said that this Budget is a litmus test of the government's intentions.

Against the backdrop of these fears, the Budget has been a pleasant surprise for most foreign institutional investors, a fact borne out by their net purchases in the market last week. The hikes in FDI and the promise of an increase in FII limits have been key drivers of sentiment for them.

A rollback in these measures would, accordingly, confirm their worst fears and send an unmistakable signal that the government will keep kowtowing to the communists.

Luckily for the Congress, the Left is not in much of a position to oppose reforms, committed as it is to keep this government in power. If they oppose a bill to make changes in the FDI cap "" the changes in telecom and civil aviation can be done through executive action "" they could well find themselves on the same side as the BJP, which may well see a need to embarrass the government on this issue.

As a matter of fact, while pledging to fight the government on the FDI issue, the Left carefully skirted the question of whether it will go so far as to bring the government down on the issue. The Congress needs to know that the Left is, in the final analysis, a toothless tiger.

The only reason the Left parties didn't join the government was because they knew they were in no position to influence policy too much. Far better, they reasoned, to stay outside the government and shout loudly to their supporters about how bad the government's policies were and how much they were trying to stall them. Put simply, the Left is playing to its own gallery. It's bark will be worse than its bite.