The new Congress-led government faced a tough test on Sunday when a key communist party ally opposed its proposal to raise the cap on foreign investment in the telecommunications, aviation and insurance sectors.
In a move aimed at showing foreign investors that India's new government is committed to market-opening policies, Finance Minister Palaniappan Chidambaram announced in his first annual budget speech last Thursday that the government planned to raise the cap on foreign equity in telecommunications to 74 percent from 49 percent.
The limit on the aviation and insurance industries would jump to 49 percent, from 40 percent and 26 percent, respectively, he said.
The Congress party apparently didn't consult the Communist Party of India-Marxist (CPI-M) before announcing the proposal.
"To give full control to a foreign party in the telecommunication sector is anti-national. We will never support it,'' Communist Party leader M.K. Pandhe told reporters on Sunday.
"We are against privatization and we will oppose it in Parliament,'' Pandhe said.
"The government must listen to us," Pandhe said.
The proposed investment cap increase must be approved by parliament before it becomes law. The CPI-M, which controls 43 seats in parliament, is not part of the Congress-led coalition government -- the United Progress Alliance -- but nominally supports it.
The communists' support is crucial for the survival of Prime Minister Manmohan Singh's fledgling government, which does not command a majority in Parliament. Congress said on Sunday it was willing to discuss its ally's concerns.
"If there are different perceptions on certain measures announced in the budget, we don't see a major hurdle," Congress party spokesman Anand Sharma said. "[Both sides] can sit down together."
On Sunday, Pandhe urged the government to reconsider its decision, but he didn't say whether his party would withdraw its support if the United Progress Alliance pushes ahead with the proposal.
India's budget is expected to be voted on by legislators later this month.
Investors have been jittery since Congress assumed power in May, fearing its leftist allies would force the government to slow the opening of India's economy to foreign competition.
Increased foreign investment is the key to sustaining the economy's growth at a rate of 7 to 8 percent in the coming years, Chidambaram said in his remarks last Thursday.
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