India: Listen to the Marxists

India's Marxists parties are feeling vindicated. For years, the Communist Party of India-Marxist (CPI-M) has been holding up the reforming fervour of Prime Minister Manmohan Singh and his predecessors. From their redoubt in the intellectual city of Calcutta, the CPI-M has used its swing position in the United Progressive Alliance coalition to slow down key items of legislation.

On several counts, the party can consider itself vindicated:

• Exhibit A is the insurance sector. Successive finance ministers in Delhi have sought to raise the amount of an Indian insurer which a foreign company is allowed to own. Were it not for the Marxists' stalwart opposition, failed US giant AIG would have a bigger foothold than its existing joint venture with the Tata conglomerate.

• Exhibit B is banking. The state-driven development strategy espoused by Prime Minister Jawaharlal Nehru bequeathed a clunky and inflexible sector, held in public hands. More recently, a much smaller set of private sector banks have been allowed to grow, led by the dynamic ICICI bank.

Yet ICICI was last month subject to a bank run in miniature, its New York office having been caught in possession of toxic Lehman Brothers securities. The ultra conservative state sector now appears a bedrock of stability, while innovative private firms -- which would be more widespread had the Marxists not objected -- are in trouble.

Notwithstanding reassuring statements by the prime minister and finance minister, corporate India is feeling the pinch from the crisis.

Last year, investment funds based out of London or New York could hardly put money into India quickly enough. Real estate was a particular draw, as portfolio investment flooded in to capitalise on a profusion of shopping malls and apartment blocks. Yet a global flight from risk, together with the poor fortunes of key stocks on Mumbai's Sensex index, has turned last year's $17bn inflow into an $8bn net outflow in 2008, sending the rupee down nearly 20%.

Some of corporate India's flagship firms have suffered. A number of firms snapped up steel mills or car plants abroad by borrowing in euros or dollars, but these loans are now much more costly in rupee terms. Tata Chemical, for instance, suffered a further loss of stock market confidence from the resultant balance sheet adjustment.

The IT outsourcing sector plays a key role, together with remittances, in allowing India to buy more from overseas than it exports. However, some 70% of earnings are from overseas clients, and 40% of the total comes from finance and insurance firms, whose budgets stand to be slashed.

Next month, Reliance Industries is due to open what will be the world's largest refining complex, turning crude oil into a range of products at a coastal facility in Gujarat. The plant is meant to sell to the US West Coast in summer, also exporting to oil consumers in Europe, Africa and Asia. But as economies across the world slow down, promising export sectors will lose ground.

Little can be done to soften the impact of slowing demand. But India's Marxists can justifiably say that the impact would be worse, were it not for them.