Economic reforms in India finally take off


September 15, 2012

Dinesh Narayanan, Forbes India
New Delhi, September 15, 2012

A day after it raised the prices of diesel and restricted supply of subsidized LPG, the United Progressive Alliance (UPA) government decided to push its political gamble further by opening up multi-brand retailing, civil aviation and the broadcast sectors. The decisions, especially the one to allow 51 per cent foreign investment in retailing, has already attracted sharp reactions from the opposition parties as well as allies such as Mamata Banerjee’s Trinamool Congress and Mulayam Singh Yadav’s Samajwadi Party.

The union cabinet had first cleared the proposal last November but left it in the cooler after opposition built up both within and outside the ruling coalition.

Going by the reaction of political parties, the Manmohan Singh government has taken a calculated risk by almost taunting its belligerent allies to pull it down. In the past few months the opposition had the government virtually on the mat as a series of corruption scandals eroded its credibility and paralysed decision-making that had sowed frustration in the Indian industry and foreign investors even as the country’s economic engine threatened to seize up. This appears to be a last-ditch effort by the Congress Party to wriggle out from the corner it has been driven to and also divert attention from the slew of corruption scandals, including allegations of irregularities in allocation of coal mines now infamous as `coalgate’.

Today’s brazen move has the potential of leading the country into a period of political uncertainty, even early elections.

Predictably, industry leaders, who have been bemoaning the government’s inaction on important policies, hailed the move. “The series of policy decisions announced by the Government today signal that India is on the move,’’ said Sunil Bharti Mittal, chairman and group CEO of Bharti Enterprises, in a statement. “They send out a clear message to the global investor community that the Government is committed to taking forward next generation economic reforms,” Mittal, whose company has a venture with global retail giant Wal Mart, said.

Friday’s decision on multi-brand retail came with an important rider: States would be free to choose whether or not to allow foreign retail chains to set shop. In a briefing commerce minister Anand Sharma said that Andhra Pradesh, Assam, Haryana, Delhi, Uttarakhand, Rajasthan, Manipur, Jammu and Kashmir — all ruled by the Congress Party or its allies — and some Union Territories had agreed to allow retail chains to start operations. Bihar, Orissa and West Bengal have opposed the policy.

Analysts believe that states could put in their own riders when ratifying the policy. “Some states may put in conditions for allowing stores,” said Devangshu Dutta, chief executive of Third Eyesight, a retail consultancy.

Retailers would have to invest at least $100 million, half of which must be in rural areas. Wal-mart, which has been lobbying for foreign investment was quick to talk about its investments. “We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation,” Raj Jain, president of Walmart India said in a statement. They would also be allowed to start store operations only in cities with a population of 1 million or more. According to Raghav Gupta, Principal, Booz and Co. the total addressable market would be between 25-30 percent of urban retail.

Separately, in a boost to single brand retailers the government agreed to do away with a clause that required them to source 30 percent of their goods from small and medium enterprises. Swedish retailer IKEA had objected to these provisions. Now the policy says the goods must ‘preferably’ be sourced from small businesses.

All these reforms will see results only if this government survives. In its previous term, Manmohan Singh had taken a similar gamble when he stood his ground on going with the US on a nuclear deal. At the time, the Left parties supporting the government withdrew their backing, threatening its survival. Mulayam Singh Yadav’s SP provided the crucial crutches then. Yadav bailed out the Congress Party again recently when he supported Pranab Mukherjee for President, neutralizing Mamata Banerjee’s opposition. Yadav is, however, staunchly opposed to FDI in retail. Two days ago, the SP passed a resolution to stop FDI in retail `at any cost’. No party leader has, however, clarified whether the cost could include early general elections.

The Congress Party has clearly played its most politically risky card. None of the measures it has announced will be able to arrest the economic slowdown, though they will give investors hope that the government will take politically tough decisions. No political party in the country is currently ready for an election. They will avoid one if they can. One of the compromises with allies could be to let today’s decision pass in exchange for rolling back the diesel price hike and restrictions on subsidized LPG. That will leave the BJP to fight the FDI battle. The party has already taken flak for obstructing the last session of Parliament. FDI is hardly an issue for rural voters. In any case it is allowed only in cities with a population of more than a million. The urban voter who has had a taste of glitzy malls and well-stocked supermarkets may not really appreciate the opposition.

(Based on inputs by Samar Srivastava)

(Published online in Forbes India on 15 Sep 2012.)