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Waking up from the inertia

Publication Date : 23-09-2012

 

Widely criticised for the government’s policy paralysis, Indian Prime Minister Manmohan Singh decided a week ago to kickstart the stagnating Indian economy by implementing a slew of long-pending economic reforms.

The most far-reaching decision was to allow 51per cent foreign direct investment (FDI) in multi-brand retail, a political hot potato.

The move is opposed not just by opposition but also by many of the allies in the United Progressive Alliance (UPA) government.

Equally unpopular was the decision to raise the price of diesel by  5 rupees a litre and put a cap on the number of subsidised LPG cylinders a family was entitled to in a year.

Within days of the announcement, the UPA’s maverick ally Mamata Bannerjee of the Trinamool Congress pulled out of the government to protest what she termed were “measures which are against the interests of the poor and common people”.

She claimed that her party was not taken into confidence before the announcement of the major economic reforms.

With Bannerjee pulling out 19 MPs from the government, the UPA faces a major political crisis with the government reduced to a minority in Parliament.

It hopes, however, to tide over the crisis by seeking outside support from the Samajwadi Party (SP) of Mulayam Singh and the Bahujan Samaj Party of Mayawati. Both are opposed to the new measures but could be relied on to bargain hard with the beleaguered UPA government.

The SP, along with eight other parties, in fact lent support to a nationwide strike on Thursday against the economic reforms. But it is unlikely to pull the rug from under the government’s feet.

The Congress is hopeful that no political party would seek a vote of confidence in the immediate future and it can ride out the political storm as few parties want a general election just yet.

The Congress itself shrugged off destabilising fears. In fact, Finance Minister P. Chidambaram promised more reforms in the next month and a half.

Among them are to allow 49 per cent foreign investment in the aviation sector. A similar limit has been sanctioned for FDI in power exchanges. The government has raised FDI in broadcast carriers to 74 per cent. It has also cleared the partial sale in four huge state-run firms.

The much-awaited reform measures come in the wake of a bleak financial scenario with the government mired in drift and an unwillingness to take hard decisions. The GDP growth in the first quarter was down to 5.5 per cent.

Countering the resistance to the government’s big reforms push, Manmohan Singh declared at a meeting of the full Planning Commission that “courage and some risks are needed” to break the policy logjam and to revive growth.

The Prime Minister’s bold initiative was praised by the corporate world and business press.

“Reforms approved by the Cabinet are a welcome signal to investors everywhere,” said Ajay Banga, US India Business Council (USIBC) chairperson.

“These big-bang reforms send a clear signal that India is open for business” was the view of USIBC president Ron Somers.

The Washington Post, which had recently severely criticised the prime minister for his inertia, called it “a dramatic push”, while the Wall Street Journal hailed it as “the toughest reforms”.

After the announcement on September 14, Indian stock markets rallied to a 14-month high while the rupee appreciated to a two-month high against the dollar.

The argument for FDI in retail is that India, as the world’s second largest producer of fruits and vegetables, loses a quarter of its produce through lack of proper cold storage and transportation facilities.

Refrigeration for food preservation is rudimentary and some 7 per cent of Indian grain rots in fields and granaries. This unacceptable wastage could be minimised with cold storage facilities and back-up infrastructure.

Foreign investment in cold chains has not been forthcoming because India has denied prospective developers access to retail sales. It is hoped that large foreign retail chains like Wal-Mart, Tesco and Carrefour will bring in modern technologies and food processing, which will benefit the farmer and increase employment in the rural sector.

There are already several foreign retail groups present in India in different forms, like cash and carry, wholesale and in the back end. Now they can move to the front end of the business.

Incidentally, the government had eased conditions for single brand retailers by removing the clause that made it compulsory to source 30 per cent from the small and medium sector.

Those opposed to FDI in multi-brand retail point out that the Indian retail sector has the biggest self-employed workforce in the country after agriculture. FDI in retail will be a major setback for small shopkeepers and curbside retailers, they argue.

Leader of the opposition in the Upper House of Parliament Arun Jaitley observed, “Structured international retail does not create additional jobs. It displaces existing jobs.”

He also pointed out that international retail sources cheaper products internationally, so that the first impact will be felt by the Indian manufacturing sector.

The government counters that each state is free to decide whether to welcome multi-brand foreign retailers and that it is not compulsory for them to open up.

This will mean FDI retailers will be restricted to states run by the Congress party such as Maharashtra, Andhra Pradesh, Jammu and Kashmir, Uttrakhand, Assam and Delhi.

With the battle lines clearly drawn, it now remains to be seen whether the government’s economic reforms would threaten the stability of the central government.

Most expect it will pull through and survive the rest of its term till May 2014, however.

 

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