Govt allows FDI multi-brand retail, aviation in bold reform push

NEW DELHI Fri Sep 14, 2012 8:45pm IST

Shoppers leave a retail store inside a shopping mall in Mumbai July 14, 2012. REUTERS/Danish Siddiqui/Files

Shoppers leave a retail store inside a shopping mall in Mumbai July 14, 2012.

Credit: Reuters/Danish Siddiqui/Files



NEW DELHI (Reuters) - After months of dithering on the economy, India's beleaguered government roared back to life in dramatic fashion on Friday, announcing big bang reforms as part of package of measures aimed at reviving growth and staving off a ratings downgrade.

A day after sharply increasing the price of heavily subsidized diesel, the government said it was opening up its supermarket sector to foreign chains and would allow more foreign investment in airlines and broadcasters. It also approved the sale of stakes in four state-run industries.

Facing the threat of having its credit rating downgraded to junk, the Indian government has been running out of time to show it is serious about fixing an economy that has been hard-hit by a global economic crisis and political gridlock at home.

(Read: Experts react as India takes bold steps to open retail, aviation sector, click here)

Underscoring the need for speed, India's inflation rate jumped to 7.55 percent in August, mainly from higher food prices, data showed on Friday.

"I believe that these steps will help strengthen our growth process and generate employment in these difficult times," Prime Minister Manmohan Singh said via Twitter.

Infighting in the fragile coalition government led by Singh's Congress party had earlier forced it to shelve the retail and aviation reforms, casting a shadow over India's aspirations to join the world's leading economies.

Signalling that trouble still lies ahead, two major allies - the Samajwadi Party and the Trinamool Congress party - demanded a reversal of the retail reform and diesel price hike. The government has backed down when faced with such pressure in the past.

The retail reform allows global firms such as Wal-Mart Stores (WMT.N) to hold a majority stake in a local partner and sell directly to consumers for the first time, which supporters say could transform India's $450 billion retail market and tame inflation.

In less than 24 hours, the government announced more measures to liberalise the economy than in the past eight years - a sign of the urgency felt in New Delhi after high spending and low growth battered India's finances in recent months.

"These measures were pending for a long time and the government has now shown political courage to push things through," said Samiran Chakraborty, regional economist at Standard Chartered Bank in Mumbai.

"This should buy some time and rating agencies may wait for the final fiscal deficit number before deciding on India's rating," he said.

But Singh will now need resolve and the support of powerful Congress party boss Sonia Gandhi if he is to muster the political will to withstand popular anger and pressure from coalition allies who fear the reforms will cost them votes.

Street protests organized by opposition parties on Friday against the diesel price increase, where effigies of Singh were burnt, may be a taste of things to come.

The government's main coalition partner, firebrand populist Mamata Banerjee, gave the government a 72-hour deadline to bin the retail policy, but did not say if she would pull out of the alliance if it ignored the ultimatum.


The measures are partly aimed at convincing the RBI to lower interest rates to help revitalise the economy.

While economists do not expect the bank to reduce the cost of borrowing when it meets on Monday - with the higher-than-expected inflation reading seen as putting paid to any chance of a rate-cut - they believe it is now more likely to do so this year.

Singh is due to chair a meeting of government economists on Saturday that could decide to implement budget cuts, a further move to meet the bank's concerns about the fiscal deficit.

Singh's inability to convince allies and his own party to support reforms to ease a high subsidy burden as growth slowed had put India in danger of becoming the first of the big "BRICS" emerging economies to see its credit rating downgraded to junk.

As finance minister in the 1990s, Singh was credited with opening up the economy, but since taking office in 2004 he has repeatedly put off or rolled back difficult economic decisions.

Earlier this year he vowed to revive the economy's "animal spirits", but weeks of inaction followed as his corruption-tainted government was consumed by an outcry over sweetheart deals for coalfields.

The retail reform will allow foreign chains such as Wal-Mart, Carrefour (CARR.PA) and Tesco Plc (TSCO.L) to own a 51 percent stake in supermarkets, opening the door to a market of 1.2 billion people with a rapidly growing middle class. Previously, foreign firms were only allowed to operate as wholesale outlets.

"We are grateful that the government has realised and appreciated the value that we will bring to strengthen the Indian economy," said Raj Jain, president of Wal-Mart India. "This policy change will allow us to connect directly with the consumer and help save them money."

The government has championed the policy as a way to unclog supply bottlenecks that cause a third of fresh produce to rot before it reaches an Indian table. It is hoped global chains will offer better prices to farmers by cutting out middle men, while also pumping investment into cold storage facilities.

But it will also come with stiff riders. Foreign retailers will only be allowed to set up in cities with a population of more than 1 million, and must source at least 30 percent of goods from local, small industries.

State governments will have the freedom to decide whether to allow the supermarkets on their patch and the minimum investment will be $100 million, Commerce Minister Anand Sharma said. Half of that investment must be in rural areas.

The aviation reform will allow foreign carriers to take a stake of up to 49 percent in local airlines, providing a potential lifeline to the country's debt-laden airlines.

(Reporting by Satarupa Bhattacharjya, Tony Munroe Rajesh Kumar Singh, Nidhi Verma Manoj Kumar, Jatindra Dash and Shafeeq Mohammed; Editing by Alex Richardson and Ross Colvin)

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Comments (4)
MarkIV wrote:
Tough economic decisions, political support are catchwords not associated with Dr Manmohan Singh’s second tenure in office. It is time he took the tough decisions needed to get the economy back on track and mustered the political support to sustain them through the self-destructive political storm that invariably follows at the behest of short-sighted, populist and ill-informed political opponents; as also black-mail and bartering by so called partners within the alliance. The spark had to come some day and the Nation sincerely hopes that the PM having learnt the ropes will nurture it into a fire. He must do it for getting India back into the groove and resurrect his ‘good-reason’ to be read in history books as the Steward of Global Bharat. It is also time for the political establishment across party lines to stand behind this man and allow him to steer the Nation.

Sep 14, 2012 8:03pm IST  --  Report as abuse
AmarHarolikar wrote:
Pranab & Mamata Out, Mulayam In: Reforms on – III

Ever since Mamata was sidelined, Mulayam joining in its fold and Pranab out, the messaging from government around reforms has been very clear and consistent.

Whether it be the case of Vodafone tax issue, taxation of FII investments, petrol price hike, diesel price hike or noises around FDI investment in retail, the government is slowly but surely pushing ahead the reforms agenda. And the timing could not be better. With elections just two years away, the government has enough elbow room to push ahead major initiatives and also start to see the fruits of its efforts.

In my stories a few months back (Pranab & Mamata Out, Mulayam In: Reforms on!, Pranab & Mamata Out, Mulayam In: Reforms on – II ) I have been consistently been pointing out that with the new political equations in place, India is all set for the next set of reforms.

In 1990’s Manmohan did magic with PVR’s support. Is he on his way to another round of magic, with Sonia’s support ? I tend to believe so. Time magazine called Manmohan singh an ‘Underachiever’ and he has been badly beaten and bruised in Indian media too. I will continue to keep track of this story to see how it plays out over the next few years.

Amar Harolikar
Unknown Insights

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Apr ‘12 : Bull run intact, Growth rate on a rise
Dec ‘11: Macro-Technicals point to a possible bottom

Sep 14, 2012 12:55am IST  --  Report as abuse
vsankar wrote:
Attempts to bring reforms aimed to salvage already weakened economy are belated,half hearted and in bits and pieces.

Sep 15, 2012 11:51am IST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

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