Congress gambles on reforms, FDI at Delhi rally

NEW DELHI (Reuters) - The embattled Congress party, led by Sonia Gandhi, sought to drum up support for the contentious opening up of the country's vast retail sector to big foreign chains at a mass rally on Sunday, saying supermarkets would help farmers and consumers battling high inflation.

The left leaning Gandhi's new support for reforms is seen as a shift in strategy by Prime Minister Manmohan Singh's government, which is trying to win over a population angry at corruption scandals as it heads into a string of elections including Himachal Pradesh assembly on Sunday.

"FDI in retail will not only benefit farmers but also unemployed youth and the common man," the Italian-born head of the ruling Congress party told a capacity crowd of mainly rural supporters in New Delhi's Ramlila Maidan ground, which holds about 50,000 people. More stood outside.

A lack of cold storage and quality granaries means up to a third of India's food production goes to waste. The government says supermarket chains such as Walmart Inc will build the infrastructure required to unblock supply bottlenecks and bring down prices.

Critics including the leading opposition Bharatiya Janata Party say foreign supermarkets will destroy millions of jobs in small shops and will lead to lower prices for farmers in the long term.

In October, Nobel Prize-winning economist Joseph Stiglitz told an Indian newspaper that foreign supermarket investment would not benefit India and could cost manufacturing jobs if the retailers sourced from China.

Gandhi, who heads a dynasty that predates the country's independence from Britain in 1947 and who is seen as the country's most powerful politician, last week promoted the new retail policy with apple farmers in Himachal Pradesh before Sunday's election in the mountainous state.

Her son Rahul Gandhi, expected to head the party's campaign for a 2014 general election, also defended the policy at the rally. The crowd, many wearing pink turbans and carrying placards in favour of foreign investment, were mainly men and women from the farming states of Rajasthan, Haryana and Uttar Pradesh.

"We support the government's decision on FDI. The opposition is only confusing the people," said Laxmi Devi, from the poor state of Bihar.

The Gandhis favour widespread welfare schemes for the poor and had previously offered lukewarm backing to policies Singh says are essential to generate the growth that funds welfare.

Seasoned economist Singh lifted a prohibition of foreign supermarkets trading in India as part of a slew of reforms since September aimed at reviving moribund economic growth and tackling yawning deficits that led to a credit downgrade threat.

EAST INDIA COMPANY

India's mistrust of foreign merchants dates back to Britain's East India Company, which used trade to colonize the subcontinent. After independence in 1947 and until a first wave of reforms in 1991, the economy remained largely closed and socialist.

But the Congress party is gambling that most opposition to the policy now comes from small traders and middlemen who traditionally support the BJP. Congress hopes to win over farmers and middle class consumers, who are angry at inflation and revelations of widespread graft.

Headline inflation in India has remained above 7 percent for two-and-half years, and the prices of many food items have gone up more than 50 percent during that period.

The first test for the new strategy is the election in Himachal Pradesh where the Congress is trying to oust the ruling BJP in a tight state race. Sonia Gandhi last week told farmers in the state the demand created by supermarkets would help end price volatility.

(Click here for a factbox on Himachal Pradesh elections)

India is due to hold 10 state level elections next year and must hold a general election by 2014, where a Congress party-led coalition will seek a third consecutive term.

Before winning its second term in 2009, the government launched a $13 billion debt-waiver for farmers, the traditional backbone of Congress party support. This time, with the fiscal deficit approaching 6 percent of GDP, the government has less room for populism.

Under pressure to introduce long-stalled reforms after ratings agencies Standard & Poor's and Fitch threatened to strip India of its investment grade credit rating, the government has raised fuel prices and announced several measures to attract foreign investment.

The leaders also defended the fuel price rise at the rally, and lashed out at the opposition for being obstructionist and corrupt.

(Additional reporting by Nigam Prusty; Writing by Frank Jack Daniel; Editing by Sanjeev Miglani)