* India has history of reform under pressure
* Far-reaching reforms politically still too difficult
* Image of a government back in action could bring political
By John Chalmers
NEW DELHI, Nov 27 Prime Minister Manmohan
Singh's move to open India's protected retail sector to global
supermarket giants last week surprised critics who had written
him off as a policy ditherer, but he was probably motivated by
expedience rather than any reformist zeal.
India's stellar economic growth is slowing, the rupee has
skidded to record lows and inflation is stuck close to a
double-digit clip. Faced with this predicament, Singh may have
simply weighed the benefits of opening a $450 billion market to
foreign investment against the political risk, and taken his
Just as he did back in 1991, when the central bank was
forced to airlift 47 tonnes of gold to Europe as collateral for
a loan to avert a sovereign default, Singh has opted for
liberalisation to deal with urgent economic problems.
"In India, we've always achieved economic reform at
gunpoint," said political commentator Swapan Dasgupta.
Many seized on Singh's retail sector decision, taken in the
face of dissent within his own cabinet, as a sign that the
reform process he had helped father was finally back on track.
The frontpage headline of the Economic Times on Friday crowed:
"Hello Walmart, Goodbye Inertia".
Unpopular, saddled with petulant coalition allies, up
against a combative opposition and facing elections in five
states next year, Singh's Congress party is likely to shy away
from far-reaching economic reforms that could cost it votes.
Nevertheless, the move to allow multinationals into the
retail market could be the first of several liberalisation
initiatives aimed at silencing complaints from business leaders
and even its own supporters that this is a government adrift.
"They are not reformers," said Surjit Bhalla, chairman of
Oxus Investments. "But, given its huge unpopularity, Congress is
now looking to do what it can. There's more than an even chance
that reforms will continue."
Next up may be a decision to open India's airline sector,
which is struggling with cost pressures and a fierce price war,
to foreign investors.
RISK AND REWARD
Singh, who will be 80 next year, earned his reformist
stripes as finance minister back in 1991 when he prised open
India's state-stifled economy, opening the way for a long run of
However, as prime minister since 2004, he has presided over
less spectacular reforms such as opening the country's nuclear
power market and freeing petrol and fertiliser pricing. And his
government, beleaguered by corruption scandals, has slipped into
a policy paralysis since it won a second term two years ago,
taking the gloss off the "India Shining" story.
Asia's third-largest economy is nowhere near the crisis it
was facing 20 years ago. However, growth has sagged since it
topped 9 percent for three years in a row before the global
financial crisis, and a monetary tightening cycle to stamp out
inflation that began in March 2010 is exacerbating the slowdown.
The move to allow multinationals into India's vast retail
market will eventually help unclog some of the supply
bottlenecks that stoke inflation.
It will also generate sorely needed foreign capital, not
least for infrastructure investment, which the government's
latest five-year plan targets at an ambitious $1 trillion.
The government has taken other steps recently to attract
funds from abroad. It has raised the limit on foreign investment
in government and corporate bonds, and the cabinet has approved
a law that - once it has parliamentary approval - will allow
limited foreign direct investment in pensions firms.
While none of this will address the country's economic ills
in the short term, it may bring an immediate political gain.
Welcoming in the world's big supermarket brands was risky.
It will fuel fury with Congress among the millions of
neighbourhood store owners, who could make the party pay in next
year's state elections.
But the promise of world-class shopping will be welcomed by
India's growing ranks of urban middle classes, and Singh's
uncharacteristic boldness could shore up public faith in his
government as it gears up for a general election in 2014.
If there is a new phase of reforms underway, it is likely to
be tentative rather than sweeping.
Some reforms, such as removing subsidies on diesel, are
politically untouchable because of the backlash the party would
face from the poor. Even the decision to open up the retail
sector was hedged with provisos that will protect shopkeepers in
small towns and rural areas.
The government's plans to pass a food security bill, which
would widen subsidies for the poor, are an example of how there
has been little change in the populist stance of the Congress
party. Critics say the bill will only add to the fiscal deficit.
Nevertheless, with its back to the wall, the government
appears to have snapped out of its inertia.
"Reforms have been thrust upon it," said Bhalla. "As long as
the pressure is on this government it will continue to act."
(Editing by Alistair Scrutton and Ron Popeski)