Analysts have been pleading with the government to institute what has come to be called the second wave of reforms in the past eight years. The last big-ticket decisions were when India allowed 74 percent investment in the telecom industry and sold several government-owned companies to private Indian investors.
Perhaps the boldest and most contentious plan announced Friday was to let foreign investors own 51 percent of supermarket chains they set up with a local Indian partner. To appease critics, India’s commerce minister, Anand Sharma, said state governments can reject the foreign investment. So far, nine state governments have supported the announcement and six have opposed it.
The Confederation of Indian Industry called the reform package a “huge mood lifter.”
“The despondency that had set in owing to absence of policy announcements would certainly be addressed to some extent,” said Chandrajit Banerjee, the confederation’s director general.
Sharma said the government consulted with various partners, traders and farmers across India before announcing its decisions.
“The response has been a mixed one, but when a major policy initiative is taken, that is how the responses come in,” Sharma said. “It will generate large numbers of jobs in rural India for our young men and women.”
After being on the defensive for two years over slowing economic growth, high inflation and growing corruption scandals, India’s coalition government finally appeared determined to make tough decisions this week.
On Thursday, the government raised the price of diesel, known here as the “poor man’s petrol,” and came under a volley of criticism from several political parties, traders and consumer groups, and transporters. A few weeks ago, the government increased the cost of gasoline but did not touch diesel prices. Both prices are kept artificially low in India through heavy federal subsidies to oil companies.
On Friday, the government also announced that it would allow private Indian companies to buy minority stakes in government-owned aluminum, oil, copper and mining companies.
“This is a strong signal that the government has shaken off some of that slumber that everybody was talking about,” said Raghav Gupta, principal at the market consulting firm Booz & Co. “It will take many, many years for it to have an impact on inflation or economic growth. But this is an important move.”
The actions come as Singh’s popularity has plunged dramatically over accusations of ineffective leadership and questions about corruption within his government.
According to a recent Washington Post profile, Singh denied an auditor’s claims last month that the national treasury had been cheated of billions of dollars after the government gave concessions to private coal-mining companies for a nominal charge.
Speaking at the Planning Commission meeting in New Dehli on Saturday, Singh said that government’s rising deficit needs to be stemmed, and his decision to hike the highly subsidized diesel prices this week is “an important step in the right direction.”
He urged Indians to fully understand the implications of “policy logjam.”
“To achieve the target of 8.2 percent growth we need to revive investment in the economy,” Singh said. “It will take courage and some risks but it should be our endeavor to ensure that it materializes. The country deserves no less.”
He said that he will personally speed up the progress of infrastructure projects because “it will also boost investor sentiment to raise the overall rate of investment.”
On his Twitter feed Friday, Singh called on the public “to support the steps we have taken in national interest.”
“The Cabinet has taken many decisions today to bolster economic growth and make India a more attractive destination for foreign investment,” the prime minister said on Twitter. “I believe that these steps will help strengthen our growth process and generate employment in these difficult times.”
Analysts in India say that in the next eight years, the country could attract more than $10 billion in the retail sector.
Facing tepid growth and the collapse of its currency, the rupee, the world’s second most populous nation is among the developing countries, including China and Brazil, that have seen significant economic slowdowns at a time when Europe faces a financial crisis and the U.S. economic recovery remains steady but sluggish.
In April, the Standard & Poor’s ratings agency cut its outlook for India to negative and noted the risk of a downgrade in the country’s debt rating.In July, the International Monetary Fund revised its 2012 forecast for India’s economic growth from 6.9 percent to 6.1 percent.
In her inaugural speech in New Delhi in April, U.S. Ambassador Nancy J. Powell said her objective in India was to bolster investment and business opportunities.She cited a McKinsey report stating that the country will need to invest $143 billion in health care, $392 billion in transportation infrastructure and $1.25 trillion in energy production by 2030 to support its rapidly expanding population.
Urging India to continue to advance economic reforms, Powell said that “the business of the U.S. mission in India is business.”
Friday’s announcement was not the government’s first attempt at retail reform. Last year, after cautiously allowing foreign investment in retail, the government backed away from its decision, bowing to pressure from not only opposition political parties but also its coalition allies and nationwide protests by small traders.
“That decision was never rolled back, was never withdrawn; it was paused,” Sharma said Friday.“In a democracy, governments have to talk to everyone before taking a decision. We have conducted 10 months of intense consultations.”
According to Sharma, India is the world’s second-largest producer of fruit and vegetables, but almost 40 percent of the produce is lost in post-harvest management. He said he hoped that foreign investment will boost development of cold chains, packaging, processing and transport infrastructure.
The government did set some riders for foreign retail investors. About 30 percent of their material will have to be sourced from small and medium-size domestic manufacturers and producers. Supermarkets can be set up only in cities with a population of more than 1 million. At least half the foreign money poured into retail must be invested in what the government calls “back-end infrastructure” — such as warehousing, packaging and logistics — within three years.
Reform called ‘anti-people’
“In spite of all these riders, it is still a sizable market and an attractive proposition for foreign investors,” Gupta said.
Allies of Singh’s coalition have accused the government of not consulting them before the announcement. Mukul Roy, a senior leader with the Trinamool Congress party, which is in the national coalition government, said his party strongly opposes the move and will take a “tough stand.”
Small traders across India also condemned the plans and said they will protest the decision.
“We have seen in America that these big supermarket chains have wiped out the neighborhood stores by their predatory pricing practices,” said Praveen Khandelwal, general secretary of the Confederation of All India Traders. “Do we want that in India? What is the logic of this anti-people, suicidal decision?”
But India’s big businesses welcomed the reforms, seeing an opportunity for job growth and lower consumer prices.
“There will be a multiplier effect in terms of employment generation, and domestic manufacturers will benefit as they integrate with the supply chains of global retail majors,” R.V. Kanoria, president of the Federation of Indian Chambers of Commerce and Industry, said in a statement. “Consumers will have a wider choice and get better deals.”