But in the past few weeks, the government has not only found new determination, it also seems to have discovered a way to break the impasse. Last month, it decided to let in the likes of Wal-Mart and Britain’s Tesco, but with one important caveat: It circumvented regional opposition by leaving it up to individual states to decide whether they wanted to go ahead.
In an era when small parties, based on regional or caste loyalties, increasingly hold the balance of power in Parliament, a new narrative is emerging in India. A growing number of economists and political analysts say the path to development lies not in an all-powerful central government calling the shots but in individual states showing the way.
It is a narrative that could point to a brighter future for India’s economy, but also one that demands a deeper understanding of the country from foreign investors and policymakers alike. India, analysts say, must be seen not as a homogenous nation run from the capital but as a collection of states with different languages, different governments and different attitudes toward economic policy and foreign investment.
To Arvind Subramanian of the Peterson Institute for International Economics in Washington, the government’s approach exploits “competitive liberalization,” the idea that instances of successful economic policies in a few states can set a powerful example for others.
Capital and labor, he said, will flow to the best-performing states, pushing the lagging ones to raise their games.
As was the case with foreign investment in the retail sector, that means the central government can often be more an enabler of reform than the sole driver of that process.
Foreign retailers looking to enter the Indian market know they need to show that their presence will bring real benefits, said Ron Somers, president of the U.S.-India Business Council.
“Proof of concept is essential. Our companies know they are going to have to make this successful,” he said. “As investment comes, and infrastructure starts getting built, warehouses start getting built and shiny new buildings start coming up, we are hopeful more and more states will see the benefit and put politics aside, joining what we believe will be a wave of progress — for farmers and consumers alike.”
India is a country of huge regional diversity and massive income inequality, with 22 official languages and 28 states, each with different social, cultural and political traditions, as well as vastly varying levels of industrialization and infrastructure.
Under India’s constitution, states have always held considerable powers, playing a leading role in law and order, electricity, education, land, and roads.