India Opens Aviation Industry to Overseas Investors

India threw open its retail and aviation industries to foreign investment as a newly assertive government bids to shake off a sense of crisis over the slowing economy and a stalled agenda, risking a political backlash.

In the biggest policy push of Prime Minister Manmohan Singh’s second term, proposals to allow overseas retailers like Wal-Mart Stores Inc. (WMT) and Carrefour SA (CA) to own 51 percent of supermarket chains, shelved last year after alliance partners threatened to revolt, have been enforced, Commerce Minister Anand Sharma said yesterday. Overseas airlines are allowed to own 49 percent of Indian carriers, he said.

The measures “will help change the perception about the government that it doesn’t have the ability to take decisions,” said Samiran Chakraborty, a Mumbai-based economist at Standard Chartered Plc. “If this changes the perception that investors have about India, this could be positive for inflows, equities and for the currency.”

Singh and his ruling Congress party have just 18 months to reverse shrinking support and restore confidence in their economic management before the next general election. The changes in ownership rules don’t require approval by parliament.

Together with a Sept. 13 deficit-reducing 14 percent increase in diesel prices, the decisions announced by Sharma in New Delhi mark a sustained effort to ease criticism of Singh’s administration. The government has been assailed by two years of corruption allegations, while its agenda has been stymied by opposition parties and coalition allies alike.

Olive Branch

Offering an olive branch to regional leaders who have said they’ll oppose the arrival of large overseas retail chains over concerns they will put millions of small shopkeepers out of work, Sharma said it will be up to state governments to decide if they want to adopt the policy. Indian airlines, which have delayed salaries and defaulted on payments to airports and fuel suppliers because of cash shortages, will now be free to seek foreign investors.

“These steps will help strengthen our growth process and generate employment in these difficult times,” Singh said in comments posted by his office on his Twitter Inc. account.

India’s growth target was lowered to 8.2 percent for the 12th five-year plan started Apr. 1 from an earlier estimate of 9 percent given the state of the global economy, Singh said today while addressing the Planning Commission.

Growth could easily slow to 5 percent annually if the worst case scenario of a policy logjam persists, he said.

Deadline to Reverse

The higher fuel prices brought calls for a rollback from Singh’s allies, pressure he has in the past responded to by lowering the size of the increases. He may face even stiffer opposition to the biggest change to foreign investment caps since the government was re-elected in 2009.

Allies such as Mamata Banerjee, the chief minister of West Bengal state, have said they will continue to oppose moves to allow overseas companies Wal-Mart and others into the country. Banerjee’s party yesterday gave the government 72 hours to reverse the policy changes, Press Trust of India reported.

“There seems to be agreement among policy makers that growth is taking a huge hit,” N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi, said yesterday before the foreign investment announcement. “If you don’t take policy measures you’re not going to be able to control the slide.”

Stocks Climb

Indian stocks climbed to their highest level in 14 months after the diesel-price increase and before the foreign investment decisions, boosted by the U.S. Federal Reserve announcement of a third round of stimulus measures.

The BSE India Sensitive Index (SENSEX), or Sensex, rose 2.5 percent yesterday to 18,464.27, its highest close since July 26, 2011. The rupee gained the most since June on expectations the fuel move would help achieve the government’s deficit-narrowing target.

The American depositary receipts of ICICI Bank Ltd. (IBN) jumped 5 percent in New York yesterday, while Sterlite Industries Ltd. (SLT) climbed 7.7 percent to $7.68, according to data compiled by Bloomberg.

Singh’s bid to implement policies to revive investment amid a rating agencies downgrade threat have been derailed by his fractious ruling coalition and graft allegations that paralyzed parliament during its last session. Inflation near 7 percent has limited room for interest-rate cuts in an economy growing at near its slowest pace in three years.

‘Rare Victory’

In the latest sign of the frustration felt by voters toward Congress, only 38 percent of Indians said they were satisfied with the country’s direction, according to a Pew Research Center survey. That was down from 51 percent a year earlier, and was the largest drop among the 17 countries in the survey, including China, the U.S. and Brazil.

Estimated major subsidies in the current fiscal year will amount to 2.4 percent of GDP, Finance Minister P. Chidambaram said today. That misses the goal of less than 2 percent set out in the March budget. The decline to 1.2 percent by 2016-2017 projected in the five-year plan may be “over-optimistic,” he said. Chidambaram also called for measures to accelerate the implementation of infrastructure projects.

The diesel price increase “comes as a rare victory for the Prime Minister and Chidambaram against the ingrained populism” of the ruling alliance, David Sloan, an analyst at New York- based Eurasia Group, said in an e-mailed analysis yesterday. “The price hike lends sorely needed credibility to their unfulfilled pledges to bolster the economy while working towards fiscal consolidation.”

Slowing Growth

Sloan and other analysts caution that proposals requiring parliamentary approval, such as raising the foreign investment cap in insurance from 26 percent to 49 percent “remain political non-starters” as Singh’s Congress party-led bloc has been unable to end a standoff with the opposition over alleged losses to the exchequer from an award of coal resources.

Amid the political gridlock, India’s economic growth potential may have fallen to 6 percent to 6.5 percent a year, below the Reserve Bank of India’s 7.5 percent estimate, JPMorgan Chase & Co. (JPM) said. Foreign direct investment fell 67 percent to $4.43 billion in the three months ended June from a year earlier, government data show.

India’s benchmark wholesale-price index, which has remained above the central bank’s 5 percent comfort level since December 2009, accelerated to 7.55 percent in August, data released yesterday showed. The increase exceeded all 35 estimates in a Bloomberg News survey. RBI Governor Duvvuri Subbarao will leave interest rates at 8 percent for a third meeting next week, 32 of 35 economists said in another Bloomberg survey, as the diesel price rise fans costs.

Deficit Target

Singh, the architect of India’s 1990s economic opening who has been prime minister since 2004, is targeting a budget deficit of 5.1 percent of gross domestic product in the year ending March from 5.8 percent a year earlier. Asia’s third- largest economy grew 5.5 percent in the three months ended June 30 after expanding 5.3 percent in the previous quarter, the least in three years.

The budget shortfall and a deficit in the current account, the broadest measure of trade, led Standard & Poor’s and Fitch Ratings to say earlier this year that they may strip India of its investment-grade credit rating.

Rating Outlook

S&P on April 25 lowered the outlook on India’s sovereign credit rating to negative from stable, saying the move reflects a one-in-three likelihood of a ratings downgrade to junk status because of slower investment and economic growth. Fitch Ratings cut its outlook on June 18, citing limited progress in paring the budget deficit. Both companies rank India’s debt BBB-, the lowest investment grade.

India has been planning the policy change for its airlines for more than three years as Kingfisher Airlines Ltd. (KAIR), controlled by billionaire Vijay Mallya, and state-owned Air India Ltd. (BHARTI) delayed salaries and defaulted on payments to airports and fuel suppliers because of cash shortage.

Jet Airways, India’s biggest carrier, has also been planning to raise funds through a rights offer for more than two years. The carrier and Kingfisher plunged more than 65 percent in 2011. Jet said last month that it plans to sell and lease back some planes to pare debt by about $400 million.

To contact the reporters on this story: Abhijit Roy Chowdhury in New Delhi at achowdhury11@bloomberg.net; Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Hari Govind at hgovind@bloomberg.net

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