Now, Singh Has to Sell Indians on Liberalization

India's UPA coalition government, widely accused of policy paralysis after having seen annual economic growth dip under its watch to 5.5 percent from more than 8 percent, initiated a slew of reform measures last weekend designed to attract foreign capital and restore investor confidence. The most significant of these reforms was the opening up of the retail sector to foreign investment, a decision first made by the government last November but subsequently rescinded after vociferous resistance both from the opposition and some of the coalition's own partners.

The reform package, which also included a liberalization of investment opportunities in aviation and power, the sale of equity in public-sector companies to raise capital and a steep increase in the price of diesel fuel, was the most far-reaching since the liberalization of India's socialist economy in 1991, when the country faced a balance-of-payments crisis.

The timing of the measures was seen by some as politically motivated, as Prime Minister Manmohan Singh's government had been in the dock for the entire monsoon session of Parliament for its role in a scam involving the allocation of coal blocks. To others, the proposals were a belated but welcome recognition by the government that it had, since coming to power for a second term in 2009, spent too profligately on subsidies and welfare programs and neglected crucial issues of wealth creation and economic liberalization. Some commentators read the moves as confirmation that reforms in India can only be delivered as shock therapy by an economic crisis, and not carried out in incremental steps after reasoned debate in Parliament, there being just too many forces invested in the status quo.

Even if we take all this to be true, Singh's coalition government still deserves to be complimented for taking hard decisions in the face of considerable opposition. The opening up to foreign direct investment in retail isn't favored by a large number of Indian people, such as the country's millions of small shopkeepers, as well as sections of the middle-class, the intelligentsia and political parties both to the left of the government (which see the move as opening the door to the economic exploitation of India by multinationals with deep pockets, such as Wal-Mart Stores Inc.) and to the right.

There is merit in some of the objections to the new reforms, but it should be granted finally that the task of a government is to lead, not to chase an impossible consensus; that the present government has after years of dithering done so; and that in doing so, it has gambled that in the two years before the next general elections it can persuade the Indian electorate that these steps were necessary for the country's long-term economic health.

In any case, the central government has left it open to India's state governments to veto the move on FDI in retail within their own jurisdictions should they want to. The government of one of the biggest states, Uttar Pradesh (which has a population of more than 200 million, or almost a sixth of India's people) as well as the states governed by the main opposition party, the BJP, have already said they are opposed to opening their doors to foreign investment in the retail sector. Almost a dozen other states have said they welcome the move. Over time these two pools of states might form something like a control group and an experimental group on FDI in retail, allowing Indians to make up their minds on the basis of hard facts.

For now, no one side is clearly in the right; there's only the sense of a whole new world ahead. As a team of reporters wrote in the weekly magazine Outlook last year, when the government made its first attempt to persuade the Indian people that FDI in retail would benefit both producer and consumer:

Manmohan Singh’s decision to open up the fast-growing organised multi-brand retail sector to FDI will be one of the biggest game-changing reforms that will touch everyone’s life: farmers, industries, traders, retailers, job-seekers and, not the least, millions of consumers. This change may take years, even decades, to play out to its full potential.

And in a front-page story in the Telegraph, Jayanta Roy Chowdhury and Sanjay K. Jha wrote:

The upshot of today’s decisions is that the grandees of the world’s supermarkets will no longer have to hide in the shadows, concealing their ambitions behind the backs of Indian partners and prosaic titles. Best Price Modern Wholesale is the mouthful that characterises Walmart’s cash-and-carry venture with the Bharti Group that is allowed to sell to only wholesale buyers.

“I think if the policy gets implemented the way it is supposed to, we should be able to see a Walmart store in India,” Raj Jain of Bharti Walmart told a television channel. “If everything goes well, (we could open a Walmart store) maybe sometime in the latter half of next year.”

In the wake of the government's announcements, a number of opposition parties, including the nationalist BJP and the Communist Party of India (Marxist), and major Indian trade confederations announced that they would hold a trade bandh, or strike, on Sept. 20, to protest the decision. The owners of millions of kirana stores, or small grocery shops, are against the entry of multinational companies into the retail market, even if they have successfully held their own over the last decade against large Indian supermarket chains. Some of the shop owners' concerns, as well as those of critics on the left, were voiced by an editorial in the Hindu, the most left-wing of India's major English newspapers:

FDI in retail would introduce competition from large players with deep pockets and international sourcing capabilities who would be able to exploit economies in procurement, storage, and distribution to out-compete smaller traders and subordinate myriad small suppliers. The immediate and direct effect would be a significant loss of employment in the small and unorganised retail trade displaced by the big retail firms. The government's claims to the contrary are questionable. They exaggerate the direct and indirect employment that large retail would create and ignore the number of jobs they would displace. Conditions on foreign investors, such as the requirement of a minimum investment of $100 million and entry permission only for cities with populations exceeding one million are not material. They do not change the source of the competition — giants like Walmart, Tesco, and Carrefour — nor the locations in which such competition is most likely to be faced. ...

An erosion of the incomes earned by petty producers is likely to accompany the loss of employment. Prices paid to and returns earned by small suppliers, especially in agriculture, would be depressed because a few oligopolistic buyers dominate the retail trade. ... Moreover, once the retail trade is concentrated in a few firms, retail margins themselves could rise, with implications for prices paid by the consumer, especially in years when domestic supply falls short.

The leader of the opposition in Parliament, Arun Jaitley of the BJP, took a different line in articulating his party's view of the new measures, saying:

Close to 20 per cent of our total workforce would be adversely affected as they depend on unorganised retail. ... India has not made enough reforms in manufacturing. Our loan rates are high, labour laws are tough and prices of goods produced are also high. Hence, the beneficiaries of FDI in retail would be countries like China, from where goods could be sourced at a cheaper rate.

But cheap Chinese goods are already plentifully available in India, sourced by the very class of small traders and businessmen whose concerns the BJP claims to represent. A more balanced overview of the situation was provided by a sage editorial in the Business Standard that argued:

The opening of aviation, broadcasting services, power exchanges and multi-brand retail to foreign direct investment, while a useful and important step, is unlikely to bring any short-term benefits to the economy. Global airlines are not flush with cash, nor are debt-ridden and poorly run Indian domestic carriers plum targets for investment without management control. In retail, the states have been given veto power, which is politically sensible yet will certainly delay any changes. The long-term effects, however, of investment in sourcing and supply-chain technology will be positive for both producers and consumers.

Overall, these reforms are positive in that they show that UPA-II is not a complete lame duck yet, and confidence in the India story has been partially restored. However, they are small compared to what is needed: reform of India’s mining, labour and land acquisition laws; solutions to problems plaguing public-private partnerships, including crony capitalism and delays; and fixing the looming crisis in the banking sector.

Meanwhile, stock markets reacted positively to the announcements, and the BSE India Sensex Index rose to a 14-month high. Singh's government now has two years before the next general elections in which to act upon the challenges it has set itself with its new policy framework, and to prove its genuine commitment to these ideas by trying to prove their intellectual coherence. The Indian voter -- whether farmer, trader, worker, consumer or investor -- has the same amount of time to consider his or her response at the ballot box in 2014.

(Chandrahas Choudhury, a novelist, is the New Delhi correspondent for World View. Follow him on Twitter. The opinions expressed are his own.)

To contact the author of this blog post: Chandrahas Choudhury at Chandrahas.choudhury@gmail.com

To contact the editor responsible for this post: Max Berley at mberley@bloomberg.net

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