India's Reform by Stealth Derails Wal-Mart: Choudhury

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By Chandrahas Choudhury

Much like any government trying to push through an unpopular decision, India's leaders first tried telling the opposition to rise above partisan politics. That was to no avail (this will come as no surprise to Americans).

Then they tried to bring around their political allies, but some of them dissented openly. Then the government went to the people with notices in newspapers ("For the country, for the people of the country"), but thousands took to the streets in protest instead. The leaders tried insisting that theirs was an executive decision, not open to a vote, but found that Parliament refused to apply itself to any other issue. They offered a vision of millions of new jobs, and argued they had made a rational, carefully calculated policy move, but found themselves ambushed instead by all manner of conspiracy theories.

Finally, India's coalition government, the United Progressive Alliance (UPA), blinked, and announced Dec. 5 that it was "suspending" the most daring policy move of its tenure: the decision two weeks ago to allow foreign retail companies such as Wal-Mart Stores Inc. to own, subject to certain provisos, a majority stake in multibrand retail. This had promised nothing less than a second consumer revolution in India by stimulating the infusion of foreign capital and allowing both farmers and consumers a greater say in India's byzantine food chain.

The suspension -- a small concession to the opposition's demand of a total "rollback" -- was a sign of how difficult it is to push through reforms in India. But it also might be read as a salutary lesson about how, in a democracy, the art of policy is nothing if it isn't complemented by the art of politics.

As the government contemplated the shambles around it, it seemed worth exploring the question of intelligent policy on a subject of vast importance that was sabotaged in its transmission by obtuse and even self-defeating politics. As I wrote last week, the initial decision on foreign direct investment had opened a chasm not only between the government and the opposition, but also between the Congress, the party that leads the UPA, and its allies. And for millions of small shopkeepers and traders (thousands of whom came out on the streets to protest the move) employed in India's vast, unorganized retail sector, it also raised the specter of lost jobs from the arrival of global supermarket giants, including Wal-Mart and France's Carrefour SA. All this was only to be expected, as is always the case when the status quo is challenged.

So what was most surprising about the decision wasn't so much its content (which, as the economist Surjit Bhalla remarked, appeared carefully thought out, with a number of caveats designed to function as shock absorbers) or its method.

Instead, it was the timing that created the problem: The decision to liberalize retail in India was announced at the beginning of the winter session of Parliament. This allowed other political parties, including the principal opposition party, the BJP (which, despite being to the right of the Congress on economic issues, declared that the time wasn't right to open up the economy to big retail giants), to hijack the move by paralyzing Parliament. When some of the Congress's own allies in the coalition government also voiced their resistance to the move, the opposition was able to demand a vote on it.

What was, then, a policy decision of tremendous import for every Indian was made to serve a more expedient function by both sides: a government under pressure on several fronts, most notably for its dithering over the anti-corruption Lokpal Bill, possibly looking for something to distract its critics, and an opposition happy to take any chance to embarrass the government.

An astringent editorial in the Indian Express, one of the English newspapers most clearly in favor of the liberalization of retail, asked:

[W]hat was the government thinking? Why set up the decision when Parliament was in session, in a way that invites opportunistic opposition, without mobilising public opinion around a vital reform? As things stand after the backdown, the perception that the UPA can be easily cowed has been strengthened, that it does not have the guts to stand by its convictions or the political artfulness to sell what is essentially a decision that potentially improves the material well-being of many, many Indians. The UPA failed to pitch it as the farmer’s issue that FDI-in-retail is, to explain how directly selling to big retailers would give them higher returns (with the right precautions), and how rural infrastructure would improve. It could have mobilised consumers, who stand to gain from greater choice and lower prices. It could have followed up its press release and statements by making it a real, resounding issue in the streets, and ensured that its own superior argument was heard over the opposition’s fear-mongering. It could have made the inflation point much more forcefully. It could have seized the initiative, instead of letting the opposition get away with framing it as an alien invasion, of big global corporates destroying small shopkeepers.

Some of the motivations behind the politics were investigated in the New York Times' India Ink blog by its correspondent Vikas Bajaj, who wrote about how the country's political climate and entrenched politics of populism have often encouraged a troubling "reform by stealth":

If the Indian government decides to undo or indefinitely delay its decision to let foreign retailers into the country, as government sources now quietly predict, proponents of modernization will probably blame the opposition political parties and allies of the government like the Trinamool Congress party, as well as small retailers and wholesale traders.

But a portion of the blame should also be set aside for another target: the cloak-and-dagger way in which this and many other free-market policies are often made in New Delhi, a process often described as “reform by stealth.” Faced with politically unpalatable proposals, Indian politicians and bureaucrats often go quiet, enact reforms in the dead of the night and then pray that the opposition is either too lazy or preoccupied to react. [...]

“In much of reform, the long-run consequence and the deeper consequences are harder to sell,” [the economist Raghuram] Rajan said. “What people can see is the most immediate stuff, and they go to town on that.”

Indeed, if there was a damning criticism to be made of the Congress outside the immediate political context of the impasse over FDI, it is that, while the party is often credited with the liberalization of India's economy in 1991, it has never seriously believed in free (or at the very least freer) markets, preferring to stake its political reputation on welfare measures and to speak not of creating wealth but of eliminating poverty. There is, then, clearly a difference (in this case a fatal difference) between the way the government interprets the economic problems of India today and the way that the party anchoring the governing coalition (and thinks of itself as center-left) does. In a way, then, the fervid opposition to the government's decision across the political spectrum amounted to the Congress being presented with a projection of its own internal dilemmas.

An acute assessment of this identity crisis was provided by Manini Chatterjee in a long essay in The Telegraph:

Normally, there should be nothing surprising about the ruling party backing its government.

But in India, ever since the Narasimha Rao government unleashed economic reforms two decades ago, this has rarely happened. The Congress was always uneasy, if not downright hostile, to what came to be known as “Manmohanomics” or what the Left unfailingly described as the “IMF-World Bank-WTO-dictated anti-people new economic policy”.

The economic reforms were tolerated on the grounds that India had no other choice when faced with an unprecedented crisis in 1991. But the Congress never embraced it, and always sought to differentiate between the party’s “pro-aam aadmi” [common man] inclinations and the government’s LPG (liberalisation-privatisation-globalisation) orientation.

Ironically, it was the BJP-led NDA — which is now at the forefront of opposing FDI in retail — that was much more unapologetic about continuing with the policy of economic reforms. The BJP was also much more explicit in extolling the visible prosperity that these reforms had brought to sections of the Indian people, notably an expanding urban and semi-urban middle class. It was this understanding that led BJP leaders to overstate the “feel good” and “India Shining” theme in the 2004 Lok Sabha elections which badly backfired at the hustings.

And an essay on the website played down fears of Wal-Mart taking control of chains of supply and distribution, pointing out that the Indian economy is possessed of a diversity and local character very resistant to homogenization:

But is a Wal-Mart in an American small town the same beast as a Wal-Mart in India? Do the same concerns about how much health insurance it provides or does not provide apply in an Indian context? Does “lower end blue collar work” mean the same thing in the two economies? Could Wal-Mart ever have the same stranglehold here, offering an illusion of choice, but only the choice it wishes to stock on its shelves? Or is it all about location, location, location? Would the context change if a Wal-Mart moved east? McDonalds in America is towards the bottom of the food chain. In India it’s priced very much as a middle class hang out, complete with uniformed doormen. That’s why it cannot really knock the chaat shop [small snack shop] out of business, leave alone the panipuri wallah [a vendor of street food].

Meanwhile, an essay in Outlook dwelt on some of the ironies of the opposition to the FDI move:

[A] visit to the crowded Sadar Bazaar, one of the wholesale hubs in the capital [New Delhi], is an eye-opener. Nearly every conceivable consumer product in this market, from crackers to electronic goods, has a cheaper counterpart from China or other nearby markets. Even as trader associations protest about inviting foreign retailers, there is no acknowledgement that they too have contributed to hundreds of cottage enterprises closing shop.

It has become clear, though, over the last week, that there are so many ways of framing the implications of the debate across issues of politics, economics, society and history that the UPA's decision to open the gates to foreign investment, even if perhaps correct in principle, was short of preparatory groundwork and dissemination of information. Reform by stealth isn't a proactive way of governing. With the decision suspended for the time being, the government has a second chance now to present its thinking to diverse constituencies, and push the move through at a more propitious time in the near future.

Under India's federal structure, its states would be free then to open their doors to FDI or reject the decision (as the prime minister pointed out). Indeed, this natural variation would be good for those on both sides of the debate. Those states that adopt a protectionist policy would serve as a kind of control group, while the experience of more adventurous ones (such as, probably, the big states of Punjab and Maharashtra, with their powerful farmers' lobbies) would serve to showcase the gains and perils of organized retail in India, and provide some empirical basis to what is currently a debate held hostage to overblown rhetoric on the one hand and political expedience on the other.

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

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Chandrahas Choudhury at

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-0- Dec/07/2011 22:04 GMT