Analysis: India poised to revive retail reform plan

June 24
6:18 PM 2012

Indian Prime Minister Manmohan Singh was overseas and his outgoing finance minister was clearing his desk last week as the government quietly began preparing the ground for a new push to open up India's $450 billion retail sector to foreign firms.

Investors and business leaders clamoring for reform may be skeptical that the bold measure, shelved in December after a political uproar, will finally be implemented.

But a combination of intensifying political pressure, souring investor sentiment, double-digit food inflation, the threat of a credit ratings downgrade and a narrowing window of opportunity to act will likely force the government to undertake some long-overdue economic reforms within the next three to six months, economists, government officials and analysts said.

"It is different this time. There is considerable pressure on them to act," said Govinda Rao, an economic adviser to Singh.

A Finance Ministry official said the government would move first on retail reform, which will allow foreign firms to own 51 percent of supermarkets, in the hope this will improve investor sentiment, boost capital inflows and help stabilize the plunging rupee, which hit a record low against the dollar on Friday.

Measures aimed at arresting the rupee's slide will be announced on Monday, Finance Minister Pranab Mukherjee said at the weekend. He was not clear on whether the steps would be taken by the central bank or the government, but finance ministry officials said they were not aware of any imminent policy announcements like supermarket reform.

There are other signs that strongly suggest the government may soon take action on stalled reforms, although this is not likely before the July 19 presidential election and possibly not until after the monsoon session of parliament ends in late August.

Mukherjee will step down on June 26 to run for president and Singh is widely expected to take on the finance portfolio, at least temporarily. Singh is hailed as the architect of India's landmark 1991 economic reforms, but as prime minister he has so far failed to build on them.

With his reputation on the line and his party facing a host of state elections later this year and next year and general elections due by 2014, there is speculation that Singh may use this opportunity to finally stamp his authority on an economy now growing at its slowest pace in nine years.


The bruising fight over the nomination for the presidency has brought Congress closer to Uttar Pradesh state's powerful Samajwadi Party (SP), which backed Mukherjee and with 21 seats in parliament could bolster the government if other allies withdraw from the United Progressive Alliance (UPA) coalition.

The ally causing the most trouble for the coalition is West Bengal state Chief Minister Mamata Banerjee, whose Trinamool Congress party was opposed to Mukherjee as president. Banerjee scuppered the proposal to open up the retail sector in December.

While Banerjee is often described as mercurial and unpredictable, SP leader Mulayam Singh Yadav has been called opportunistic and fickle. He strongly opposed the retail reform in December, but in an interview with Reuters last week he hinted that he may have softened his position.

"Let me be very clear that I will not compromise the interests of farmers or the common Indian businessmen or traders," he said.

But, he added: "We will not let the UPA government fall because that would mean giving rise to communal forces, which we will just not allow under any circumstances."


Corporate Affairs Minister Veerappa Moily sees the Congress party's success in getting the Samajwadi Party and other allies to back Mukherjee as "a good platform for take-off" on reforms.

"The government is seriously moving on FDI (foreign direct investment) in retail and civil aviation," he said.

Economists say the most urgent reform is not opening up the retail sector but cutting the government's huge fuel subsidies bill, which has swollen the fiscal and current account deficits.

But implementing supermarket reform, which has already been passed by the cabinet, would be less politically explosive than hiking diesel and kerosene prices, which has the potential to trigger violent social unrest.

Singh told the G20 summit in Los Cabos, Mexico, last week that his government was "taking steps to revive investor sentiment" and was ready to make tough decisions on subsidies.

He gave no details of the steps, but his speech coincided with leaks in Indian newspapers that the government planned to move soon on retail reform.

At the same time, Commerce Minister Anand Sharma, a champion of the reform, wrote again to the chief ministers of some states to emphasize that it would not be imposed by the central government. Rather, it would be left to individual states to decide whether to implement it.

The idea behind this "inkblot" strategy is that as some states take up the retail reform, others will see the benefits and implement it too, said Thomas Varghese of the Confederation of Indian Industries.

The big question is: if only a handful of states take it up, will that be enough to lure the likes of Carrefour (CARR.PA), Tesco (TSCO.L) and Wal Mart (WMT.N) - which already have joint venture wholesale operations in India - into the potentially hugely lucrative market? There was no immediate comment from the companies.

India is the world's second-largest producer of fruits and vegetables with an annual production, according to the government, of more than 200 million tons. But much of the harvest is left to perish because the country does not have adequate cold chain and transportation infrastructure.

The entry of big foreign retailers may change that.

Sharma wrote that the retail reform plan "holds the potential to transform the rural economy" that most of India's 1.2 billion people still depend on for their livelihoods.

Although the chief ministers of Congress-run states Maharashtra - India's richest - New Delhi, Haryana and Assam publicly pushed for the reform last week, senior party officials told Reuters there was still a lack of consensus because of concerns that foreign firms could import goods to the detriment of local suppliers.

Rajeev Malik, a senior economist at CLSA Singapore who has been acid-tongued about what he sees as the government's incompetent management of the economy, said he expected it to implement some economic reforms in the coming weeks.

"I do think some things will happen. But will much of it happen? That remains to be seen. The government is not going to become a born-again government," he said.

This article is copyrighted by Reuters

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