Prime Minister Manmohan Singh’s decision to backtrack on plans to let overseas retailers expand in India may undermine efforts to revive growth and curb inflation, while deepening a yearlong paralysis in government.
The 79-year-old Singh, credited with sparking India’s economic transformation when finance minister two decades ago, yesterday bowed to opposition protests that had forced repeated adjournments of parliament since the Nov. 24 move to allow foreign investment in multibrand retail. Finance Minister Pranab Mukherjee told lawmakers the decision was suspended until a consensus could be reached.
The reversal indefinitely puts off an influx of foreign investment from companies including Wal-Mart Stores Inc. (WMT) and Tesco Plc (TSCO) that are bidding to enter the $396 billion market, at a time when the rupee is already trading near a record low. It also adds to a list of unfinished economic initiatives that includes a proposed tax overhaul and changes to how land is acquired for infrastructure projects.
“It is frustrating to look at unresolved issues and know that they’re resolvable if you can get some leadership and orientation around them,” John Flannery, chief executive officer for General Electric Co. (GE)’s India unit, said in an interview yesterday.
India’s $1.7 trillion economy expanded last quarter at the slowest pace in almost two years after the central bank raised interest rates to slow inflation. The rupee has fallen almost 14 percent this year as investors sold emerging-market assets on concern Europe’s debt crisis will lead to a global recession.
Local Suppliers
In an attempt to kick start the economy, Singh had approved allowing overseas companies including Carrefour SA (CA) to own as much as 51 percent of retailers selling more than one brand, as long as they sourced 30 percent of their products from local suppliers. International retailers are currently restricted to wholesale operations.
Singh argued that opening the retail sector to foreign investors would tame inflation and reduce food wastage in a country where 40 percent of vegetables rot before they can be sold. Foreign companies would bring expertise growing crops and developing a supply chain to keep food fresh, he said at a rally of his ruling Congress party in New Delhi last month.
The government immediately ran into resistance from its two largest coalition partners, Trinamool Congress and the Dravida Munnetra Kazhagam, as well as from opposition parties. Small shopkeepers, who said the plan would wipe out their jobs, joined a one-day union strike Dec. 1 to protest the move.
‘Even More Cautious’
“For anyone hoping that this government would do something, it’s effectively another nail in the coffin,” said Robert Prior-Wandesforde, Singapore-based head of India and Southeast Asia economics at Credit Suisse Group AG. “They will be even more cautious in taking reforms forward than they were before.”
The government has just 10 days left of a crucial session during which it’s seeking to sign into law proposals to set up an anti-graft agency with power to punish civil servants. Transparency activists say they will renew protests that roiled the government in August if the bill isn’t passed this year.
The government has failed to push through any major pieces of legislation since the middle of last year after being embroiled in corruption charges, including allegations against a former minister, bureaucrats and businessmen over a 2008 sale of mobile-phone licenses. Opposition lawmakers’ protests against the government’s failure to check graft had disrupted the previous three sessions of parliament.
‘Political Suicide’
While Singh may have bought breathing space for his administration, both have been badly damaged, said Surjit Singh Bhalla, chairman of New Delhi-based Oxus Fund Management.
“This is political suicide on the part of the Congress government,” Bhalla said in a phone interview. “The only conclusion one can draw is that this government has lost any moral authority to lead. It is completely inexplicable.”
Shares of Indian retailers that could have tied up with foreign companies fell in Mumbai trading yesterday. Shoppers Stop Ltd. (SHOP) dropped 4.9 percent to 349.65 rupees and Trent Ltd. (TRENT) fell 0.7 percent to 956.2 rupees. The benchmark BSE India Sensitive Index gained 0.4 percent.
The government’s decision was “deeply disappointing” and “highly regressive,” Harsh Mariwala, president of the Federation of Indian Chambers of Commerce, said in a statement.
The rupee touched a record low of 52.73 to the dollar on Nov. 22 as overseas funds turned net sellers of stocks amid slowing growth, rising interest rates and the failure of policy makers to rein in prices. Benchmark inflation has stayed above 9 percent all year.
Ambani Call
“We currently have a run on the rupee because we have a total loss of confidence in the government’s capacity to govern,” said Prem Shankar Jha, an independent political analyst and former aide to former Prime Minister Vishwanath Pratap Singh. “The failure to push through FDI in retail is symbolic of the government’s lack of ability” to win arguments.
Reliance Industries Ltd. (RIL) Chairman Mukesh Ambani, India’s richest man, last month urged the government to prioritize laws to bolster the economy.
Major economic changes in the remaining two years of Singh’s second term are unlikely, said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. That may rule out opening pension, insurance and aviation sectors to foreign investment, he said.
“The government is now facing more challenges from its coalition partners to carrying out reforms than it is from opposition parties,” Shankar said in an interview.
Disappointments
After leading Congress to its biggest victory in two decades at elections in 2009, Singh has disappointed the businesspeople and analysts who expected him to build on his 1990s’ dismantling of India’s state-dominated economy. Instead, his government has continued a focus on direct support for the nation’s poor, in a country where more than three-quarters of the people live on less than $2 a day.
Singh enacted a jobs plan in 2006 that gives 100 days’ work to any rural household that requests it, and this year indexed the pay rates to the pace of inflation.
Welfare systems, which include a food security bill that will provide cheap grain to nearly three-quarters of India’s 1.2 billion people, have been promoted by Rahul Gandhi. He probably will lead the ruling party into the 2014 election, according to Eurasia Group, after taking over as party president from his mother, Sonia Gandhi. She was treated overseas in August for a medical condition neither the family nor the party will discuss.
Faced with at least five regional elections next year, including one in Uttar Pradesh, India’s most populous state, the government may refrain from making controversial decisions, said Religare’s Shankar.
After those regional ballots “we will be heading into general elections and the closer we get to that, the less likely you are likely to bring out reforms,” Shankar said.
“This is the beginning of the end for this Congress government,” said Bhalla of Oxus. “The government is floundering. The opposition knows these guys are extremely vulnerable and they are just going to keep on attacking them.”
To contact the reporters on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net; Andrew MacAskill in New Delhi at amacaskill@bloomberg.net
To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Peter Hirschberg at phirschberg@bloomberg.net
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