Government bites the bullet; opens retail, aviation to foreign investment

New Delhi  :  Ending months of percieved policy paralysis, the UPA government Friday finally allowed 51 percent foreign direct investment (FDI) in multi-brand retail – and also opened up the aviation sector – triggering expected outrage among some of its allies as well as the opposition.

The government clarified that states which did not favour 51 percent FDI in multi-brand retail – which opens up India’s $590 billion retail market to foreign supermarkets like Walmart and Carrefour – were free to not implement the policy.

This effectively means that states ruled by Congress governments can implement the decision while states ruled by non-Congress parties or the central government’s allies will not have to implement it

The government also approved FDI in aviation and gave its nod for disinvestment in four PSUs, part of a package of reformist measures, along with the steep hike in diesel prices announced Thursday, which are widely seen as aimed at shoring up the faltering economy and the international standing of India that has taken a severe beating in recent months.

The decision could potentially be a game-changer for India’s retail market, which is dominated by neighbourhood stores.

The move comes at a move when the government’s reputation has been battered by a host of alleged scams and prime minister’s reputation as a reformer has taken a dent, with a leading US daily portraying him as “a tragic figure” and Time magazine describing him as “an underachiever”.

While industry bodies welcomed the move, ally Trinamool Congress joined the angry chorus of the Bharatiya Janata Party (BJP) and the Left to denounce the move, which the government insisted would not hurt India’s national interests.

BJP and Communist leaders called the decision a “betrayal” of the people’s interests.

“This is a complete betrayal, also of parliament,” BJP MP Balbir Punj said. Communist Party of India’s D. Raja said a corruption-tainted regime was trying to salvage its image.

West Bengal Chief Minister and Trinamool Congress Mamata Banerjee was furious and said she would not stand for it. According to Kunal Ghosh, a Trinamool Congress MP, the party’s parliamentary board will meet Tuesday to take a final decision, which could even lead to withdrawal of support from the government. “All options are open. We are ready to take any kind of strong decision,” he said.

As criticism mounted, Commerce Minister Anand Sharma defended the sweeping policy changes, viewed as a major step to spur economic reforms.

“It is not a sudden decision,” Sharma told the media, explaining the decisions taken Friday evening by the Cabinet Committee on Economic Affairs chaired by Prime Minister Manmohan Singh.

The cabinet also decided that overseas retailers setting up a single brand store in India must source at least 30 percent of their goods from Indian companies, preferably from micro, small and medium enterprises (MSMEs). Earlier it was mandatory for the overseas firms to source 30 percent of the goods from MSME.

The minister said the decision was first taken last November but subsequently held back following opposition mainly from the Left, BJP and the Trinamool Congress.

But it was “never rolled back”, Sharma clarified.

He said since then the government had held intense discussions with various stakeholders with a view to creating broad consensus. “Ten months is not a sudden decision.” He said among those who were spoken to were farmers associations, civil society groups, regional chambers of commerce and industry as well as state governments.

“I had personally written to every chief minister of the country, spoken to almost all of them. There are states which reacted to the proposal very well, some expressed opposition. The response has been a mixed one.”

According to the government, the move comes with some conditions for the investors.

Sharma said multi-brand FDI was expected to generate a large number of jobs in rural India besides giving remunerative prices to farmers for their products.

Hailing the step, the Federation of Chambers of Commerce and Industry (FICCI) said it reflected the resolve of the government to usher in a retail revolution in the country and signalled to the investor community that India is committed to furthering reforms.

Critics were not impressed.

The BJP, whose opposition to the coal block allocations paralyzed parliament’s monsoon session, vowed to unleash nationwide protests against the FDI unveiling.

This comes a day after the government hiked diesel prices by Rs.5 a litre and limited subsidized cooking gas cylinders to six per year per family.

Those decisions sparked off a volley of protests across all strata of society who fear a cascading price rise.

Sharma, however, denied that the FDI decision was aimed at erasing an impression that the government, under attack over corruption, had gone into a shell.

“There was never any policy paralysis,” he said.

Photo : AFP