India's Unfortunate Political and Economic U-Turn

Story Stream
recent articles

What a difference two and a half years make: In May 2009, Indian Prime Minister Manmohan Singh won a landslide reelection on his platform of economic reform, and high hopes drove India's stock market up a whopping 20% the next day. But aside from free trade agreements with South Korea and ASEAN, progress has been limited. Scandals in Telecom, Energy and Mining have fueled anti-government sentiment and protests, strengthening the opposition and sidelining reform while the government battles corruption and in-fighting. Supply-side tax reform was an unfortunate casualty in August, and now another planned change is stuck in limbo.

In late November, Singh's cabinet agreed to open India's borders to foreign retailers. It was a bold move that would have brought Wal-Mart, Carrefour, Tesco and many more-and the vast consumer choice (not to mention, jobs) they provide-to India's largest cities. This likely would have been a net positive for Indian society, which has long grappled with high malnutrition. India's agricultural sector is vast-by some estimates, its produce yield is the globe's second-highest. But due to dated, subpar storage and transportation, too much food rots before reaching the stores. Hence, supply is unnecessarily scarce and prices needlessly high.

Letting in foreign retailers was supposed to help change this, since participating firms were required to invest at least $100 million, with at least half going to agricultural and supply chain infrastructure. It wouldn't be an instant fix, but over time, it could have brought more advanced farming techniques, more reliable storage and more refrigerated trucking. Together, these likely would have increased supply and lowered prices-big plusses indeed.

Singh promoted this as best he could, but he was drowned out by a chorus of fears of knock-on effects on Indian merchants. Small shops are the lifeblood of Indian retail, comprising around 90% of the roughly $450 billion sector-one shop, it's estimated, for every 10 people. Shopkeepers feared giant foreign firms would drive them out of business (not unlike the same complaints waged against big boxes in the US), and they launched a national protest, rallying popular sentiment. Opposition lawmakers stood with them, passing counter-measures in some states and effectively shuttering Parliament since the change was announced.

This left the government a dilemma. The change didn't need full parliamentary approval-a cabinet vote sufficed. But proceeding amid such forceful opposition would have spent every last rupee of Singh's political capital, likely killing his chances of passing any other reforms through Parliament-assuming opposition parties would have allowed Parliament to convene any time soon. Hence the tough choice: Force an unpopular change, or U-turn (and risk appearing weak) so government can function. They chose the latter, announcing the plan was "suspended until a consensus is developed through consultations with various stakeholders." In exchange, opposition lawmakers agreed to go back to work.

Officially, it's a pause. But given the political disconnect and popular unrest, it's tough to imagine all parties finding consensus on anything resembling Singh's initial proposal-especially considering it included some safeguards for domestic commerce. For example, participating retailers would have had to source at least 30% of merchandise from small-scale industries, and they'd only be allowed in cities with at least one million residents. Further protections would likely make the deal unattractive for foreign firms. In short, an Indian retail revolution seems unlikely.

This saga makes it increasingly clear desirable reforms to liberalize India's economy and unleash productivity aren't on the horizon. Which is disappointing, since there's ample room for improvement. Labor markets, for one, could use a major overhaul making it easier for businesses to hire and fire workers-that would reduce the influence of employment contractors and allow firms to function much more efficiently. The tax code also still needs a face lift, and several trade barriers need tearing down. But the foreign retail U-turn seems to have undermined popular and parliamentary confidence in the government, which could make it exceedingly difficult to pass meaningful reforms. Hopes were high in 2009, but reality didn't follow-a common theme in modern Indian economic history.

Show comments Hide Comments