India launches reforms in bid to revive growth
New Delhi, September 15, 2012
After months of dithering on the economy, India's beleaguered government roared back to life in dramatic fashion yesterday, announcing big bang reforms as part of package of measures aimed at reviving growth and staving off a ratings downgrade.
A day after sharply increasing the price of heavily subsidised diesel, the government said it was opening up its supermarket sector to foreign chains and would allow more foreign investment in airlines and broadcasters. It also approved the sale of stakes in four state-run industries.
Facing the threat of having its credit rating downgraded to junk, the Indian government has been running out of time to show it is serious about fixing an economy that has been hit by a global economic crisis and political gridlock at home.
Underscoring the need for speed, India's inflation rate jumped to 7.55 per cent in August, mainly from higher food prices, data showed yesterday.
"I believe that these steps will help strengthen our growth process and generate employment in these difficult times," Prime Minister Manmohan Singh said via Twitter.
Infighting in the fragile coalition government led by Singh's Congress party had earlier forced it to shelve the retail and aviation reforms, casting a shadow over India's aspirations to join the world's leading economies.
Signalling that trouble still lies ahead, two major allies - the Samajwadi Party and the Trinamool Congress party - demanded a reversal of the retail reform and diesel price increase.
The retail reform allows global firms such as Wal-Mart Stores to hold a majority stake in a local partner and sell directly to consumers for the first time, which supporters say could transform India's $450 billion retail market and tame inflation.
In less than 24 hours, the government announced more measures to liberalise the economy than in the past eight years - a sign of the urgency felt in New Delhi after high spending and low growth battered India's finances in recent months.
"These measures were pending for a long time and the government has now shown political courage to push things through," said Standard Chartered Bank regional economist Samiran Chakraborty.
"This should buy some time and rating agencies may wait for the final fiscal deficit number before deciding on India's rating," he said.
The retail reform will allow foreign chains such as Wal-Mart, Carrefour and Tesco to own a 51 per cent stake in supermarkets, opening the door to a market of 1.2 billion people with a rapidly growing middle class. Previously, foreign firms were only allowed to operate as wholesale outlets.
"We are grateful that the government has realised and appreciated the value that we will bring to strengthen the Indian economy," said Raj Jain, president of Wal-Mart India. "This policy change will allow us to connect directly with the consumer and help save them money."
But it will also come with stiff riders. Foreign retailers will only be allowed to set up in cities with a population of more than one million, and must source at least 30 per cent of goods from local, small industries.
State governments will have the freedom to decide whether to allow the supermarkets on their patch and the minimum investment will be $100 million, Commerce Minister Anand Sharma said. Half of that investment must be in rural areas.
The aviation reform will allow foreign carriers to take a stake of up to 49 per cent in local airlines, providing a potential lifeline to the country's debt-laden airlines.