New Delhi: India threw open its retail and aviation industries to foreign investment as a newly assertive government bids to shake off a sense of crisis over the slowing economy and a stalled agenda, risking a political backlash.
In the biggest policy push of Prime Minister Manmohan Singh’s second term, proposals to allow overseas retailers like Wal-Mart Stores Inc. and Carrefour SA to own 51 per cent of supermarket chains, shelved last year after alliance partners threatened to revolt, have been enforced now, Commerce Minister Anand Sharma said. Overseas airlines are allowed to own 49 per cent of Indian carriers.
The measures “will help change the perception about the government that it doesn’t have the ability to take decisions,” Samiran Chakraborty, a Mumbai-based economist at Standard Chartered Plc, said. “If this changes the perception that investors have about India, this could be positive for inflows, equities and for the currency.”
Singh and his ruling Congress party have just 18 months to reverse shrinking support and restore confidence in their economic management before the next general election.
Together with Thursday’s deficit-reducing 14 per cent increase in diesel prices, the decisions announced by Sharma in New Delhi mark a sustained effort to ease criticism of Singh’s administration. The government has been assailed by two years of corruption allegations, while its agenda has been stymied by opposition parties and coalition allies alike.
Olive branch
Offering an olive branch to regional leaders who have said they’ll oppose the arrival of large overseas retail chains over concerns they will put millions of small shopkeepers out of work, Sharma said it will be up to state governments to decide if they want to adopt the policy. Indian airlines, which have delayed salaries and defaulted on payments to airports and fuel suppliers because of cash shortages, will now be free to seek foreign investors.
The higher fuel prices brought calls for a rollback from Singh’s allies, pressure he has in the past responded to by lowering the size of the increases. He may face even stiffer opposition to the biggest change to foreign investment caps since the government was re-elected in 2009.
Allies such as Mamata Banerjee, the chief minister of West Bengal, have said they will continue to oppose moves to allow overseas companies Wal-Mart and others into the country.
“There seems to be agreement among policymakers that growth is taking a huge hit,” N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi, said before the foreign investment announcement. “If you don’t take policy measures, you’re not going to be able to control the slide.”
Indian stocks climbed to their highest level in 14 months after the diesel price increase and before the foreign investment decisions, boosted by the US Federal Reserve announcement of a third round of stimulus measures.
Rupee gains
The BSE India Sensitive Index, or Sensex, rose 2.5 per cent to 18,464.27, its highest close since July 26, 2011. The rupee gained the most since June on expectations the fuel move would help achieve the government’s deficit-narrowing target.
Singh’s bid to implement policies to revive investment amid a rating agencies downgrade threat have been derailed by his fractious ruling coalition and graft allegations that paralysed Parliament during its last session. Inflation near 7 per cent has limited room for interest rate cuts in an economy growing at near its slowest pace in three years.
In the latest sign of the frustration felt by voters toward Congress, only 38 per cent of Indians said they were satisfied with the country’s direction, according to a Pew Research Centre survey. That was down from 51 per cent a year earlier, and was the largest drop among the 17 countries in the survey, including China, the US and Brazil.
The diesel price increase “comes as a rare victory for the Prime Minister and Finance Minister Palaniappan Chidambaram against the ingrained populism” of the ruling alliance, David Sloan, an analyst at New York-based Eurasia Group, said in an emailed analysis earlier on Friday. “The price hike lends sorely needed credibility to their unfulfilled pledges to bolster the economy while working towards fiscal consolidation.”
Sloan and other analysts caution that proposals requiring parliamentary approval, such as raising the foreign investment cap in insurance from 26 per cent to 49 per cent “remain political non-starters” as Singh’s Congress party-led bloc has been unable to end a standoff with the opposition over alleged losses to the exchequer from an award of coal resources.
Political gridlock
Amid the political gridlock, India’s economic growth potential may have fallen to 6 per cent to 6.5 per cent a year, below the Reserve Bank of India’s 7.5 per cent estimate, JPMorgan Chase & Co. said. Foreign direct investment fell 67 per cent to $4.43 billion (Dh26.3 billion) in the three months ended June from a year earlier, government data show.
India’s benchmark wholesale-price index, which has remained above the central bank’s 5 per cent comfort level since December 2009, accelerated to 7.55 per cent in August, data released on Friday show. The increase exceeded all 35 estimates in a Bloomberg News survey. RBI Governor Duvvuri Subbarao will leave interest rates at 8 per cent for a third meeting next week, 32 of 35 economists said in another Bloomberg survey, as the diesel price rise fans costs.
Singh, the architect of India’s 1990s economic opening who has been prime minister since 2004, is targeting a budget deficit of 5.1 per cent of gross domestic product (GDP) in the year ending March from 5.8 per cent a year earlier. Asia’s third-largest economy grew 5.5 per cent in the three months ended June 30 after expanding 5.3 per cent in the previous quarter, the least in three years.
The budget shortfall and a deficit in the current account, the broadest measure of trade, led Standard & Poor’s and Fitch Ratings to say earlier this year that they may strip India of its investment-grade credit rating.
S&P on April 25 lowered the outlook on India’s sovereign credit rating to negative from stable, saying the move reflects a one-in-three likelihood of a ratings downgrade to junk status because of slower investment and economic growth. Fitch Ratings cut its outlook on June 18, citing limited progress in paring the budget deficit. Both companies rank India’s debt BBB-, the lowest investment grade.
India has been planning the policy change for its airlines for more than three years as Kingfisher Airlines Ltd., controlled by billionaire Vijay Mallya, and state-owned Air India Ltd. delayed salaries and defaulted on payments to airports and fuel suppliers because of cash shortage.
Jet Airways, India’s biggest carrier, has also been planning to raise funds through a rights offer for more than two years. The carrier and Kingfisher plunged more than 65 per cent in 2011. Jet said last month that it plans to sell and lease back some planes to pare debt by about $400 million.
