India poised to revive retail reform strategy

By Ross Colvin and Rajesh Kumar Singh, Reuters

NEW DELHI — Indian Prime Minister Manmohan Singh was overseas and his outgoing finance minister was clearing his desk last week as the government quietly began preparing the ground for a new push to open up India’s US$450 billion retail sector to foreign firms. Investors and business leaders clamoring for reform may be skeptical that the bold measure, shelved in December after a political uproar, will finally be implemented.

But a combination of intensifying political pressure, souring investor sentiment, double-digit food inflation, the threat of a credit ratings downgrade and a narrowing window of opportunity to act will likely force the government to undertake some long-overdue economic reforms within the next three to six months, economists, government officials and analysts said. “It is different this time. There is considerable pressure on them to act,” said Govinda Rao, an economic adviser to Singh. A finance ministry official said the government would move first on retail reform, which will allow foreign firms to own 51 percent of supermarkets, in the hope this will improve investor sentiment, boost capital inflows and help stabilize the plunging rupee, which hit a record low against the dollar on Friday. Measures aimed at arresting the rupee’s slide will be announced on Monday, Finance Minister Pranab Mukherjee said at the weekend. He was not clear on whether the steps would be taken by the central bank or the government, but finance ministry officials said they were not aware of any imminent policy announcements like supermarket reform. There are other signs that strongly suggest the government may soon take action on stalled reforms, although this is not likely before the July 19 presidential election and possibly not until after the monsoon session of parliament ends in late August. Mukherjee will step down on June 26 to run for president and Singh is widely expected to take on the finance portfolio, at least temporarily. Singh is hailed as the architect of India’s landmark 1991 economic reforms, but as prime minister he has so far failed to build on them.

With his reputation on the line and his party facing a host of state elections later this year and next year and general elections due by 2014, there is speculation that Singh may use this opportunity to finally stamp his authority on an economy now growing at its slowest pace in nine years.

The bruising fight over the nomination for the presidency has brought congress closer to Uttar Pradesh state’s powerful Samajwadi Party (SP), which backed Mukherjee and with 21 seats in parliament could bolster the government if other allies withdraw from the United Progressive Alliance (UPA) coalition. The ally causing the most trouble for the coalition is West Bengal state Chief Minister Mamata Banerjee, whose Trinamool Congress party was opposed to Mukherjee as president. Banerjee scuppered the proposal to open up the retail sector in December.