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September 17, 2012

Indian Government Plans Bold Economic Measures

by Anjana Pasricha

In India, the government is not likely to back down from a series of sweeping economic reforms it has announced, despite stiff political opposition. The reforms are expected to invigorate the country’s flagging economy and salvage the reputation of a government widely criticized for a paralysis in policy-making.

The decision to allow foreign supermarket chains such as Walmart and Tesco to set up shop in India is the boldest and most contentious reform measure taken by the government. But it is not the only one.

Authorities have also permitted foreign airlines to buy stakes in local carriers, raised the limit for investment by overseas companies in broadcasting and decided to sell stakes in four state-owned industries. It has also hiked diesel prices.      

The scale and speed with which the stalled reforms were announced last Friday surprised a country where the government has long dithered over such measures because of stiff political opposition.

Ambitious reforms

Commerce and Industry Minister, Anand Sharma, hopes the ambitious reforms will silence doubters and “those who projected India in a bad light.” He says there is no question of turning back.       

“We have sent a very clear message that this government thinks of India’s interest, its growth, its development, its job creation, wealth generation, infrastructure development. We have taken decisions which have resonated globally,” says Sharma.

A political storm is already brewing around the decision to allow foreign supermarkets to have a 51-percent stake in Indian ventures and the hike in diesel prices. Nationwide shutdowns and protests have been planned later this week.

A key ally, the Trinamool Congress, has warned it could withdraw from the government. Opposition political leaders have hinted at early elections if the coalition is not able to hold together.

Foreign supermarkets

Critics of the measure fear that foreign stores such as Walmart will put tens of thousands of small shops out of business and jeopardize jobs.  

“This would very seriously impinge upon the employment potential and earning potential of small retailer and traders in India,” says Ravi Shankar Prasad, a spokesman of the Bharatiya Janata Party, or BJP.

To tone down that opposition, the government says states opposed to the measure can opt out. Several large states, such as West Bengal, Bihar, Gujarat and Uttar Pradesh - governed by regional parties - have already said they will not allow foreign supermarkets to enter.

But political analysts say this time the government will not back down from rolling out the measure, as it did last year, following an outcry by its allies.

Independent analyst Prem Shankar Jha says the government took the bold steps both to revive India’s tanking economy and to ward off accusations of paralysis in policy making.   

“They are going straight ahead," says Jha. "There is a feeling that we will go down if we do nothing, and if we have to go down we better go down fighting, and that the goal of the BJP is to force us to be paralyzed, so they can wave our paralysis in front of the electorate.” 

Stalled economy

There are hopes that the slew of measures will invigorate the slowing economy.

The opening of the country’s $450 billion retail sector could bring in much-needed foreign investment into the country. The reform of the aviation sector will help domestic airlines, which are struggling with high debt. And lowering subsidies on diesel will help the government reduce its fiscal deficit.

However, India’s Reserve Bank left interest rates unchanged Monday despite many calls by businesses to cut borrowing rates to revive growth.   

India’s economy has slowed to 5.5-percent growth and there are growing worries that the country is losing its allure for investors as an attractive emerging economy.