India’s government has fought itself to a standstill over a reform plan that would allow foreign-owned retail chains direct access to Indian markets. As soon as the reform measure passed in Parliament, the opposition Bharatiza Janata Party (and others) brought the government to a halt and Indian traders organized a day-long strike in protest. On Monday, the ruling Congress Party put the reform on hold in search of political consensus; today, they shelved the plan entirely.As the FT reports:
India’s ruling Congress party suffered a humiliating defeat on Wednesday after it was forced to shelve a landmark reform to open the country’s $450bn retail sector to global supermarkets such as Tesco and Walmart.Pranab Mukerjee, India’s finance ministry, said that the decision to permit 51 per cent foreign direct investment (FDI) in supermarkets “is suspended till a consensus is developed through consultation amongst various stakeholders”…The Federation of Indian Chambers of Commerce and Industry, one of the country’s leading business bodies, described the government’s reversal as “deeply disappointing”.Tesco, the British supermarket, said the decision was a “missed opportunity” for Indian producers, farmers and consumers in a statement.
Shelving this plan is a setback for the modernization of India’s economy, and a serious hit to the ambitions of Indian PM Manmohan Singh, who viewed this reform plan as a continuation of the economic liberalization policies he oversaw as finance minister.Divisions within India’s coalition government are to blame for the surprising U-turn on the reform plan, writes Prof. Ramachandra Guha at the FT:
A critical factor in this is the complete breakdown of relations between the Congress and the BJP, the two main parties. For more than a decade their leaders have poured abuse and scorn on one another. Even on matters of vital national interest – as with terrorism or relations with Pakistan – the two parties cannot even begin a conversation, let alone arrive at agreement. The partisanship is so poisonous that relations between Republicans and Democrats in the US seem almost courteous by comparison.
Liberalizing Indian business will be painful. Walmart will displace mom-and-pop shops and other small businesses. But the entry of efficient retailers would do wonders for efficiency and productivity.The biggest beneficiaries will be the poor; India’s inefficient retail network makes basic goods much more expensive than they have to be. The poor live less well so India’s mom-and-pop retailers can live better.Eventually, India will have to face this difficult decision again; it can’t keep Walmart and others at bay forever. When the time comes, strong leadership will be needed, because the backlash will be intense — but the stakes are high. India needs an efficient retail sector if it wants to play in the big leagues.