Was it the harsh criticism of the government, especially the Prime Minister, in international circles that did the trick, or did the government just muster the courage required to the bite the reform bullet? The answer is unclear and perhaps the real story will be told in the coming weeks and even months.
On Friday, the government announced that the Cabinet had approved several key measures that had been hanging fire for years. Even if the government’s inability to conduct business in parliament could have been blamed on the opposition’s tactic of disrupting proceedings, they had no answer to why the Cabinet was not taking decisions it was empowered to.
The government has been constantly criticised for going slow on reforms, but the chorus had spread to international media as well. The PM has come under direct attack in some of these reports, a marked difference from earlier years when he always got good press, even when the government was shown in bad light.
Whatever may be the reason, India desperately needs some doses of reform, which will lead to a few feel good factors to dispel some of the gloom that has settled on the business environment. The government has said that allies have given their assent to these decisions.
If this is true, then they should not be protesting against the decision, or threatening to leave the coalition if these reforms are not rolled back (including the hike in diesel prices and the cut in subsidised LPG cylinders).
That they are doing so either means the government does not have their support, or they are just posturing in public and will not do anything rash. How its allies actually reconcile to these reforms is the only risk standing between the government’s reformist intentions and whether investor opinion of the business climate will change for the better.
The key measures taken are:
- FDI in retail
India has not allowed multi-brand retailers such as Walmart or Carrefour to set up shop in the country. An earlier decision to allow multi-brand retail in November 2011 had to be suspended by the government as both allies and opposition parties protested against the decision.
The government will allow foreign companies to hold up to 51% in retail companies,who can set up retail outlets subject to the approval of state governments, and only in cities where the population exceeds 10 lakh (1 million). In smaller states, retail outlets can be set up in the largest city in the state.
In single brand retail, where FDI is permitted, the government has relaxed sourcing conditions, as that had proved to be a big deterrent to investment.
- FDI in civil aviation
The government has allowed foreign aviation companies to invest up to 49% in Indian airlines. Earlier, they were allowed to invest in support services but not in airlines. There are some pre-conditions that need to be fulfilled, but companies such as Jet Airways, Kingfisher Airlines, and SpiceJet can seek foreign equity if they so desire. Weaker airlines may be able to attract foreign capital and stay afloat longer.
- FDI in power exchanges
This is a surprise as there seemed no overwhelming reason to allow foreign investment into power exchanges. There is no apparent distress in the sector, or any infrastructural benefits that can accrue from allowing FDI here. This seems a result of successful lobbying by a country or industry.
The government has announced its decision to disinvest small parts of its stakes in public sector units such as National Aluminium Company Ltd, MMTC Ltd, Oil India Ltd, and Hindustan Copper Ltd. This step should not qualify as a reform, as these decisions have been hanging fire due to poor market conditions. Still, they qualify for being included in signals that show the government is shedding an image that its functioning has been paralysed.