IndusView, Sunday September 16 (London): The Indian Prime Minister introduced the long awaited reforms allowing foreign direct investments (FDI) in multi-branded retail and aviation sectors on Friday.
In the biggest economic policy push, more than halfway through Prime Minister Manmohan Singh’s second term, proposals to allow overseas retailers like Wal-Mart Stores Inc. and Carrefour SA to own 51% of supermarket chains, shelved last year after alliance partners threatened to revolt, have been reinforced now.
The government will also allow foreign airlines to buy stakes of up to 49% in local carriers, a much-awaited policy move that provides a potential lifeline to the country's debt-laden airlines such as Kingfisher and open fresh sources of funding for the likes of SpiceJet Ltd, Go Airlines Ltd and Jet Airways Ltd.
It’s a bold move after months of fighting high inflation, a sluggish economy and a threat of having its credit rating downgraded.,” said Bundeep Singh Rangar, Chairman of London-based IndusView. “It also put the ball back in the RBI’s court to do its part now to bolster India’s sputtering economic growth.”
“It could certainly help retail, airlines, bank and real estate industry sectors,” said Rangar. “More FDI will help big over-leveraged Indian retail companies like Pantaloon Retail and Future Group raise money and reduce debt. It will also help Indian banks, which are mostly public sector ones, with high exposures to Indian retailers, rescue their loans from turning into non-performing assets. And it will help commercial real estate prices stabilize and lift sentiment in the depressed realty markets of big Indian cities to which FDI in retail is currently restricted.”
India’s growth has been slowing and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. During April-May 2012 too, FDI in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy.
India has announced a 14% rise in the price of diesel, the first increase in more than one year, in an attempt to cut the country's budget deficit.
“The RBI has been reluctant to ease rates without the government doing its part to fix its budget deficit,” said Rangar. “The diesel rate hike was the minimum needed to get the RBI to act.”
On Monday, the Reserve Bank of India’s review of its monetary policy will be keenly watched for any changes to its key lending rates.
Together with this increase in diesel prices, the decisions announced by Commerce Minister 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 criticized by opposition parties and coalition allies alike.
Late last year, the cabinet had also allowed 51% Foreign Direct Investment or FDI in multi-brand retail, but suspended its plans after Ms Banerjee, whose Trinamool Congress is second largest constituent in the ruling United Progressive Alliance (UPA) and opposed to FDI, threatened to leave Singh’s Congress-led UPA.
The move had been strongly opposed by tens of thousands of small businesses and corner-shops, which fear they will be put out of business. But this latest move has already been welcomed by economists and industry, who say it will transform the way Indians shop and boost the country's flagging economy.
Prime Minister Manmohan Singh is the only Prime Minister since India’s founding Prime Minister Jawahar Lal Nehru to return to power after a full five-year term in office. Singh’s liberal economic policies have rolled back much of Nehru’s socialist economic construct that saw dismal growth rates for nearly five decades of post-independent India.