Economy, not kirana shops, is biggest loser in retail FDI debate

First, the scary part: it looks like the economy will expand by a mere 6.9-7 percent (annual) in the three months ending September, according to estimates by _ Reuters_and and some other surveys.

That will be the slowest growth rate in more than two years. India’s gross domestic product expanded by 7.7 percent in the April-June quarter. Data for the September-ending quarter will be released on Wednesday.

[caption id=“attachment_142905” align=“alignleft” width=“380” caption=“The economy is at its lowest while we scuffle over retail fdi. Reuters”]  [/caption]

Now, the scarier part: the government might not be able to do anything about it, given the rabid opposition from some quarters to its first attempt at economic reforms and liberalisation by permitting foreign investors to have 51 percent stake in a multi-brand retail venture.

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The move was designed to boost foreign investments and kick-start the drooping economy, but it will be extremely tough to keep the momentum going now.

Economic growth has sagged after the Reserve Bank of India hiked interest rates 13 times since March 2010 to tame inflation, which remains elevated at around 9 percent.

In September, industrial output expanded by a mere 1.9 percent from a year earlier, the slowest pace in two years. Exports also possibly grew by just over 10 percent in October, down sharply from 82 percent in July, reflecting growing global uncertainty and the effects of the growing eurozone sovereign debt crisis.

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Earlier this month, the rupee also hit an all-time low of 52.73 against the dollar as investors dumped relatively riskier emerging market assets in favour of safe haven assets such as the greenback.

So, if there was ever a time for the government to come up with an action plan, it’s now. Yet, the first step it took after a prolonged phase of inertia, has sparked so much political uproar that there is even some speculation that some parts of the policy might even be 'rolled back '.

As _ Firstpost _points out, a showdown appears imminent at today’s all-party meeting convened by the government to discuss the contentious policy.

So now, along with an economic slowdown, we can add political uncertainty to the mix.Investments in the retail sector, especially in rural infrastructure, were supposed to unblock some of the supply constraints that have fuelled higher prices in the economy.

However, the ongoing political uproar is certain to dissuade foreign investors, who will opt to wait and watch how everything unfolds before taking any decision. And it won’t be just in retail.

Given that the cash-strapped government is in no position to stimulate the economy with funds, that means more lost time for an economy crying out for greater investments, especially in infrastructure development.

If our politicians continue to act the way they are doing right now, the economy, not the kirana shops as some people claim, will emerge as the biggest loser of the FDI debate.

We also, as the Financial Times suggests, might soon have to accept “7 percent” as the new normal for the Indian economy.