FDI: Big bang reforms signal that India is open for business
Foreign investors can hardly believe what a difference a day can make. After months of policy paralysis, Manmohan Singh's government roared back to life on Friday by unleashing a blitz of reforms.
New York: Foreign investors can hardly believe what a difference a day can make. After months of policy paralysis, Manmohan Singh's government roared back to life on Friday by unleashing a blitz of reforms. In less than 24 hours, the government announced more measures to liberalize the economy than in the past eight years.
The bold move, though long overdue, repaired the government's tattered image overseas and that of Singh himself. "The decisions mean that the prime minister can look forward to kinder reviews on September 26, his 80th birthday," said The Independent.
There is no doubt that the decisions have made foreign investors, previously disillusioned by India's policy drift, sit up. They are pleased with the decisions to allow foreign direct investment from abroad of up to 51 percent in multi-brand supermarkets, up to 49 percent in aviation, up to 71 percent in broadcasting and up to 49 percent in parts of the power industry.
US industry gave marks to Singh's perseverance in loosening restrictions on foreign multi-brand retail. Singh has cleverly sidestepped opposition parties and waspish allies this time by leaving it to individual states to decide whether to allow the supermarkets on their patch. The minimum investment will be $100 million. So Wal-Mart, Carrefour or Tesco will be free to focus on states where they might be able to gain entry and avoid those where they won't, notably West Bengal.
"These big bang reforms send a crystal clear signal that India is open for business," said Ron Somers, president of the US-India Business Council (USIBC).
Somers, an Indophile who actively promoted the India-US civil nuclear energy deal in Washington, had earlier lashed out at the Indian government for last year's failed attempt to open multi-brand retail.
"Opening the multi-brand retail sector to foreign direct investment will drive the modernisation of India's expansive agri-retail marketplace. India's supply chain infrastructure will see improved efficiencies and expertise, consumers will benefit from increased quality and choice," said Somers.
The Economist noted the result from the retail move could be welcome: higher prices for farmers, and lower prices for consumers. "Of course somebody will suffer: those middlemen, the small-time traders. Their pain may be limited, assuming India's domestic market continues to keep growing. But in any case, thinks Congress, such traders typically vote for the opposition Bharatiya Janata Party (BJP)," said the magazine.
The government appears to be gambling that its political fortunes in the 2014 national elections are best served by being bold. The welcome boldness has definitely got Wall Street's attention.
"Investors are returning to emerging markets stock funds and India will get a large piece of the action after this rush of reforms. Given the liquidity in the global markets, I expect India to be a beneficiary of the risk-on trade," said hedge fund manager Gregory Turza, who is based in New York.
"The government's leadership will improve business sentiment. I think the BSE Sensex can ride up to 19,000 if the headlines stay good," said Turza while sipping a chilled Sauvignon Blanc at a Manhattan piano bar.
"I think the prime minister is messaging that India is a safe country to invest."
India's benchmark BSE index rose 2.46 percent to 18,464.27 points on Friday, its highest close since 26 July, 2011. The government's diesel price hike and the US Federal Reserve's monetary stimulus sparked a broad-based rally.
In the days since his appointment as finance minister, for a third time, Chidambaram has shaken up the ministry and impressed investors by holding off on retrospective taxes. He has sought to signal that Asia's third-largest economy finally has someone willing to take tough decisions.
The government has also decided to ignore Jet's opposition by allowing foreign investment in aviation. This offers a glimmer of hope to Kingfisher owner Vijay Mallya who has long lobbied for this reform. According to analysts, foreign airlines based in the Gulf are expected to be interested in taking stakes, led possibly by Emirates which has a 20 percent share of India's outbound air traffic.
"The reforms approved by the Cabinet are a welcome signal to investors everywhere. The bold actions will help create a predictable investment and business climate," said Ajay Banga, CEO of Mastercard Inc.
Singh said the subsidy on petroleum products was fast increasing the pressure on the exchequer.
The PM asserted that the decisions on allowing FDI in retail and also in other sectors were based on sound economic logic.