Manmohanics is Back

Manmohan Singh is back as `Salman Khan' aka `Tiger' !*

 

Manmohanics is finally back. On Friday night, a cabinet headed by prime minister Manmohan Singh, the original reforms man, decided to allow foreign direct investment into India's $ 600 billion retail market, albeit with riders and limited to willing states,.

It also agreed to let power exchanges sell stake to foreign owners, allow foreign airlines to buy into Indian carriers, hike FDI levels in non-news broadcast services and disinvest in 4 blue-chip public sector firms which could rake in about $ 2.5 billion.

Hit by charges of sleeping on the job and of ushering in an era of policy paralysis, Singh’s cabinet, which earlier this week cut subsidy on diesel, by hiking price of the auto-fuel and reduced supply of subsidised coking gas, decided to gamble that a wave of reforms would be too many for recalcitrant allies to take on.

The prime minster, who is credited with having introduced the first big burst of economic reforms in the early 1990s ( an early burst of import-export reforms in the early 1980s by then finance minister Pranab Mukherjee is believed to have helped build the stage for his big leap), is believed to have been keen these decisions should be passed and passed in one shot to dispel notions that his government did not have the belly to take hard-nosed decisions and to kick-in an economic climate where Indian and foreign investors would be enticed to invest.

Especially as India’s GDP growth had slowed down from over 9 per cent a few years ago to just over 5 per cent in the last quarter and a threat from global rating agencies of marking India out by giving it the dubious distinction of having its credit rating downgraded to that of junk bonds.

While the Trinamool Congress which boycotted the reform agenda cabinet meet, was busy sending a 72 hour ultimatum for a roll back of diesel prices, the Congress led coalition decided to risk her and another key ally Samajwadi party’s ire by going ahead with FDI in retail.

The idea seems to be that the government will bow down later to Mamata and roll back diesel price hike by 20-25 per cent or increase the number of subsidised cooking gas cylinders allowed per family, letting her claim victory, while going ahead with the bouquet of reforms. ** 

Friday, September 14’s decision will allow foreign retailers like Walmart, Carrefour and Tesco to take up to 51 per cent stake in large format departmental stores, which Indian officials have dubbed multi-brand retail, but will be limited to states which have agreed to allow them. As yet some 11 states and union territories including Delhi, Maharashtra, Assam, Haryana, Andhra Pradesh, Uttarakhand, Rajasthan, Manipur and Jammu and Kashmir.

"The series of policy decisions announced by the Government today signal that India is on the move (and) they send out a clear message to the global investor community that the Government is committed to taking forward next generation economic reforms,”  said an exuberant Sunil Bharti Mittal, who has a tie-up with US giant retailer Wal-Mart.

However, the reform burst did not come just because of a desire to attract investments and check a slowdown in the economy. Many analysts saw this as an attempt to cash in on a period when elections were not on the anvil. The next round of state elections are in Gujarat in November-December. Nearer to that date, the Congress led government will have to go back to being populist and not reformist.

Earlier suggested rules of limiting foreign owned retailers to cities with 1 million plus population have been junked, allowing state governments to decide which cities to allow retailers entry into. However, new terms which ask retailers to invest 50 per cent of funds in back-end infrastructure such as cold chains and processing plants in rural areas have been brought in, making the retail proposition attractive to any state with large agricultural production.

West Bengal does happen to be the largest producer of rice, vegetables, fish and pineapples and second largest producer of potatoes in the country and accounts for about 10 per cent of edible oil produced in the country. However, potatoes often sell at as low as Rs 2 a kg at farm market in the state, while they retail at over Rs 20 a kg in most metropolitan cities and at Rs 10 a kg in Calcutta.

Farmers in West Bengal as in other parts of the country rarely benefit from their huge surpluses the way they would have if middlemen could be eliminated from the supply chain and retailers buy directly from farmers. Commerce Ministry officials hope that big states like West Bengal, Tamil Nadu and Uttar Pradesh will be forced to change tack on foreign retailers once they see the direct benefit to their large farmer communities. 

The reforms burst, is expected to be followed by a cut in interest policy rates or a cut in the cash reserve ratio, the amount banks have to keep with the Reserve Bank, despite inflation still ranging at over 7.5 per cent. The RBI it is believed will be told that the government is making sincere efforts to cut subsidies and hence borrowings and this should give the central banker room to manoeuvre on interest rates. ^

But in all this flurry of grand reforms – one little economic logic does not seem to be working out. New jobs and thence fresh demand needs to be generated to make the old economy to jump to new rates of growth.

* The picture taken from The Telegraph newspaper, is a spoof based on the Bollywood Movie `Ek tha Tiger' (Once there was a tiger) where actor Salman Khan plays the role of a Bond-style super-agent, nicknamed `Tiger'. Here Dr Singh is shown as the new `Tiger'.
** At the end of a week after this was written, a `deal' on partial roll-back did not happen after both sides hardened stands and Mamata hit out accusing the Congress of trying to cover up scams such as Coalgate and of tapping her cell-phone. This seemed to be proverbial Rubicon and the Congress decided to call her bluff and let go of her and her party from the coalition in favour of more pliable allies such as Mayawati's BSP.
^ Three days after the article was written - The RBI stuck to its stand on not lowering interest rates, but it did cut the CRR, pumping in some Rs 170 billion or $ 320 billion into the marketplace, thereby encouraging banks to lower lending rates.