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Tuesday, Oct. 9, 2012

Singh's belated push for reform

Special to The Japan Times

HONG KONG — Indian Prime Minister Manmohan Singh celebrated his 80th birthday on Sept. 26 in his typically low-key no-fuss manner, which was in sharp contrast to his recent very passionate demonstration of the need for economic reform.

After years of dithering, he announced a series of measures, including cutting subsidies and raising fuel prices, allowing a greater role for foreign retail giants, and selling stakes in four government companies, to get economic reforms back on track. There was an outcry of opposition, strikes and demonstrations and the loss of six ministers as a key ally quit the government, thus depriving it of its majority in Parliament.

Singh stuck to his guns, claiming in successive days of interviews and speeches, that the reforms are essential.

"We must act before people lose confidence in our economy," he declared, recalling that back in 1991, when he started the reform process, India was in a desperate plight, with only enough reserves to pay for two weeks of essential imports and, "No one was willing to lend us even small amounts of money then."

Before anyone can shout "Bravo" that India is on the right economic track again, there is the problem that this is a case of too little, too late. In addition, they may be the wrong measures to solve India's deep economic and social problems.

The departure of Mamata Banerjee's Trinamool Congress cost Singh his slender majority in Parliament, and left open the question of precisely how the government proposes to implement its reforms.

The opposition Bharatiya Janata Party has been a leading backer of the protests and said it will do its utmost to halt the reforms, an act of brazen political opportunism in light of its support for retail reform when it was in power. But that is Indian politics, a deadly concoction of ambition, regionalism, caste, backstabbing and eagerness for the plentiful opportunities for enriching themselves that ministerial office brings.

Today, as in 1991, the need to get foreign money has been an important factor. India faces a specter of downgrade to junk status by the rating agencies, as its growth has fallen and the government deficit has risen. Growth was 5.5 percent at an annualized rate in the latest quarter, a far cry from the hopes of catching and surpassing China. The government budget deficit is likely to be 5.7 percent this year, according to Fitch rating agency. Add the state budget deficits and the total is more like 9 percent.

Foreign-based commentators have concentrated on the prospects that global supermarket giants will at last gain coveted entry to India's retail market, with headlines on the proposed reforms screaming that the door is now open for Walmart or Tesco or Carrefour, depending on the nationality of the media, to bring Indian agriculture and retailing into the 21st century.

It shows the limited vision of foreign commentators about India. There is no doubt that Indian farming needs improvements. About 40 percent of crops are wasted or spoiled on the journey from the farm to the market and the Indian farmer gets a smaller percentage of the price of his product than his counterparts worldwide.

The high hope is that foreign retailers with their experience in supply chain management and keeping food fresh from the farm to the supermarket shelves will ride to the rescue and offer a range of food and consumer goods at cheaper prices. It is a big task, and could come at a considerable price for both the farmers and the 40 million Indians involved in retailing, who must be trembling at statistics that a single Walmart can displace up to 1,400 stores and destroy 5,000 jobs.

The record of some of the foreign supermarkets is hardly stellar. Carrefour has done well in some countries, but recently announced plans to pull out of Malaysia, Singapore and Thailand. It left Japan and South Korea after it found local competition too tough.

Tesco has done well in some Asian countries with a blend from hypermarkets to local convenience stores.

Walmart is the big bad daddy with a reputation for ruthless cost control, which may be hard to replicate in India.

Some economists claim that India should not really be worried about foreign retailers given the high price of land and the fact that hypermarkets will be well out of city centers and will need the blessing of state governments before they can enter.

But in that case what do the foreigners have to bring to the party that big Indian companies cannot?

As Vikas Kumar of Azim Premji University recently wrote, "It is not clear why foreign capital, technology and management are indispensable" in creating an efficient farm-to-fork infrastructure. The problem is that India pours billions of dollars into food and agriculture, much of which are wasted through mismanagement and corruption.

Singh predicted that the entry of foreign retailers would create "millions of good, new quality jobs." But the new jobs may bypass the poor and inefficient farmers who are hardly likely to be noticed by a Tesco or Walmart.

Critics are correct that the reforms do not go far enough. To take the burning issue of foreign investment, retailers need state government permission and can hold no more than a 51 percent stake and can only set up in cities with more than a million people, with restrictions on sourcing of 30 percent of their products from within India.

Why only 30 percent? It is a reflection on how far India, once a supplier of textiles to the world, has fallen behind China and other fast-growing countries.

In aviation and electric power, the new limits for foreign involvement will be 49 percent and, in broadcasting ,74 percent.

Given the badly organized and corrupt ways of some of these industries, foreigners may not want to go where angels fear to tread. Even after selling some of its stake in petroleum, aluminium, copper and other enterprises, the government will still hold a majority stake in them and will get 150 billion rupees, which is half the budgeted target for sales of government assets.

The reforms are the low-hanging fruit. Removal of the fuel subsidies will cut the total fuel subsidy bill only slightly.

Finance Minister Palaniappan Chidambaram said this month that major subsidies on fuel, food and fertilizer may cost as much as 2.4 percent of India's GDP in the current fiscal year.

India is still a greatly divided society. Singh is quite correct that he needs to get growth moving so that money can go to key areas such as education, health and welfare — not to mention better roads so that the new retailers can get their refrigerated trucks from the farms to the stores.

Large shopping malls in the suburbs of the big cities are testament to the growing middle class of 400 million Indians, who already welcome international brands.

But the World Bank found last year that 32.7 percent of Indians — or 400 million people — live below the international poverty line of $1.25 a day and 68.7 percent live on less than $2 a day.

Cynics contend that Singh has acted to divert attention from a spate of corruption scandals in which ministers, either from ignorance or greed, sold off state assets from the 2G telephone spectrum to auction off coal blocks at tens of billions of dollars below their true cost.

His supporters claim that having kicked former Finance Minister Pranab Mukherjee upstairs to be president of India, Singh has a belated opportunity to fulfill his dreams. But at 80 and with elections due in 2014, he has set about his reform tasks late.

Kevin Rafferty is editor in chief of PlainWords Media. He formerly served as executive editor of the Indian Express newspaper group.

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