Last Wednesday, the Government of India announced it was suspending its two-week old decision to allow up to 51 per cent foreign ownership in retail stores and supermarket that sell multiple brands of goods. The policy reversal is credit negative.
It deflates the ephemeral boost to business confidence that took hold after the measure’s initial announcement, curtails planned foreign investment in the retail sector, and reinforces the popular view that Indian politics hamper the government’s ability to implement policies decisively.
Notably, some of the parties that had attempted to ease foreign entry into retail when they were members of the ruling coalition government in 1999-2004 have been the most vociferous opponents of the government’s decision to do the same last week.
Investment in India grew to 35 per cent of GDP by 2010 (from around 25 per cent in the late 1990s) and contributed to India’s acceleration in GDP growth to an 8.5 per cent average between 2003 and 2010 from a 5 per cent-6 per cent average in the 1990s.
This year, however, investment has slowed markedly. As gross fixed investment in India declined 0.6 per cent year over year in third-quarter 2011, compared with 7.9 per cent growth in second quarter 2011, GDP growth slowed to 6.9 per cent year over year in the third quarter from 7.7 per cent in the previous quarter.
The investment slowdown reflects diminishing investor confidence related in part to a perception of “policy paralysis” in the government, which has failed to announce major investment incentives in recent years. As a result, the reversal of the retail foreign direct investment initiative reduces the cumulative benefit of the series of measures aimed at boosting investment that we viewed as credit positive.
It deflates the ephemeral boost to business confidence that took hold after the measure’s initial announcement, curtails planned foreign investment in the retail sector, and reinforces the popular view that Indian politics hamper the government’s ability to implement policies decisively.
Although foreign retailers have long wanted to participate in India’s $450 billion retail market, their entrance is strongly opposed by the small and medium-size retailers comprising 90 per cent of the sector. Therefore, although the issue has been on the policy agenda for more than a decade, implementation has been politically difficult.
Notably, some of the parties that had attempted to ease foreign entry into retail when they were members of the ruling coalition government in 1999-2004 have been the most vociferous opponents of the government’s decision to do the same last week. These parties effectively shut down Parliament, refusing to allow it to resume functioning until the government revoked the measure.
The government did not need Parliamentary approval to pass the measure. However, other important reforms on the government’s agenda, including measures addressing pension reform, food security legislation, and an anti-corruption bill, do require Parliamentary approval. As a result, we see the government’s decision to suspend the retail measure as a tactical retreat to prevent a parliamentary shutdown of its entire reform agenda.
Atsi Sheth is Vice President - Senior Analyst, Sovereign Risk Group, Moody's Investors Service, Inc.