Stung by increasingly sharp criticism at home and abroad, the Indian government lat last week announced a raft of foreign direct investment reforms in supermarkets, airlines and other areas that ended three years of policy inertia. This followed a highly controversial decision to cut fuel subsidies, triggering a 12 percent increase in diesel retail prices and restrictions on the sale of cooking gas.

“If we have to go down, we have to go down fighting,” Manmohan Singh, the prime minister, said at the cabinet meeting that took the decisions, anticipating opposition from within his coalition which could reduce the government’s parliamentary majority. It was time, he said, “for big bang reforms”.

Complaining about the decisions, which have caused a political furor, a BJP spokesman said they had been taken “under foreign pressure” – and he was probably correct! I hesitate to suggest that foreign correspondents based in New Delhi provoked Manmohan Singh into action, but there is no doubt that sharp criticisms in The Washington Post, The Economist and Time magazine, among others, have struck home.

More importantly, there are growing risks of India being downgraded by international rating agencies because of a high fiscal deficit with economic growth slowing to as low as 5.5 percent.

The media reports have focused on the prime minister’s lack of leadership and action. Simon Denyer described him in the Post last week as “a dithering, ineffectual bureaucrat presiding over a deeply corrupt government” who “remained silent as his cabinet colleagues filled their own pockets” – a reference to the coal industry and other corruption scandals that have involved government ministers.

Manmohan Singh’s 80th birthday

Today’s decisions mean that the prime minister can look forward to kinder reviews on September 26, his 80th birthday.

They will also help to divert attention from the coal corruption scandal that has dominated the headlines in recent weeks.

The FDI announcements have been widely praised, but they are much more significant for their symbolism and impact on market sentiment than for any rapid direct economic effect. They show that the government is willing to dare coalition partners – notably Mamata Banerjee of the West Bengal-based Trinamool Congress – to oppose the changes and even withdraw from the coalition.

Taken with the fuel price hike, they also seem to show that Manmohan Singh is prepared to do things that may not necessarily meet the approval of Sonia Gandhi, his political boss at the head of the coalition, and her son Rahul, though their views are not known. The main FDI change is that, after years of debate, supermarket companies (dubbed multi-brand retail) such as Wal-Mart and Tesco can have a 51 percent equity stake in Indian retail joint ventures. This has been opposed by many parties for populist political reasons focused on the impact that it could have on small shopkeepers and street-sellers.

Food distribution

The real opposition has however been generated by public sector agencies and middlemen, who dominate the inefficient and waste-ridden distribution system between farmers and the shops. These vested interests are the main target of the reform. Foreign companies are expected to invest in their own modern distribution systems to serve the retail outlets that they are now to be allowed to open.

Indian companies such as Reliance and the Future Group however have failed to break the grip of the current operators, so it remains to be seen how successful foreign retailers can be, working with their Indian partners.

To placate opposition, the government has said that individual states can decide whether to allow the FDI. That means it will not happen in many states, at least for some time. There are also requirements for the joint ventures to spend half their investment on rural-based distribution systems, and to source 30 percent of their products from Indian small and medium sized firms.

Some companies might open stores fairly quickly, and the measure could have an impact within a few years, but it is not relevant to the immediate recovery of India’s economy.

A decision to allow foreign airlines to take up to 49 percent stakes in Indian airlines (subject to regulatory arrangements) also needs to be seen in context. The government is not pushing something it specially believes in. It is partly reacting to market conditions, but has mainly been influenced by a change in the attitude of India’s leading private airlines, notably Jet Airways, which has managed to block the initiative for some 15 years.

Jet seems to have withdrawn its opposition, and FDI is now favored by airlines that urgently need fresh capital, notably Kingfisher which is near to financial collapse, and Spice Jet. Foreign airlines based in the Gulf are expected to be most interested in exploring possible stakes – led maybe by Emirates which already has a big 20 percent share of India’s outbound air traffic, and Qatar Airways.

The government also raised FDI limits for broadcasting and introduced it for electricity power trading exchanges, and announced small equity divestment plans of around 10 percent for five public sector corporations – Oil India, Hindustan Copper, NALCO (aluminium), MMTC (metals trading) and RITES (transport projects).

Rahul Gandhi next?

The next attention-diverting announcement will probably be a ministerial reshuffle, plus Congress Party changes including a new party post for Rahul Gandhi, dynastic heir to the party leadership, whose failure to impress so far has been matched only by that of the government.

This could come this week, according to media reports. It will then be up to Rahul to show whether this appointment is mere symbolism, or whether he can grow sufficiently in stature to become a prime ministerial candidate.

He might also tell people whether he believes in the sort of economic reform announcements made yesterday and today, or whether subsidies and other pro-poor policies are much more important because he thinks they are most likely to help his Congress Party do well in elections.

(John Elliott blogs at http://ridingtheelephant.wordpress.com/)

Manmohan Singh responds to critics with…

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