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India to open door to foreign investment in some sectors

India's government approves economic reforms aimed at invigorating the economy and announces plans to sell its stake in several public service companies.

September 15, 2012|By Mark Magnier, Los Angeles Times
  • Many of India's retail stores are small, such as this one in Mumbai.
Many of India's retail stores are small, such as this one in Mumbai. (Rajanish Kakade, Associated…)

NEW DELHI — After months of criticism over policy malaise, the Indian government on Friday announced a series of bold economic reforms allowing significant foreign investment in the retail, aviation and broadcasting sectors.

The moves, aimed at invigorating the economy, would allow investment from abroad of up to 51% in supermarkets and chain stores such as Wal-Mart, up to 49% in aviation, up to 71% in broadcasting and up to 49% in parts of the electrical power industry. In addition, New Delhi announced plans to sell its stake in several public service companies dealing in oil, copper and aluminum.

Aware of the political risk in a country with socialist roots and millions of small-business owners, analysts said, the government is gambling that its political fortunes in the 2014 national elections are best served by being bold.

"If we have to go down, we have to go down fighting," Prime Minister Manmohan Singh said at a meeting of the Cabinet Committee of Economic Affairs, which decided on the reforms.

Critics of the policy initiative by the Congress Party-led coalition government were quick to make their displeasure known.

"We strongly oppose the move," said Kunal Ghosh, a leader of Trinamool Congress, a party allied with the government that has repeatedly opposed more foreign participation in the economy. "We demand that the government should review this decision."

Communist Party leader Gurudas Dasgupta was even more blunt, terming it the "futile act of a bankrupt government."

Indian business groups welcomed the move, however, which they see as a way to jump-start momentum at a time when the Indian currency has weakened, economic growth slowed and foreign investment declined.

"I think it's a great development," said Chandrajit Banerjee, director-general of the Confederation of Indian Industries. "The government is extremely bold in going ahead on this."

The government has announced increased foreign investment in the retail sector before, only to back down under political pressure. Much also will depend on how regulations are written and implemented in a country that has consistently ranked low on international business surveys.

India's airlines and electricity-generating sectors are in financial trouble and probably will welcome foreign partners, but the liberalization of the $450-billion retail market, in a nation with millions of jobs tied to small shops, is a much more controversial initiative.

"Only two types of people will benefit: the elite who have all the money to splurge, and the unemployed willing to work for starvation wages," said Raj Kumar Gupra, 62, owner of a small grocery store in Delhi's Vasant Vihar neighborhood where cans are stacked 20 feet high on shelves accessed by rickety ladders. "We are at the mercy of officials who want all sorts of bribes so we can run our shops. This new policy is one more way to crucify us."

The government has argued that reforms will generate 10 million jobs, spur efficiency and attract much-needed foreign investment. Wal-Mart, for instance, is likely to invest millions of dollars in warehouses, refrigeration units and trucking services to support its anticipated stores. That could also improve the quality and quantity of food Indians eat, given that an estimated 30% of fruits and vegetables spoils on the way to the consumer.

Some larger Indian retailers welcomed the move.

"It's good for the Indian market given that foreign players are much better equipped and experienced," said Kunaal Kumar, owner of the upscale Modern Bazaar supermarket group. "But it will be tough for them. Rules in India are pretty funny and stringent."

One proposal, to protect small wholesalers, would mandate that 30% of inventory be purchased from small companies. Foreign retailers point out, however, that many small companies aren't capable of handling large orders. And if they do fill a large order for Wal-Mart, for instance, they're no longer a small business.

Finding sites large enough for the likes of Wal-Mart is also a challenge, analysts said, as are the vagaries of bureaucracy and corruption. Each of India's 28 states will have enormous sway over how the liberalization is implemented locally. And foreign multi-brand retailers, who must work with a local partner, will be limited to cities with populations of more than 1 million and will be obligated to invest in expensive warehouses and refrigerated facilities.

Labor relations also are a concern. In July, a manager at an Indian-Japanese joint venture auto plant was killed when workers went on a rampage, burning part of the factory and destroying vehicles.

"Labor is a concern," business confederation head Banerjee said. "But what we really need to see is how industry, unions and investors can get together. It's important. What we really want is that labor unrest is not regular, but an exception."

mark.magnier@latimes.com

Tanvi Sharma of The Times' New Delhi bureau contributed to this report.

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