Poor India has had a terrible time attracting foreign investment in recent years. Of the four BRIC nations ( Brazil , Russia , India and China ), it’s the only one whose foreign capital inflows fell in 2010, and the drop-off has continued this year.
Domestic economic reforms could change this, making India a more attractive destination for foreign capital. Prime Minister Manmohan Singh tried to move in this direction in late November, when he announced his cabinet’s decision to open India ’s borders to foreign retailers. Under the proposed new rules, foreign-owned hypermarkets, grocery stores and single-brand retailers would be allowed to open in India , provided participating firms invested at least $100 million, with at least $50 million going to infrastructure, transport and storage.
This could have carried huge benefits for Indian society over time. India has long struggled with high malnourishment due to its aging food storage and transportation infrastructure. Its agricultural sector is vast, but much of the harvest rots before it can reach households, causing supply shortages and higher prices. The government believes the influx of foreign investment could spur massive upgrades in agricultural productivity and efficiency, eventually putting cheaper food on people’s plates.
Unfortunately, this proved too tough a sell for the Indian public. Small business owners staged a national protest last week, and the opposition parties have forced Parliament to adjourn since the Prime Minister’s announcement (the new rules required only cabinet, not parliamentary approval). Why was it so unpopular? Small shops are the lifeblood of Indian retail, comprising around 90% of the $450 to $500 billion sector. It’s estimated there’s one shop for every 10 people. Naturally, these merchants fear they’ll be chased out of business by giant foreign superstores, and opposition lawmakers are rallying to their defense.
The government held its ground for over a week, but it has now bowed to political pressure, as a government official said the plans were on hold—no doubt a disappointment to the retailers that already lined up to enter. Whether the about-face is temporary or permanent is uncertain—the government understands the benefits of these reforms and wants to move forward, but if the political costs are too high, the changes may get stuck in limbo. Pushing the reforms through would likely use most or all of the government’s political capital, but backing off permanently could erode confidence in the cabinet’s ability to govern. We’ll be watching to see how this plays out.
