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BW Businessworld

Retail FDI On Hold; Step Regressive, Says India Inc

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Disappointed by the government's decision to put foreign direct investment (FDI) in multi-brand retail on hold, India Inc described the move as "highly regressive". Bowing to intense pressure from within and outside, the UPA government on Wednesday announced suspension of its decision to allow FDI in the $450-billion retail sector, backtracking over one of its boldest reforms in years. Parliament was back to business after nine days of logjam.

Shares in Indian retailers were mostly flat on Wednesday, after falling sharply earlier this week when news of the reform "pause" leaked out.

The breakthrough in the Parliamentary standoff came at an all-party meeting this morning where the government offered to put on hold the Cabinet decision to allow 51 per cent FDI in multi-brand retail and the Opposition accepted it.

Soon after, Finance Minister Pranab Mukherjee made an announcement in the Lok Sabha that the government has decided to put on hold the decision on FDI till all stakeholders were consulted.

A similar statement was made in the Rajya Sabha by Commerce and Industry Minister Anand Sharma.

"The decision to permit 51 per cent FDI in multi-brand retail is suspended till a consensus is developed among various stakeholders," Mukherjee said in the Lok Sabha.

He explained that the stakeholders were political parties and Chief Ministers without whose involvement this decision "cannot be implemented".

Coming less than two weeks after it announced the move, the retreat is another nail in the coffin of Prime Minister Manmohan Singh's economic reform programme, just as Asia's third-largest economy suffers from a growth slowdown and falling investment.

Both ruling Congress party allies and opposition parties, fearing massive job losses for millions of small shopkeepers, had disrupted parliament for two weeks in protest, stalling some key bills such as increased food subsidies for the poor.

The suspension will help cement a view that the world's biggest democracy is an emerging market slowcoach slowly losing economic clout to other BRIC nations like China and Brazil.

Ficci proposed watering down the plan to limit FDI in supermarkets to 49 per cent; make the big retail groups source more produce from small businesses; and only allow foreign store openings in cities with at least 1.5 million people.

"The image, the credibility of the government is lost," said D.H. Pai Panandiker, head of the RPG Foundation think-tank.

"The business community is frustrated anyway. In fact, many of the companies are cash rich, but still don't want to invest. The decision-making process by the government has almost come to a stop. That's the problem."

"... It is a highly regressive move. For the growth of this vital sector of the economy, which is likely to result in strong linkages with the farm sector and for the economy as a whole, it is imperative that reforms like these should take place," Ficci President Harsh Mariwala said.

He was reacting to the announcement made by Finance Minister Pranab Mukherjee in Parliament that the government has decided to hold back its decision to allow 51 per cent FDI in multi-brand retail.

The decision to hold back FDI in multi-brand retail will have a strong impact on the domestic and foreign investor sentiment, another chamber, the Confederation of Indian Industry (CII), said in a release.

"We firmly hope that this would not be a rollback and a quick consensus is reached," CII Director General Chandrajit Banerjee said.

Describing the volte face as a case of "missed opportunity", Assocham Secretary General D S Rawat said, "It will send a very negative message to foreign investors."

Rawat said FDI in multi-brand retail could have created over 10 million jobs in three years, curbed wastage of farm products and benefited farmers through better prices for their produce. Ficci urged the government to move ahead with this progressive reform and proposed solutions like considering a maximum of 49 per cent FDI in multi-brand retail and increasing the percentage of sourcing from the small scale sector, which was proposed to be fixed at a minimum 30 per cent.

Opposition Elated
Leader of the Opposition Sushma Swaraj welcomed the announcement to put on hold the decision.

"Government has bowed to the wishes of the people. To bow before the will of the people is not defeat," she said.

After the statement by the Leader of the House, Speaker Meira Kumar disallowed the adjournment motions moved by several opposition parties, including the BJP, the Left and BSP. BSP members were dissatisfied and staged a walkout.

The House then took up the Question Hour for the first time since the Winter session began on November 22.

In the Rajya Sabha, Sharma made the statement on the suspension of the government decision on FDI in retail.

A BSP member, however, expressed opposition to the suspension of FDI in multi-brand retail and staged a walkout saying that his party wants nothing but rollback of the decision.

Sitaram Yechury (CPI-M) said the state governments should be included in the consultation process.

Earlier, at the all party meeting convened by Mukherjee the opposition agreed to the government proposal of suspending the FDI in retail decision till a "consensus" emerges after consultations with different stakeholders.

All the parties, including UPA allies TMC and DMK, which were opposed to the decision, agreed to support the resolution and allow the House to function.

The BJP and the Left were demanding a complete rollback but agreed to the government proposal contending that trying to build a "consensus" virtually meant that the FDI decision has been put on the backburner indefinitely.

"This is a virtual rollback of the FDI decision, so we will allow the House to function. We are more keen than the government that Parliament should function," CPI leader Gurudas Dasgupta told reporters after the meeting.

No Timeframe Given
The government gave no timeframe for the suspension of the reform, which would have allowed foreign firms a 51 per cent stake in supermarket ventures, to be back on track.

Allowing foreign direct investment into a retail industry dominated by small shops was trumpeted by Congress as a policy that would help ease stubbornly high inflation, improve supply-chain infrastructure, and create millions of jobs.

Business leaders had already rounded on the government for flip-flopping.

In an open letter earlier this week to "the saner sections of Corporate India", former Hindustan Unilever chairman Ashok Ganguly and Deepak Parekh, chairman of Housing Development Finance Corp, said opposing the reform was "to the detriment of the vast majority".

"This decision has certainly delayed creating new economic activity," said Kishore Biyani, CEO and managing director of Future Group, the parent company of Indian retailer Pantaloon .

"We are convinced that good sense will prevail at some point, and a consensus will emerge in some form, maybe not in the initially proposed form."

Politics Rules
With important state polls next year, including India's politically most important state Uttar Pradesh (UP), the window for reform may be closing quickly. One leftist party called the suspension a "virtual rollback".

"From now until the UP elections, I think it will be a stalemate again, except for populist measures," said Panandiker.

The silver lining is that the opposition will now stop disrupting parliament after two weeks of adjournments, allowing the government to pass other key reform bills.

But the quick about-turn -- and obvious disarray among government ministers -- has raised questions as to who is running India.

The prime minister is 79 and his cabinet are mostly septuagenarians seen as out of touch with this globalising nation. Sonia Gandhi, Congress party chief and India's most powerful politician, suffers from an undisclosed illness reported to be cancer.

The government has stumbled amid corruption scandals this year and has not passed a single major reform bill.

The economy grew at its weakest pace in more than two years in the quarter to end-September, revealing the toll that stubborn inflation, rising interest rates and crisis-hit global capital markets are having.

The biggest factor in the decision to suspend the reform was the opposition of coalition allies like Mamata Banerjee, the firebrand leader of West Bengal, highlighting the kind of messy coalition politics that competitors like China are free from.

(With Agencies)