Govt Has Its Big Bang Moment; Allows 51% Retail FDI

In a big bang announcement, the government on 14 September cleared a slew of proposals concerning FDI  in multibrand retail, aviation and broadcasting sectors. It also allowed disinvestment of stake in 5 PSUs.

 

The biggest bang of course was reserved for the proposal allowing up to 51 per cent Foreign Direct Investment (FDI) in multi-brand retail. FDI in multibrand retail was allowed on the condition that states will be able to decide whether they want to opt for it.

Government had allowed 51 per cent FDI in multi-brand retail in December last year, but the decision was kept in abeyance following widespread opposition from the allies and opposition parties.

Overriding huge opposition from allies like Mamata Banerjee and friendly parties like Mulayam Singh Yadav, the government, in a surprise move, opened its retail sector to foreign supermarkets. This will allow global retail giants like WalMart to set up deep-discount stores in India. The decision is bound to create a much bigger political storm than what the hike in diesel prices has.
 
In less than 24 hours, the government announced more measures to liberalise the economy than in the past eight years - a sign of the urgency felt in New Delhi after high spending and low growth battered India's finances in recent months. Today's announcement follows the sharp hike in the price of heavily subsidised diesel on 13 September..

 

Strongly opposing the major reforms announced by the Centre, key UPA constituent Trinamool Congress on 14 September set a 72-hour deadline to government to withdraw decision on multi-brand retail and diesel price hike.

The party has decided to convene an urgent meeting on the issue on 18 September to "take a tough decision" after the Centre's decision to allow 51 per cent FDI in multi-brand retail and hike of Rs 5 in diesel price.

Reacting to the government's decision, opposition party BJP called the FDI in retail as a "betrayal of people of country".

India also allowed foreign airlines to buy stakes of up to 49 per cent in local carriers in a long-awaited policy move, providing a potential lifeline to the country's debt-laden airlines by opening up a fresh source of funding. "This will open up a wide range of opportunities for both Indian carriers and foreign carriers who wish to participate in the strong growth potential for civil aviation in our country," ailing airline Kingfisher said in a statement.

In another major decision to liberalise the broadcast sector, the government on 14 September decided to raise FDI cap to 74 per cent in various services of the sector, except the TV news channels and FM radio where the cap of 26 per cent will apply.

Read: Govt Bites The Bullet, Hikes Diesel Price By Rs 5

Retail stocks surged on market speculation that the government might finally allow foreign investment in the country's multi-brand retail sector.

Kishore Biyani, chairman of retailer Future Group said:  "We are hoping this time the government will stick to its decision (allowing FDI in multi-brand retail) because that is absolutely essential.

Although it has been left to the states to take a call, I still think it is a pretty positive development, for even if some of the states make a start and the economics of it becomes evident to the others, then more will be likely to embrace it.

"The decision to let individual states decide on whether they want it is a good decision. This should satisfy people who are opposing it. The industry is convinced once a few states implement it the others will see the benefits and definitely consider it as well."
 

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According to Mohit Bahl, Partner, KPMG, it is a step in the right direction. But he also said: "I don't expect a huge floodgate to open in the next six months.  No doubt international retailers will now start formulating plans,  but I feel people will be quite considered and measured in their reaction."

 

The move would allow global firms such as Wal-Mart Stores to set up shop with a local partner and sell directly to consumers for the first time, a move which supporters say could transform the $450 billion retail market and tame inflation.

Importantly - and the government has underscored this provision -  the policy allows state governments to decide whether to allow FDI in multi-brand retail or not. So, the government says, if opposition parties don't want the FDI, they can make that choice.
 
Multinational retailers like WalMart, Carrefour of France and Metro of Germany already have stores, but they are not allowed to sell to walk-in customers. They deal with smaller retailers, like the family-run shops in most localilities.

Samiran Chakraborty, regional economist, Standard Chartered Bank, Mumbai said: "These measures were pending for a long time and the government has now shown political courage to push things through. The process of clearing all these got delayed and it is just that all are coming together.

"As an immediate impact, business and consumer sentiment will improve, stock market will improve. But I don't think RBI will cut rates after these measures because the impact of these steps on supply side will only be in the medium term.

"The government's intention is to pacify rating agencies or convince them that government is taking the right steps. This should buy some time and rating agencies may wait for the final fiscal deficit number before deciding on India's rating."

Divestment Programme Back On Rails

India approved stake sales in four state-run companies, restarting a stalled divestment programme as part of a broader push to revive a reform agenda.

The Cabinet approved stake sales in Hindustan Copper Ltd, National Aluminium Co Ltd, trading firm MMTC Ltd and explorer Oil India Ltd. It also approved 10 per cent disinvestment through initial public offering in RITES.

New Delhi aims to raise Rs 30,000 crore through share sales in state-run companies in the current fiscal year that ends in March 2013, but has been unable to raise any funds thus far because of weak market conditions.

Read: Mamata Sets 72-Hour Deadline On Retail FDI
Read: Govt Allows 49% FDI In Aviation Sector
Read: Broadcast Sector Reform: FDI Up To 74% To Be AllowedRead: Govt Bites The Bullet, Hikes Diesel Price By Rs 5