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India ready for strict economic reforms

India ready for strict economic reforms
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First Published: Wed, Jul 14 2010. 10 14 AM IST
Updated: Wed, Jul 14 2010. 10 14 AM IST
New Delhi: The Centre, after showing its mettle with an unpopular repeal of fuel subsidies, might be set to bite the bullet on more reforms after years of dragging its feet, analysts say.
Last month the Prime Minister Manmohan Singh government announced the boldest policy move yet of its second term.
The Congress-led government said it would free up petrol prices and reduce its crushing $16 billion fuel subsidy bill to trim the public deficit -- ignoring opposition protests that the step would hurt the poor.
“It’s an important sign by the government that it wishes to push through tough economic reforms -- many investors had become disillusioned,” said Deepak Lalwani, India director of London-based investment house Astaire Securities.
“The government bit the bullet,” he said.
Deregulation of petrol prices, the biggest reform since Singh was reinstated as premier after the May 2009 general election, showed the government’s desire to put its financial house in order, analysts said.
It was “a bold policy move, signalling the government’s willingness to initiate expenditure reforms towards fiscal consolidation,” said Shubhada Rao, chief economist at Yes Bank.
The government says it must curb subsidies to meet its target of reducing the fiscal deficit to 5.5% of gross domestic product in the current financial year from a record 16-year high last year.
Giving a further fillip to its reform agenda, the government last week kicked off public debate on opening $500-billion retail sector to foreign investors -- a move opposed by millions of small family-run stores.
In a discussion paper, the government said permitting foreign direct investment in retail could be an “efficient” means of addressing massive supply bottlenecks in the sector, easing double-digit inflation.
Foreign multibrand retail giants such as Wal-Mart, Britain’s Tesco and French supermarket Carrefour have been pushing for a government green light that would fully open up the vast sector to foreign players.
Currently, only single-brand retailers are allowed to open shops, such as sports retailers Reebok or Adidas.
The entry of foreign multibrand retailers and growth in domestic supermarkets are controversial because of worries they will drive family-run corner shops out of business.
The ministry has sought comment from industry players and the public by 31 July.
“The tone of the (government) paper is a positive signal -- it’s reflecting on the positive benefits of opening retail,” Arvind Singhal, chairman of retail consultancy firm Technopak, said.
“It makes me optimistic” that the government will go ahead, he said. “Also the tight deadline they have given makes me think they are serious.”
Analysts suggest the government could seek to open up the retail sector as an important liberalisation move ahead of a visit to India by US President Barack Obama in November.
The government has also raised the possibility of nearly tripling the cap for foreign direct investment in the defence equipment sector to 74%.
After the Congress party won re-election, analysts said its strong mandate should allow it to push ahead with reforms after being hamstrung during its last term by its reliance on the communists to stay in power.
Reducing government control over the economy, in terms of direct ownership and red tape, has long been prescribed by economists as an important way to boost growth, create jobs and alleviate chronic poverty.
But since last year, aside from plans to sell minority stakes in 60 state-owned companies and promises to overhaul tax laws, advances have been much slower than expected.
The government is in a “good spot” to undertake reforms now as it does not face state elections until next year, said Mahesh Rangarajan, a political analyst at Delhi University.
“By then, it should have ridden out” any voter backlash, he said.
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First Published: Wed, Jul 14 2010. 10 14 AM IST
More Topics: India | Manmohan Singh | Fuel | Reform | Congress |