New Delhi/Mumbai: Signalling its political vulnerability, the Congress-led United Progressive Alliance (UPA) on Wednesday suspended its decision to open up domestic retail to foreign investment.

The setback comes on the eve of a crucial ruling on home minister P. Chidambaram by a Central Bureau of Investigation court into the allocation of second-generation telecom spectrum.

The decision, which sent out adverse signals to foreign investors, has also cast doubts on whether the UPA has the stomach to pursue much-needed policy change.

The episode has served to make clear the divisions among allies, further impeding any attempt at policy change. It also spotlights the government’s political vulnerability and its low morale, having to go back on what it considered to be a showpiece reform.

The Indian government, which was forced to suspend the key economic liberalization measure in order to break a deadlock in Parliament, may find it difficult to get the reform agenda moving again, analysts said.

“The decision to permit 51% FDI (foreign direct investment) in multi-brand retail is suspended till a consensus is developed among various stakeholders," finance minister Pranab Mukherjee said in Parliament on Wednesday, explaining that the stakeholders include state chief ministers and political parties. “Without the chief ministers, it cannot be implemented."

The move has also put paid to any prospect of overseas retail companies entering India or picking up stakes in existing multi-brand ventures, at least until the government can find a more conducive political climate.

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An industry department official, speaking on condition of anonymity, indicated that the decision to raise FDI in single-brand retail to 100% from 51% stays. However, he added that since both single-brand and multi-brand FDI decisions were taken together by the cabinet on 24 November, it wasn’t clear how and when the proposal could be implemented.

Political vulnerability

The government was forced to climb down after facing a barrage of criticism by the opposition, allies and even some Congress leaders, who said the move would put family-run small stores out of business and lead to job losses for millions of people who worked in the unorganized sector of the industry.

The winter session of Parliament was interrupted by protests since it began on 22 November, and these intensified after the cabinet decision two days later, leading to the halt of all proceedings. Proceedings resumed on Wednesday after a truce was called at an all-party meeting during which the UPA agreed to put on hold the decision on retail.

The reform process may resume after elections in Uttar Pradesh next year, said Balveer Arora, analyst and former head of Jawaharlal Nehru University’s political science department. Once the polls are over, the Congress will be able to seek the support of the leading parties in the state for its policies.

Congress general secretary Rahul Gandhi, who has been struggling to revive the party’s fortunes in Uttar Pradesh, has been on the offensive against the state’s ruling Bahujan Samaj Party and the opposition Samajwadi Party at election rallies. Both parties extend issue-based support to Prime Minister Manmohan Singh’s coalition government.

The suspension of the decision has damaged the image of Singh and the government, Laveesh Bhandari, director of Indicus Analytics, an economics research firm in New Delhi, told Bloomberg.

“It is very clear now that the reform process is over until we have a new government, a new prime minister," he said. “The government is so weak, they will give up on anything."

The government has listed two draft items of legislation for Parliament on Thursday. These are the Pension Fund Regulatory and Development Authority Bill and the Life Insurance Corp. of India (Amendment) Bill that seeks to corporatize the state-owned company. Both have been opposed by the main opposition, the Bharatiya Janata Party (BJP), and the Left parties.

Dinesh Trivedi, railway minister and member of key UPA partner Trinamool Congress, said: “No hasty attempt should be made to reintroduce the Bill. This is a big-ticket item and this needs to be talked about." The Trinamool Congress had sided with the opposition in resisting FDI in retail.

Separately, the cabinet on Wednesday cleared an Rs8,750 crore financial package for West Bengal’s backward districts following a demand by Trinamool Congress leader and state chief minister Mamata Banerjee.

The BJP’s Yashwant Sinha, a former finance minister, said the government should work on consensus rather than being confrontationist.

Buoyed by the government’s move, the Communist Party of India-Marxist, or CPM, said it would demand an immediate ban on forward trading in all agriculture commodities, the rollback of petrol price increases and the release of excess foodgrain in government stocks. It also said the retail measure has been effectively scrapped.

“The decision will not be implemented. In future, whatever decision will be taken on the issue, it will be based on a consensus with all stakeholders," CPM leader Sitaram Yechury said.

The decision would send a negative signal to the international market, said Sudipto Mundle, emeritus professor at the National Institute of Public Finance and Policy. “This will severely affect the credibility of the government."

The suspension of the measure is a setback for those who back reforms, said Yes Bank Ltd chief economist Shubhada Rao.

“Perhaps this is something the government had not anticipated properly," she said. “I expect the government to take the consensus route for other reform areas. Now that Parliament has started functioning, I hope to see the pending key legislation debated and taken forward."

Congress spokesperson Renuka Chaudhary denied that reforms would come to halt.

“I do not have such pessimism. It’s only a matter of negotiations and convincing allies. We have no concern or fear over the other initiatives, because the country will know who will stand for what," she said. “There is always a place for course correction. We learnt that we have to approach them differently. We can’t sacrifice what is good for the country at the altar of short-sightedness."

Indian retailers such as Govind Shirkhande, managing director and chief executive officer, Shoppers Stop Ltd, said they will wait for a consensus to emerge.

Pantaloon Retail (India) Ltd, India’s largest listed retail chain by revenue, said its plans remain on track. It is seeking to add 9 million sq. ft over the next three-four years to its existing footprint of 15.5-16 million sq. ft. The retailer had said previously that it would look at realigning its debt of Rs5,400 crore after the cabinet made the change on 24 November.

“We haven’t yet initiated any talks with MNCs (multinational corporations) after the announcement. Our expansion plans remain on track as before the announcement," said a spokesperson for Future Group.


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