Time for India to take a firm stance on FDI

India Dispatch: Foreign direct investment reforms are essential if the country wants a more inclusive model of development. But individual states can still hamper the process.

Wal-Mart operates 17 cash-and-carry wholesale stores in India with Bharti, such as the one above near Chandigarh in Punjab. Sanjit Das / Bloomberg News

Will Wal-Mart, Tesco and other foreign retailers open up shop in India soon?

This week the Indian parliament will vote on this crucial issue.

But in fact, Tesco and Wal-Mart already have a presence in India. Wal-Mart has been in the country for five years. In its joint venture with the Indian business house Bharti, it operates 17 cash-and-carry wholesale stores. Tesco has a franchise agreement with the Tata-owned Trent, which runs the hypermarket chain Star Bazaar. So what is all the fuss about?

The real question hanging over the Indian parliament is whether to allow 51 per cent foreign ownership in multi-brand retail, permitting investing retailers front-end visibility and more complete control of their multibillion-dollar Indian retail operations.

But more confusingly, the Congress party-led cabinet had already approved the decision to allow 51 per cent ownership in multi-brand retail in September. The government passed this measure through an executive decision.

This angered both its coalition partners at the federal level and opposition parties that argued the decision adversely affects millions of small traders and family owned retail stores. Thus, the main opposition Bharatiya Janata Party has been adamant about seeking a legislative vote. The likely political outcome of such a vote is that the government's executive decision will be confirmed by parliament.

The Congress party has pulled out all the stops to ensure this. It wooed and frantically negotiated with its allies and the opposition.

Assured of their numbers, the government believes the vote will pass uneventfully. The only question is whether the Samajwadiparty, the incumbent in India's largest state, Uttar Pradesh, and a key government ally in the coalition at federal level, will let it go through.

The party is against the policy, but says it will nevertheless support the government in the lower house by abstaining from voting. Still, Samajwadi has also said it will oppose the measure when it comes to voting in the upper house. This, however, is merely posturing rather than actual threat.

Which is a good thing. Because the government is desperate for the bill to pass. After the spate of corruption scandals over the past year, it needs to redeem itself and reassert its reformist credentials.

Indeed, failure to pass the bill would bring to question its ability to pull off the next elections, likely to be held in 2014. But so far it is one up on the opposition in the perception battle. The opposition, plagued by an internal power struggle, is yet to get its house in order.

With the parliamentary vote pretty much a foregone conclusion, the stage is set for increased foreign direct investment (FDI) in multi-brand retail to make a grand entry. So what will it mean for the Indian economy?

Growth in India this year has been the most sluggish in a decade. GDP growth is less than 6 per cent, while the country needs consistent growth of at least 8 per cent a year to spread wealth to all areas of the country.

Moreover, policy inertia, lagging progress with infrastructure projects, capital flight and rising inflation suggest that India is in urgent need of new economic reforms, which have been overdue since the first spate of liberalisation in 1991. This new wave will buoy the stock market and halt the worrying slide of the rupee.

The likelihood of FDI approval at the federal level was always likely. The problem is that individual states can always interfere. However, given that the law will require the foreign companies to source 30 per cent of their goods locally, there is every chance that states will eventually regard this more as an opportunity than a liability.

If the FDI retail policy is confirmed by parliament, this will send a positive signal to the international investment community, boding well for a revival in economic growth figures.

Priya Virmani is a political and economic commentator based in London