Domestically, India can generate considerable amounts of capital, but foreign investment is still essential for infrastructure expansions, introducing new technology and developing a cohesive national transportation network. Indeed, the Sept. 14 reforms are hardly revolutionary; the hotly contested retail FDI reforms were first passed in November 2011 only to be stalled for 10 months.
Supply Chain Development
It was India's nearly nonexistent national supply chain infrastructure that prompted New Delhi to reform FDI retail regulations in 2011. The supply chain development that multi-brand retailers, such as IKEA, Wal-Mart and Tesco, can provide is as important for India's continued development as the jobs and technology offered by other types of foreign investment. For example, 30 percent of redistributed grains and nearly 25 percent of produce for domestic consumption spoil or are lost before reaching market. Several of these international companies already provide back-end support to domestic retailers in specific locations, but none has been able to develop a nationwide presence or an associated supply distribution infrastructure network in the absence of meaningful political reform.
Prior to 2006, India did not allow FDI into either single or multi-brand retail — such was the populist policies bent on protecting small, local producers, vendors and rural farmers. In early 2006, the government passed reforms allowing up to 51 percent foreign investment in retail under certain conditions, mainly as whole or retail trading companies. When Wal-Mart tried to operate in accordance with these reforms in 2007, local political opposition groups, nongovernmental organizations and small vendors responded by protesting. Some organizers even bused in individuals from other states. Concerns about lack of indigenous competitiveness, rumors of land grabs by foreign companies and a growing cultural preference for "pro-Indian" growth and development were exploited by many who opposed the parliamentary alliance in New Delhi.
The United Progressive Alliance was only slightly stronger than its political rivals in 2004, so its members did not have the political will to aggressively push ahead with reforms in the face of opposition. Reforms introduced in 2011 were blocked until regional and presidential elections concluded in September 2012, when the United Progressive Alliance won enough seats to push forward with its agenda.
Deferring to States
The vitriol surrounding the Sept. 14 reforms belies the fact that individual states can opt out of them. But the Singh government's decision to allow states to opt out of the FDI reforms sets a potentially dangerous precedent. New Delhi already contends with strong state governments that in the past have impeded foreign investment proposals and central government proposals. For example, opposition from landowners in Orissa state has stalled India's largest FDI project — a $12 billion project with South Korean steel manufacturer POSCO — for seven years despite New Delhi's support. By deferring to states' autonomy on such a nationally sensitive issue, the United Progressive Alliance risks validating opposition to future reform and thus compromising the government's ability to implement nationwide reform.
This runs counter to the very goals of increased FDI in various sectors of the Indian economy. If allowing foreign retailers to operate in India is meant to improve supply chain and integration, allowing states to opt out means large portions of a vital cross-country infrastructure would not be developed.
Many Indian states, including Haryana, Maharashtra and Andhra Pradesh, all of which host strong economies and developed infrastructure, support the reforms. However, other states and political parties, especially those with histories of strong protectionist and socialist leanings, will likely continue their efforts to develop political capital locally and block foreign retailers from entering their economies. The Bharatiya Janata Party is leading the calls from opposition groups — even some of Singh's allies — alleging the reforms threaten domestic industries and business practices and hurt rural farmers. Some local governments, such as West Bengal, have said they would never allow foreign retail FDI.
The threat from West Bengal's Trinamool Congress to withdraw from the parliamentary coalition exemplifies the competition between the Indian states and the central government. Faced with justifying the move to its constituencies, the Trinamool Congress must appear to be against the reforms while still willing to negotiate. Should it leave, the United Progressive Party would lose nearly 20 seats in the lower house of parliament, giving it only 248 of 545. The bloc would then rely more on the Samajwadi and Bahujan Samaj parties, both of which extend the United Progressive Alliance legislative support from outside the alliance.
Political and social opposition will almost assuredly follow the government's fuel subsidy cuts and foreign investment reforms. Large-scale, nationwide protests have been planned for Sept. 20 in response to the reforms, especially in states with opposition political parties. A similar set of strikes took place May 31 in response to increased fuel prices, so the United Progressive Alliance likely understood its actions would be met with strong public protests. Whether subsidy cuts are reduced or FDI reforms are again scrapped due to the protests, New Delhi will nonetheless continue to pursue economic reforms aimed at increasing India's economic competitiveness until national elections take place in 2014.
Given India's need for investment, we can expect the central government to attempt bolder reforms and to confront local opposition, especially through litigation, to help improve investor confidence. The United Progressive Alliance will have to carefully balance short-term political appeasement and strong state-level autonomy with more dramatic, long-term economic and political reforms. While continued economic reforms and government initiatives can be expected, the current administration has already shown a willingness to tout change while India's underlying constraints — poor infrastructure, strong state governments and political deadlocks — remain very much the same.
