After months of dithering on the economy, India’s beleagueredGovernment roared back to life in dramatic fashion, announcing big bang reforms as part of pack-age of measures aimed at reviving growth and staving off a ratings downgrade.
I believe these steps will help strengthen our growth process and generate employment in these difficult times
A day after sharply increasing the price of heavily subsidised diesel, the Government said it was open-ing up its supermarket sector to foreign chains and would allow more foreign investment in airlines and broadcasters.
It also approved the sale of stakes in four state-run industries.
Facing the threat of having its credit rating downgraded to junk, the Indian Government has been running out of time to show it is serious about fixing an economy that has been hard-hit by a global economic crisis and political gridlock.
Underscoring the need for speed, India’s inflation rate jumped to 7.55 per cent in August, mainly from higher food prices, data showed.
“I believe that these steps will help strengthen our growth process and generate employment in these difficult times,” Prime Minister Manmohan Singh wrote on Twitter.
Infighting in the fragile coalition Government led by Singh’s Congress Party had earlier forced it to shelve the retail and aviation reforms, casting a shadow over India’s aspirations to join the world’s leading economies.
Signalling that trouble still lies ahead, two major allies – the Samajwadi Party and the Trinamool Congress Party – demanded a reversal of the retail reform and diesel price hike. The Government has backed down when faced with such pressure in the past.
The retail reform allows global firms such as Wal-Mart Stores to hold a majority stake in a local partner and sell directly to consumers for the first time, which supporters say could transform India’s $450 billion retail market and tame inflation.
In fewer 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.
“These measures were pending for a long time and the Government has now shown political courage to push things through,” said Samiran Chakraborty, regional economist at Standard Chartered Bank in Mumbai.
“This should buy some time and rating agencies may wait for the final fiscal deficit number before deciding on India’s rating,” he said.
But Singh will now need resolve and the support of powerful Congress Party boss Sonia Gandhi if he is to muster the political will to withstand popular anger and pressure from coalition allies who fear the reforms will cost them votes.
Street protests organised by opposition parties on Friday against the diesel price increase, where effigies of Singh were burnt, may be a taste of things to come.