Congress Party bungles investment changes

By Seema Desai

In early December, India’s Minister of Finance Pranab Mukherjee confirmed to parliament that the government would halt current efforts to open up FDI for foreign companies such as Wal-Mart in multi-brand retail. The government is likely to revisit the subject in 2012, perhaps with a reduced FDI limit, but the decision does not signal that the government’s limited ability to push economic reforms has eroded any further, or that its survival is in doubt. No major political party, within the ruling coalition or the opposition, is prepared to bring down the government and force a snap election. The current Congress government will continue in power, though there is a possibility that Prime Minister Manmohan Singh may be replaced midway through 2012. Though unlikely, if Singh suddenly resigns in protest against his eroding authority and the cabinet is replaced, it is difficult to visualize the party pushing ahead with any controversial reform.

The same constituency that brought retail reform to near-completion after years of consultation with stakeholders will likely revive the push in 2012. The measure’s backers include Minister of Commerce Anand Sharma, senior cabinet members, and various sections of industry. The Congress Party built its case for in support of FDI in multi-brand retail over the past five years but rushed the final announcement, angering party and coalition members.

The bungled announcement has, however, put a fresh political dynamic into play within the Congress Party and its alliance members. The party’s senior leadership is not against the retail FDI policy, but the government is also acutely aware of the political dangers posed by the faltering Indian economy. The party will have to address dissenters’ concerns and work extra hard to secure support from coalition members. Neither the Dravida Munnetra Kazhagam nor the Trinamool Congress is willing to exit the coalition or face fresh elections, but they felt slighted by not being informed properly about the Nov. 24 policy announcement.

Despite the overblown media commentary, this policy reversal does not materially change the progress of internal economic reforms. Next year, the government is likely to secure legislative approval for some reform legislation, including mining, land acquisition, and direct tax bills. The retail FDI fiasco has not altered the outlook for these internal reform measures, and the political dynamics and probability of these reforms being enacted are unaltered.

There have been structural obstacles for reform since mid-2009, including a lack of real drive from the Congress party leadership. In addition, the likely internal leadership transition and the risks it poses to reformist policymaking will accelerate and grow over 2012. The exceptionally antagonistic relationship between the two main national parties, the Bharatiya Janata Party and Congress, has also made reform even more difficult over the past five years. This dynamic will continue to cast a shadow over reforms in the future unless relations improve.

Still, there continues to be movement on policy announcements that are not contentious (such as infrastructure policy), do not require parliamentary approval (the National Manufacturing Policy), or have been making their way slowly through the system over the past decade (the Goods and Services Tax).

Seema Desai is an analyst with Eurasia Group’s Asia practice.