UPA unleashes big-ticket economic reforms: India Inc cheers FDI in retail, aviation and power exchanges

Political Headwinds

The announcements came after market hours. "These announcements have changed the narrative back to reforms and the economy after a long time. These measures should restore investor confidence purely in the sense that it demonstrates that despite India's problems, paralysis of governance and policy does not fall below a threshold," said Pratap Bhanu Mehta, chairman of the Centre for Policy Research, a Delhi-based think-tank.

Former RBI governor Bimal Jalan said, "The so-called policy paralysis will not be a consideration when the global credit rating agencies review the rating soon. Definitely, the rating agencies will take this into consideration." In June this year, ratings agency S&P had threatened to downgrade India unless Asia's third-largest economy acted in a purposeful manner to cut fiscal deficit.

But the political headwinds facing the ruling Congress became evident within minutes of the formal announcement on Friday evening, with the Trinamool Congress setting a 72-hour deadline for the government to roll back at least three of the reform-friendly decisions.

The party, which has convened a meeting of its MPs on Tuesday, wants the government to scrap the hike in diesel prices and restrictions on cooking gas subsidies besides rolling back FDI in multi-brand retail.

In a statement, the Prime Minister's Office sought the support of all sections of society. Television channels, citing unnamed sources, quoted the PM as saying he was willing to "go down fighting" in the course of the cabinet meeting.

In the first term of the UPA, BJP's opposition to the Indo-US nuclear deal was widely believed to have cost its middle-class support in the 2009 elections and Congress strategists might be hoping that a similar scenario plays out this time around too.




"A critical thing in political management is not just handling the Opposition or truculent allies, but to demonstrate the effect of these reforms on public sentiment, to manifest some positivity accruing from these decisions," Mehta said, responding to a question on the possible political fallout.

India's business leaders exulted in the sudden efflorescence of reforms after the long winter of policy paralysis. "From a famine of policy action, we have moved to a feast. The government's got back its gumption! We cheer and urge that they stay the course," tweeted Anand Mahindra, chairman of the Mahindra & Mahindra group.

Said Sunil Mittal, chairman of the Bharti Group, which has a joint venture with Walmart Inc to operate cash and carry stores, "They (the FDI decisions) will boost sentiment within domestic industry and provide much-needed momentum to the economy."

Commenting specifically on FDI in multi-brand retail, Kumar Mangalam Birla, chairman of the Aditya Birla Group, said, "It sends a positive signal and will stoke growth and garner investments given the potential of the market."

ET View: Well done, UPA. It’s over to BJP

The government has taken a giant leap of faith by opening up FDI in multibrand retail, allowing overseas airlines to invest in domestic carriers and clearing divestment in four companies.

These measures will impact the economy positively, and more important, send out a strong signal that the administration has shaken free of its policy paralysis.

Now it is time for the BJP, which is against FDI in retail, to demonstrate that it is a responsible opposition party. Instead of rabble-rousing anti-reform rhetoric, it should support measures which can boost growth, and improve the quality of life for a billion people.