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Stuck

A chorus of criticism by top businessmen a week ago got the wheels of government slowly turning over the past few days, when it made announcements in key sectors. But investors say it needs to back this with action to get India’s modernising economy on the fast track again, reports Gaurav Choudhury.

business Updated: Nov 19, 2011 23:30 IST
Gaurav Choudhury

Galvanised into action by accusations of a policy paralysis, criticism over a series of scams and concerns in international circles about macroeconomic mismanagement, the Manmohan Singh-led United Progressive Alliance (UPA) government is poised to introduce a slew of reforms, including politically contentious ones such as allowing foreign direct investment (FDI) in multi-brand retail and aviation.

A flurry of reformist noises over the past few days come amid increasing fear among industrialists and investors that the government will not actually push through critical policies to boost long-term growth in the world’s second fastest-growing economy. A lot will depend on how the government tackles the groundswell of political opposition that it will likely encounter.

“The market will be looking for actions rather than comments,” said a top executive of a foreign bank who did not wish to be named. “Confidence can return only when there is perceptible movement.”

The government announced on Wednesday that it would allow FDI of up to 26% in pension funds, a decision that was too hot to handle in the past because of fierce resistance from the Left.

The next day, officials confirmed that the finance ministry had favoured FDI of up to 51% in multi-brand retail despite strong opposition from the BJP, which maintains that giant multinational chains will threaten the livelihoods of mom-and-pop kirana stores and street vendors. (See box below for announcements over the past week.)

The government has been under pressure for a while. A week ago, India’s wealthiest man, Reliance Industries Limited chairman Mukesh Ambani, joined a growing chorus of experts urging the UPA government to push through policy reforms at a pace that matched people’s growing aspirations.

Ambani’s comments came barely a month after a group of 14 businessmen, such as Deepak Parekh (chairman of HDFC), Azim Premji (chairman of Wipro), Jamshyd Godrej (chairman of Godrej and Boyce) and Bimal Jalan (former RBI Governor), wrote their second open letter in 10 months asking the government to speed up reforms.

Last week, the government heard it straight from the US administration and investors: They want reforms soon in banking, insurance and retail trade.

“US inves-tors view the Indian market with immense potential,” said Anil Kakani, senior advisor, US treasury department, who was in Mumbai to attend the World Economic Forum’s annual India meeting a week ago. “The bilateral relationship between India and US has deepened. But there is a need to focus on the reforms agenda to increase capital inflows and augment investor confidence.”

Said a senior executive of a US-based fund who did not wish to be identified: “Pressure to tackle the twin issues of corruption and inflation has diverted the focus on expediting reforms.”

Some industrialists, however, cheered the moves.

“They will send the right signals to investors,” said Ashok Hinduja, executive chairman of Hinduja Ventures. “The Cabinet can take many measures without Parliament’s approval.”

Moreover, some experts disagree with the premise of a policy paralysis. “It is unfair to say that there is a policy paralysis,” said NR Bhanumurthy, a professor of economics at the National Institute of Public Finance and Policy. “Swiftness of action does not necessarily mean beneficial action. Most pending policies, such as land acquisition, labour laws and FDI in retail, are delicate issues. It’s better to go slow, rather than go wrong.”