US President Barack Obama’s admission that India needs another round of reforms should be seen as the views of a sympathetic observer rather than a hegemonic attempt to dictate economic policy.
India is debating the issues raised by Mr Obama — restricted access to foreign capital in areas like supermarkets and insurance — and the degree of easing will be decided by the national discourse, not by external influences, a sensitivity shared by the US president. The US has considerable comparative advantage in these two areas and Indians are hopelessly underinsured and are oblivious to modern retailing, yet Mr Obama’s claim that allowing more foreign investment in these sectors will create jobs in both countries is debatable.
Retailing employs around 40 million Indians, who among them do $450-odd billion of business. Walmart, the world’s largest supermarket chain, too does business of $450-odd billion. It hires 2 million people globally. The prospect of 20 shopkeepers being squeezed out by every person Walmart hires in India is thus not too far-fetched. Yet this is only a part, albeit the scary bit, of the story the political opposition to foreign retailers is flogging. India has one shop for 100 people.
The atomisation of the industry robs shopkeepers of any pricing power that would allow them to scale up. Operating in the informal sector, 98% of the trade has no access to the institutional supports of business like credit. As it exists today, India’s retail sector has no hope of acquiring the efficiencies of a modern industry. Foreign investment in cold chains has not materialised because India has denied their developers access to retail sales. We desperately need the refrigerated trucks to bring vegetables into kitchens instead of rotting in the fields. The most immediate way to raise farm productivity involves enhancing the efficiency of the internal food trade.
Private healthcare spending in India is today thrice that of State expenditure and its share is climbing. Indians spend around R10,000 crore on health insurance premiums. Consulting firm McKinsey & Co estimates this could rise to 8-10% of the GDP by 2025 when nearly half the population will constitute city-dwelling adults and the country’s health insurance business has the potential to grow to Rs 35,000 crore by 2015.
Health is just a part of the overall insurance industry. A bill pending in Parliament initially proposed to raise the foreign investment limit in private insurance companies to 49% from the current 26%. The government’s case is India needs a big injection of foreign capital if it wants to stop being chronically underinsured. The opposing view is that higher foreign holdings increase the scope for capital flight, particularly after an epidemic of sickness among international insurers.