Ending months of perceived policy paralysis, the UPA government Friday finally bit the bullet and pushed ahead with the boldest reforms yet by allowing 51% foreign investment in multi-brand retail - and opening the aviation sector - triggering expected outrage among some of its allies as well as the opposition.
The government clarified that states which did not favour 51 percent FDI in multi-brand retail - which opens up India's estimated $450 billion retail market to foreign supermarkets like Walmart and Carrefour - were free to not implement the policy.
This effectively means that states ruled by Congress governments can implement the decision while states ruled by non-Congress parties or the central government's allies will not have to implement it. 'Policy on FDI transparent'
The move comes at a time when the government's reputation has been battered by a host of alleged scams and Prime Minister Manmohan Singh's reputation as a reformer has taken a dent, with a leading US daily portraying him as "a tragic figure" and Time magazine describing him as "an underachiever".
Manmohan Singh was the prime mover behind this audacious but politically fraught decision.
Informed sources said he reportedly pushed for the decision at the meeting of the cabinet committee on economic affairs (CCEA), saying the UPA government needs to "bite the bullet".
"We have to bite the bullet. If we have to go down, let us go down fighting," the prime minister was quoted by the sources as having said there.
The government also approved FDI in aviation and gave its nod for disinvestment in four PSUs, part of a package of reformist measures, along with the steep hike in diesel prices announced Thursday, which are widely seen as aimed at shoring up the faltering economy and the international standing of India that has taken a severe beating in recent months.
Soon after the decisions were made known, the prime minister appealed to the people to support the government's steps that were "taken in national interest."
"I urge all segments of public opinion to support the steps we have taken in national interest," the PMO's Twitter handle quoted him as saying. "I believe that these steps will help strengthen our growth process and generate employment in these difficult times."
The decision could potentially be a game-changer for India's retail market, which is dominated by neighbourhood stores.
While industry bodies welcomed the move, ally Trinamool Congress joined the angry chorus of the Bharatiya Janata Party (BJP) and the Left to denounce the move, which the government insisted would not hurt India's national interests.
BJP and Communist leaders called the decision a "betrayal" of the people's interests.
"This is a complete betrayal, also of parliament," BJP MP Balbir Punj said. Communist Party of India's D. Raja said a corruption-tainted regime was trying to salvage its image.
West Bengal Chief Minister and Trinamool Congress Mamata Banerjee was furious and said she would not stand for it.
According to Trinamool MP Kunal Ghosh, the party's parliamentary board will meet Tuesday to take a final decision, which could even lead to withdrawal of support from the government. "All options are open. We are ready to take any kind of strong decision," he said.
DMK president M.Karunanidhi also said his party has opposed FDI in retail as it would result in competition for small traders.
Customers shop at a Best Price Modern Wholesale store, a joint venture of Wal-Mart Stores Inc and Bharti Enterprises, at Zirakpur, Punjab. Reuters photo
The BJP, whose opposition to the coal block allocations paralyzed parliament's monsoon session, vowed to unleash nationwide protests against the FDI unveiling.
Attacking the central government's decisions allowing overseas investments in multi-brand retail and raising diesel price by Rs. 5 a litre, the CPI-M too said it, along with other secular parties, will launch a nationwide stir against the measures.
As criticism mounted, Commerce Minister Anand Sharma defended the sweeping policy changes, viewed as a major step to spur economic reforms.
"It is not a sudden decision," Sharma told the media, explaining the decisions taken Friday.
The cabinet also decided that overseas retailers setting up a single brand store in India must source at least 30 percent of their goods from Indian companies, preferably from micro, small and medium enterprises (MSMEs). Earlier it was mandatory for the overseas firms to source 30 percent of the goods from MSMEs.
The minister said the decision was first taken last November but subsequently held back following opposition mainly from the Left, BJP and the Trinamool.
But it was "never rolled back", Sharma clarified.
He said since then the government had held intense discussions with various stakeholders with a view to creating broad consensus. He said among those who were spoken to were farmers associations, civil society groups, regional chambers of commerce and industry as well as state governments.
"I had personally written to every chief minister of the country, spoken to almost all of them. There are states which reacted to the proposal very well, some expressed opposition. The response has been a mixed one."
According to the government, the move comes with some conditions for the investors.
Sharma said multi-brand FDI was expected to generate a large number of jobs in rural India besides giving remunerative prices to farmers for their products.