Public Affairs Perspectives Asia Pacific

ISSUE 1

January/February

2013

Behind the Curtain: Understanding Indias Changing Political Landscape

Latest FDI Policies Target Indias Retail Sector

The goal of Indias Foreign Direct Investment (FDI) policy is to attract and promote foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth. FDI has long been an important component in Indias fiscal management, with a significant part of the capital deficit also financed through FDI. In recent times, the government has struggled to maintain interest from foreign investors in the economy. Recent economic reforms have tried to shake a bad reputation created by opposition parties claiming most policies are one sided and beneficial to the rich. Recent Developments
FDI inflows in India; Data source: World Bank and DIPP, Govt of India In this context, Indias government recently introduced a number of changes to its FDI policy. One of the most significant and controversial policies has been the decision to allow up to 51 per cent of FDI in multi-brand retail.

The retail sector employs around 10 per cent of Indias workforce the second largest after agriculture. Estimated employment in the sector is around 40 million, mostly in small mom-n-pop stores. Opponents of the move to allow FDI in retail fear this might lead to large-scale job losses as small businesses collapse under the onslaught of big retail. However, supporters say allowing FDI would create more than 10 million new jobs and lead to a modernisation of Indias creaking supply chain infrastructure. While there could be some impact on small retail, the large space requirements of larger, foreign retailers and their inability to match the personalised services offered by corner shops might ensure the Davids of Indias retail sector continue to thrive even as the Goliaths set -up shop. Indias government has a lot on the line with this new policy: if it works, the country benefits from an employment boom, while the retail industry proves its ready to grow up and welcome big brands. If it doesn't work, and small business suffers, the government risks shouldering the after -effects of an economic bump.

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Latest FDI Policies Target Indias Retail Sector, contd FDI: Key Milestones At this point, its not clear if other FDI reforms related to insurance or pension funds will be pushed through Indias upcoming budget session. After all, success in retail doesnt mean Sep 2012: The the Government wont play it safe and shy away from other reforms in the face of pending government revives an elections. At the same time, India faces severe pressure to take steps in addressing the earlier decision to allow ballooning fiscal and Current Account deficits, and to stave off the threat of a possible ratings FDI in multi-brand retail. downgrade. A report by a government panel recently warned that the Indian economy is The decision had poised on the edge of a fiscal precipice and the Finance Minister has promised that the originally been put on ice 2013/14 Budget will be responsible. Given the approaching elections in 2014, and the tight after political fiscal space, expect the Finance Minister to try and strike a golden mean between populism disagreements. The govt and fiscal rectitude. also announces its intent to hike FDI in insurance, permit FDI in pension funds, and allows FDI in The Confederation of Indian Industry (CII): Indian carriers by foreign A Champion of All Trades airlines. Three types of industry associations exist in India national all-industry associations, regional associations and industry-specific associations. The Confederation of Indian Industry (CII) is a national association that works on issues affecting sectors in manufacturing, services and agriculture. CII is an important stakeholder for the government and is often involved in consultations on policy or regulatory issues that impact industry. As a result, many global companies also use them as a sounding board to understand the current climate around policy issues in India. CII also helps major companies in India connect with each other and identify industry or sector issues, providing important information the government can use in responding to industry concerns. It has partner associations in most countries, many of which are important sources of investment for India, and has also set up institutes of excellence in areas such as corporate social responsibility (CSR), sustainability & environment, and quality management. The association has been a strong advocate of industry reforms and is part of important global platforms such as the B20 coalition of G20 countries, thereby lending its weight in India to talk about issues impacting countries across the globe. So why should a company work with CII? Think of the association as your ultimate champion. In many cases, it can open doors for sustained government engagement, provide insights into industry concerns and collaborate on valuable research. Dec 2012: Parliament votes against motions calling for a roll-back of the decision to allow FDI in multi-brand retail. Jan 2013: Indias Finance Minister embarks on a tour to meet investors in foreign countries, promising policies aimed at reviving growth and better fiscal management. Jan 2013: Controversial anti-tax avoidance proposals in Budget 2012 -13 are shelved after widespread investor unease. Jan 2013: Indias Foreign Investment Promotion Board (FIPB) clears a US$ 2b IKEA proposal after much back-andforth.

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Indias General Elections: Still Too Fractured to Call

State elections held in Gujarat (December 2012) and Himachal Pradesh (November 2012) Budget 2013/14: Whats provide an interesting preview of Indias upcoming general elections of 2014. The Bharatiya on the Table Janata Party (BJP) won the state of Gujarat for a fourth consecutive term, while it was ousted in Himachal Pradesh by the Indian National Congress party, the single largest party in the FDI: The government is United Progressive Alliance (UPA). UPA is the coalition of parties running the national expected to introduce government in India, presently in its second term. bills increasing FDI for both insurance and Although the win in Himachal Pradesh was a relief for the UPA , the Alliance still faces many pension funds from 26% challenges ahead of the 2014 elections. Its second term was marred by a series of scams to 49%. and corruption charges, slow economic growth, and policy paralysis impacting investment and industry. In an attempt to fix this, and with the general elections less than 16 months GST: The government is away, the UPA recently announced several economic reforms including the approval of likely to announce a Direct Cash Transfers for subsidies, FDI in multi-brand retail and aviation, raising the FDI cap revised roll-out schedule in insurance, and opening the pension sector up to foreign investment. for the Goods and However, as inflation numbers rise and India's fiscal deficit increases, the UPA has also taken tough economic measures which have chipped away at its popularity, such as limiting subsidized Liquefied Petroleum Gas (LPG) cylinders to six per household annually and increasing diesel prices. Recent ABP Nielsen Poll numbers show the Congress -led UPA coalition Party sitting 17 points behind the National Democratic Alliance (NDA) in 28 cities. The NDA is Indias major opposition party, led by the BJP. In an effort to revamp its image and woo youth voters, the Congress party recently elevated Rahul Gandhi son of Congress president Sonia Gandhi to the position of Vice-President. Rahul is widely believed to be the partys prime ministerial candidate for the 2014 elections, but has yet to implement policies or changes setting him apart. Should these trends continue across the country, measures by the Congress party to benefit the rural poor (such as Direct Cash Transfers) could deliver votes for the party. On the other hand, lingering negative sentiment for the Congress may provide BJP the opportunity to once again take the lead in government. What remains to be seen is whether the NDA can hold its current lead or if recent economic reforms last long enough to change the tide for the UPA. A key takeaway for businesses operating in the current scenario: it is just as important to engage with government stakeholders as it is to continue speaking with key influencers in the opposition. With a political landscape this fractured, it is just too early to predict which party will emerge triumphant in 2014. Services Tax (GST), replacing many current indirect taxes. Taxation: The budget might include more clarity on current tax rules, starting with the official roll-out schedule for the new Direct Tax Code. Economic Growth: A key focus for the government, parliament will introduce steps to increase growth from the present 5.3% to 6.5-7%. Food Security: The 2013/14 budget is expected to announce mechanisms to fund Indias ambitious Food Security program, slated to launch the next Fiscal. Subsidies: With a focus on reducing subsidy burdens, the budget is likely to table polices making it easier to transfer cash subsidies to beneficiaries.

Supporters of (BJP) hold posters of Gujarat Chief Minister Narendra Modi while celebrating the party's victory in the State Assembly elections, in Ahmedabad. Image courtesy of thehindu.com

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Narendra Modi: Indias Polarizing Politician

Chief Minister of the state of Gujarat, Narendra Modi is one of Indias most polarizing figures. While supporters see him as a strong leader with a proven track record in development-oriented governance, his opponents associate him with right wing Hindu extremism. In 2002, Modi was months into his current position when religious riots broke out in Gujarat, resulting in the deaths of thousands of people, mostly Muslim. Many held his administration responsible for the riots and some members of his cabinet were even jailed for their role in it. Critics have long accused Modi of not doing enough to stem the violence, with some alleging he quietly encouraged it accusations he has denied and which have remained unproven. For years, he was a political pariah both overseas and at home, with Washington denying him a travel visa in 2005 for religious intolerance.

Narendra Modi speaks during a recent interview. Image courtesy of rediff.com

However, Modis star has recently been on the rise. Under him, Gujarat has seen sustained growth and he has projected himself as someone who speaks a different lingo from the often casteist and populist language so common in Indias polity. Through aspirational rhetoric and well -executed marketing, Modi has built Gujarat and himself into an investor-darling. Though the state of Gujarat accounts for just five per cent of India's population, it generates 16 per cent of Indias industrial output and 22 per cent of its exports; its GDP rates consistently exceed national averages, though it is not the fastest growing state in India. By linking himself to the economic viability of Gujarat, Modi was successfully re -elected as Chief Minister for the fourth time in December 2012, almost sweeping the urban regions, and is widely seen as a potential candidate for Prime Minister in 2014. In an indication of growing international recognition, Modi recently appeared in public with both the British Ambassador and the U.S. Consul-General. Gujarats success, coupled with Modis appeal to many of Indias youth, makes him a good political candidate in the eyes of many Indian businessmen and foreign diplomats who praise him for corruption-free administration, inclusive development and good-sense business policies. He has also received a thumbs-up from India Inc. for luring investors to the state and ensuring they stay. However, pundits and critics alike remain divided on whether Modi can capture enough votes outside of his home state and appeal to Indias ever-changing diverse society. In Indias divided polity, his party the Bhartatiya Janata Party (BJP) - might find it difficult to attract allies willing to support a Modi -led administration. With polls having swung in favour of the BJP and calls from within the party for his appointment as Prime Minister, it seems likely Modi may find himself running against the Congresss choice in 2014 with a very good chance at the top job.

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