News and Events

Fears of a rating downgrade and the possible fallout from a euro zone meltdown have forced a sense of urgency on India's beleaguered government, re-igniting hopes for stalled economic reforms. Both Fitch and Standard & Poor's (S&P) have cut their credit outlook for India to negative from stable, citing its slowing economy, policy inaction and worsening fiscal situation. S&P has also warned of a sovereign credit rating downgrade if the situation remained unchanged. Following are some of the big ticket reforms that India has been struggling to implement for want of political consensus. FOREIGN INVESTMENT IN SUPERMARKETS After years of deliberation, Prime Minister Manmohan Singh finally proposed late last year to open up India's $450 billion supermarket sector for foreign investment. But he had to backtrack a few days later as a political backlash over the issue put his government in danger. Opening up the sector is expected to modernize an archaic supply chain, which will help resolve the problem of high food inflation. But critics say it would wipe out indigenous mom-and-pop stores, causing massive unemployment and social unrest. Although Singh has long been promising to revisit the decision, a worsening economic situation and changed political equations may finally allow him to act on that promise after the July 19 presidential election. Government officials say opening up the retail sector would help boost capital inflows, which will help strengthen the rupee and bolster investor confidence in the economy. The government is hoping the socialist Samajwadi Party (SP) will help implement this controversial reform, just as the latter bailed it out on the presidential election. Late last year, the SP strongly opposed the decision to allow 51 percent foreign direct investment in multi-brand retail, but its leaders now say they would not let the government fall over the issue. FUEL SUBSIDY REFORM Every year, the Indian government pays huge compensation to state-run oil companies for selling diesel, kerosene and cooking gas below market price. This acts as a drag on public finances and ends up widening the fiscal gap. But the subsidies are intended to benefit the poor and any tinkering with them has the potential of raising a political storm and endangering the government. New Delhi had to pay about $12 billion to oil firms in fiscal 2011/12 (April-March) to cover their losses, which widened its fiscal gap to 5.8 percent of GDP from the planned 4.6 percent. India had to raise an extra $17 billion from market borrowings to meet the overall deficit. Economists say a lower deficit and lower government borrowing are preconditions for reviving private investment that has been anemic since the 2008 financial crisis. Fears of a political backlash have not allowed the government to hike prices of subsidized fuels since mid-2011. But mounting concerns over public finances are expected to force the government to raise at least diesel prices after July 19. FDI IN CIVIL AVIATION The proposal to allow foreign airlines buy stakes in local carriers is expected to help address their financial woes. Indian airlines were laden with $20 billion in debt and probably lost $2.5 billion in the fiscal year that ended in March, according to Centre for Asia Pacific Aviation, a consultancy. Although the civil aviation industry has been lobbying hard for permitting foreign investment, opposition by the Trinamool Congress, a key government ally, has forced the government to put it on the backburner. FDI IN INSURANCE AND PENSION SECTORS India has plans to permit 26 percent FDI in the pension sector and raise the investment limit in the insurance sector to 49 percent from 26 percent. However, political opposition has forced the government to defer the proposals as enacting them requires legislative approval. The ruling coalition does not enjoy the required majority in the upper house of parliament to pass the proposals. GOODS AND SERVICES TAX (GST) The proposed reform intends to transform India into a single fiscal union, helping cut business costs and boost government revenue. A nationwide GST is estimated to add between 0.9-1.7 percentage points to India's GDP. However the proposal, first mooted in 2007, is facing opposition from state governments, which fear revenue losses once the GST comes into effect. Enacting GST requires an amendment to the constitution, which needs approval by two-thirds of federal lawmakers and needs to be passed by at least half of 28 state legislatures. The ruling Congress Party-led coalition needs the opposition Bharatiya Janata Party's support for these numbers.