FDI Reforms: Policy Paralysis End, But Results Awaited

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As the market has reacted positively, there will more to follow, the government said. And more measures would be taken, till the overall mood and sentiment improves. However, these policy measures are also interpreted as moves to alleviate the sentiments of various rating agencies.

What should be the Next Moves from the Govt?

With these moves, the government has gone ahead and the Trinamool factor has been gotten over. But the government should make sure to fulfill all its announcements so that the political bricks do not get deconstructed, as these political constituents have different ideologies over these reforms already.

It should also do some introspection in terms of its own budget processes. According to the current budget details, the fuel subsidy for the year will be 43,500 crore based on an average crude oil price of $115 per barrel. And since the budget has been announced, this number has not been exceeded and has also dipped below the $100 mark for quite a period. It is expected that the budgetary exercise should make more realistic assumptions.

In the case of FDI in retail, the retailers should not be much affected. The states are given authority to take decisions over it and the Wall-Marts are restricted to the big towns etc. are playing safeguard. In our nation, domestically organized retailers even are facing crisis, thus any foreign entry could meet with high opposition from the masses.

The domestic shops’ proximity to the customers and their ability to provide short-term credit, to supply in small quantities and to build strong relationships with their customers; all these are the advantages they have over the foreign retailers. The customers visit the organized retailers only in a weekly basis, not daily. Moreover, the organized retailers need space, which is a challenge even in bigger Indian towns. In that way, the movement should be slow and measured. What do the Policy Reforms Mean to Commoners?

For the common man, a hike in diesel and LPG prices means a great hit on inflation because, when the Consumer Price Index (CPI) inflation is 10 percent, such reforms are hard to digest. While for the government, it makes economic sense to rein in the deficit. A commoner understands inflation more than he understands the fiscal austerity. If the price hike were implemented over a period of time, such as hiking the price at Re.1 per litre per month, it would not have hurt the common men that much.

Moreover, FDI in retail does not seem to affect the middle-class so severely; instead if it works out well, they will be benefitted with better choice, quality, price and shopping experience; all of these only could be proved in the future.

Will the face of Agriculture Change?

The argument that FDI will provide a panacea for the nations farming ills is not that sure to happen. In the retailer shops there are only limited space (only up to 10 percent) for such products; the rest is being devoted to other consumer products.

Furthermore, FDI will build value chains for a limited supply of products to the consumer in specific geographies through contract farming. Hence it will be extremely niche segments that they will be looking at.

Thus it is foolish to think that FDI will take over the entire agriculture sector and transform it into a high yielding sector that addresses issues of land under cultivation, productivity, crop selection, output, logistics, marketing and the retail sale. Though, the FDI will improve the value chain, it cannot bring about any change in production, irrigation or productivity.Will the Economy Get Boosted?

It is believed that there will not be any immediate change for the economy of the country as well; since the recently announced reforms do not have a significant bearing on the country’s inflation, low investment, industrial stagnation and declining corporate profits. The Firstpost.com reports that though the higher diesel prices will surely improve the fiscal deficit, it has to be followed up with similar effective actions in line. FDI in retail or airlines will work only over a period of time.

With the policy reforms announced by the government, however, the exchange rate may become steady, as the dollar is getting weaker day by day.

Among these, the disinvestment announcement is rather big and it is expected that the target of the year will be achieved soon, which will keep the stock market alive. It will hold for the reduction of withholding tax on interest on foreign loans. But they also are not expected to add to immediate GDP or lower inflation.