India's stuttering economicreform program faces a key parliamentary test this week onwhether to let foreign supermarket chains such as Wal-MartStores set up shop, in a vote that could pave the wayfor further measures to revive the economy.
Prime Minister Manmohan Singh's minority government bowed toopposition pressure last week in agreeing to a vote, ending daysof deadlock in parliament and cheering investors who saw it as asign of a renewed policy momentum to come.
News that the government agreed to a non-binding vote helpedIndian shares climb to their highest in nearly 19 months andbolstered the rupee . But defeat for the ruling Congressparty could see the currency tumble to 56 to the dollar fromabout 54, said Abhishek Goenka, chief executive at India ForexAdvisors.
The government opened its doors to foreign retailers inSeptember as part of a package of measures to stave off alooming credit rating downgrade, cut a swelling fiscal deficitand revive the country's investment climate.
While it doesn't need parliament's approval, defeat would beembarrassing and the government would come under pressure toroll back a policy that critics say would squeeze existingretailers and cost jobs.
Whether or not the policy survives the vote will be ameasure of the minority government's agility in pushing itslegislative agenda in the time it has left before a generalelection due in just over a year.
If Singh loses, it could also put at risk other reformspending in parliament, including measures to inject foreign cashinto the struggling pension and insurance industries. If hewins, it could hasten their passage and embolden the governmentto move ahead with plans including simplifying the tax system.
These are seen as key for reviving investment and slashingthe fiscal deficit, one of the widest among major emergingeconomies. At 5.9 percent of GDP last year, India's deficitearned it a warning from global ratings agencies that it couldlose an investment grade rating for its sovereign debt.
"Reforms stalled in the legislative circuit are vital forthe country to avoid a ratings downgrade," said an editorial inthe Hindustan Times newspaper. "Stuck in the pipe are lawsallowing more foreign investment in insurance and pension funds.The hope now is that some of the opposition sting will ebb oncethe vote on foreign direct investment in retail chains is out ofthe way."
Deeper Reforms Wanted
Singh's government has battled to free up an economy thatwas largely run through state-controlled permits and quotasuntil the 1990s. But reforms have progressed in fits and startsin the teeth of fierce political opposition.
The symbolic vote is likely to be held on Wednesday. Singh'sCongress party is expected to muster enough support to win inthe lower house, but could face defeat in the upper chamber.
The government could also face a separate vote on amendingIndia's foreign exchange rules, which it needs to win in orderto be able to implement policies including retail reform.
Asia's third-largest economy looks set for its worstperformance in a decade, with low growth and uncomfortably highinflation. Investors are urging the government to acceleratedeeper reforms including simplifying a convoluted tax system andspeeding up clearances for big-ticket infrastructure projects.
"Sadly, India's reform needs are greater than its politicalsystem's capacity to deliver at the moment, and policyimplementation uncertainty remains a key risk," said JyotiNarasimhan, senior principal economist at IHS Global Insight.