FDI Reforms to Boost Retail, Airlines, Banks and Property Sectors in India

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IndusView, Sunday September 16 (London): The Indian Prime Minister introduced long awaited reforms on Friday allowing foreign direct investments (FDI) in multi-branded retail and aviation sectors that should boost Indian retail, airline, banking and property industries.

In the biggest economic policy push in eight years, more than halfway through Prime Minister Manmohan Singh’s second term, proposals to allow overseas retailers keen on investing in India’s $450 billion retail market, such as Wal-Mart Stores Inc., Tesco Plc and Carrefour SA to own 51% of supermarket chains, shelved last year after alliance partners threatened to revolt, have been reinforced now.

The government will also allow foreign airlines to buy stakes of up to 49% in local carriers, a much-awaited policy move that provides a potential lifeline to the country’s debt-laden airlines such as Kingfisher Airlines Ltd and open fresh sources of funding for the likes of SpiceJet Ltd, Go Airlines Ltd and Jet Airways Ltd.

“It’s a bold move after months of fighting high inflation, a sluggish economy and the threat of a credit rate downgrade,” said Bundeep Singh Rangar, Chairman of London-based IndusView. “It also puts the ball back in the RBI’s court to do its part now to bolster India’s sputtering economic growth.”

On Monday Sept. 16, the Reserve Bank of India’s review of its monetary policy will be keenly watched for any changes to its benchmark lending rates.

“It could certainly boost retail, airlines, bank and real estate industry sectors,” said Rangar. “More FDI will benefit big over-leveraged Indian retail companies like Pantaloon Retail and Future Group raise money and reduce debt. It will also help Indian banks, mostly public sector ones, with high exposures to Indian retailers, rescue their loans from turning into non-performing assets. And it will help stabilize commercial real estate prices and lift sentiment in the depressed realty markets of big Indian cities to which FDI in retail is currently restricted.”

India’s growth has been slowing and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. During April-May 2012, FDI in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy. Credit rating agencies put India on a watch list for a possible downgrade to “junk” status.

Singh’s government announced a 14% rise in the price of diesel, the first increase in more than one year, in an attempt to cut the country’s budget deficit.

“The RBI has been reluctant to ease rates without the government doing its part to fix its budget deficit,” said Rangar. “The diesel rate hike was the minimum needed to get the RBI to act.”

Together with the increase in diesel prices, the decisions announced by Commerce Minister Sharma in New Delhi mark a sustained effort to ease criticism of Singh’s administration. The government has been assailed by two years of corruption allegations and opposition parties and coalition allies alike have criticized its economic agenda.

Late last year, India’s Cabinet also allowed 51% Foreign Direct Investment or FDI in multi-brand retail, but suspended its plans after populist Ms Mamata Banerjee, whose Trinamool Congress is second largest constituent in the ruling United Progressive Alliance (UPA) and opposed to FDI, threatened to leave Singh’s Congress-led UPA.

The move had been strongly opposed by tens of thousands of small businesses and corner-shops, which fear they will be put out of business. Economists welcomed the latest move, however, saying it will transform the way Indians shop and boost the country’s flagging economy.

Prime Minister Manmohan Singh is the only Prime Minister since India’s founding Prime Minister Jawahar Lal Nehru to return to power after a full five-year term in office. Singh’s liberal economic policies have rolled back much of Nehru’s socialist economic construct that saw dismal growth rates for nearly five decades of post-independent India.

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