India Takes Steps to Rekindle its Glow

on Sep 17, 2012
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India’s government has finally taken bolder steps to try and reinvigorate its lethargic economy after seeing annual growth slow from 8 percent two years ago to 5.5 percent in the second quarter of 2012. New Delhi announced a sharp increase in diesel prices – a policy meant to cut a budget deficit heavily inflated by energy subsidies. The Congress-led government said the decision was taken in light of the projected $34 billion (£21 billion) annual cost of fuel subsidies at a time of high world oil prices. The cabinet also approved a batch of long-stalled reforms, which include opening the retail and aviation sectors to international companies in an attempt to attract foreign investment.

From 14 September, diesel at a Delhi gas station will cost around Rp47 (£0.53) per litre, a 14 percent rise from current prices. The increase was much needed to counteract the growing budget deficit which has amounted to about 6 percent of gross domestic product (GDP) for the central government alone. In June, Standard & Poor threatened to downgrade India’s sovereign debt a notch from BBB- to BB+, effectively rating it as “junk”. According to analysts, the increase in diesel price will hardly do anything more than allow the government to manage the cost of subsidies and keep pace with oil prices and currency movements. “The fiscal impact is not substantive…You need to hike prices further.” opined Sonal Varma, chief India economist at Nomura. The policy also comes with great political cost – the opposition condemned the price increase claiming it would hurt the poorest in India who are already suffering from high food inflation.

!m[](/uploads/story/379/thumbs/title_pic_inline.png)The other policy reform will allow foreign airlines to hold up to 49 percent in Indian carriers, potentially saving some struggling domestic airlines in dire need of deep-pocketed overseas partners. New Delhi also pledged to open the door for up to 51 percent foreign direct investment (FDI) in department stores and supermarkets on the condition that each individual state could decide on its own whether to allow foreign firms to set up shop in their region. Retail giants such as Tesco, Walmart and Carrefour were allowed last year by the government to take their operations inside India but this quickly changed after a rapid public outcry. The new policy allows foreign retail companies to enter the massive Indian market but leaves it to them to find willing host states.

The new reforms are a breath of fresh air as the country has suffered long enough from ill-advised government meddling and rampant corruption. They also support what Anand Mahindra, chairman of Mahindra Group, said about his country’s economy in a recent interview he gave for The Times: “When people raise expectations too high, it is probably unjustified. We should never have been put on a pedestal — but we shouldn’t be in the trash can now either.” Mr Mahindra sees the vast, growing, ambitious and youthful 1.2 billion population as the fundamental strength that propels India’s economic expansion: “People used to have a saying about India: ‘The genie is out of the bottle.’ What they meant was the growing consumption story in India — and none of that has changed at all. The demand for everyday good things has not slowed down — people’s aspirations, their needs and their ability to afford a better quality of life. All of that remains.”

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