GD 6: Recent Economic Reforms of India (FDI's in Retails)


Addressing the citizens of India, Dr.Manmohan Singh (The Prime minister of India) in his speech said that at present we are in a position to turn around the economic downturn of India. The growth rate of our nation reached to almost 9 year low. To put it back on track the Government of India took some initiatives like

1)  Postponement of GAAR (General Anti Avoidance Rules) by 3 years as recommended by Shome panel to revive foreign investment in India.
2)   Introduction of FDI (Foreign Direct Investment) in to
a---100% in single brand retail
b---51% in multi brand retail
c---49% in aviation sector
d---74% in broadcasting sector
3)   Relaxation in foreign borrowings
4)   Disinvestment in P.S.E’s (Public Sector Enterprises) to generate an amount of Rs 30,000 crore.
5)   Introduction of RGESS (Rajiv Gandhi Equity Savings Scheme) to attract new Indian investors into equity markets.

These initiatives are considered as reforms to take India to its previous glory of 8-9% growth. The reasons for the introduction of these reforms at jet speed are firstly to prevent the downgrade of investment rating of India by rating agencies like Standard & Poor, Moody and Fitch. Secondly to erase the opinion that there exist policy paralysis in India among the world nations. Majority of economists and industrialists are applauding these decisions of government and are confident that these will boost the economy.

If we consider these reforms option by option, the introduction of Rajeev Gandhi Equity Savings Scheme is meant to reduce the rising demand for gold. Gold is the 2nd largest item in our country’s imports after crude oil and this has been widening the India’s Fiscal Deficit (FD) and Current Account Deficit (CAD). These twin deficits are responsible are responsible for the fall of Indian rupee against American dollar. The other option of disinvestment in Public Sector Enterprises will not only generate some liquidity to government to carry forward its welfare schemes but also provide an opportunity for investors to invest in most secured firms of India. Coming to the aspect of GAAR, if foreign individual wish to invest in Indian companies he need to pay some tax to the government but certain countries like Mauritius have an exception. Since certain investors, leveraging this option is trying to evade tax and to put an end for such activities GAAR was proposed. But taking the bad investment climate into consideration it was postponed to attract investment somehow or other.

Finally coming to the aspect of FDI’s and FII’s, these are people who bring foreign currencies into Indian markets on long term and short term basis. Since we need to repay majority of our imports in terms of American dollars, we need to purchase them in the international monetary markets. But these FDI’S and FII’s will reduce this purchase and strengthen Indian rupee against US dollar. Among all the reforms the most controversial one, FDI into retail market of India. Even though government indicated that 50% of investments in these should go towards construction of storehouses, production units etc., many are not convinced at this option. And we all are aware of the aviation sector of India. Recently GOI helped Air India, with a package of Rs 30,000 crore to mitigate the losses incurred. The kingfisher airlines were almost on the verge of a bail out. Hence FDI’s will generate some investment to continue their operations without getting shut down.

Despite all these positives, several people fear that these FDI’s & FII’s will shift the decision making powers to foreign nationals. Quoting the negative impact of Wal-Mart in US, several people argue that these organizations really don’t have capability to replace the number of jobs created by the local retail markets which is the 3rd largest sector that provides employment after agriculture and cattle rearing which is true. The economist turned Prime Minister of India said on many occasions that the real essential thing Indian economy needed is investment in its infrastructure which includes granaries, cold storages and manufacturing Industries. All these reforms might have created some room and money to invest in the things mentioned by our Economist turned Prime Minister to boost domestic demand and supply without which India can never tread the path of sustainable growth rate of 8-9% or more. Even as an individual one to contribute to nation’s growth by encouraging Indian products.