Gurumurthy Kalyanaram on Liberalization of Foreign Direct Investment in Retail Business in India

Gurumurthy Kalyanaram - Liberalization of foreign direct investment in retail business in India (to 100 percent in single-brand and to 51 percent in multi-brand retail business) has met with monumental political resistance. The government is expected to announce that it is suspending all decisions and notifications regarding this decision till a greater consensus is achieved.

Intellectuals including many economists have urged the government to stay the course, and not give in to political pressures. The singular argument of the proponents is that the benefts of liberalized policy in retail (e.g., increased infusion of foreign capital, technology and managerial expertise in retail sector; development of modern and sophisticated logistical technologies and attendant infrastructure including food warehousing and transportation approaches; reduction in transit and other costs and hence lower price to consumers; and reduction in the power of intermediaries between farmers and the market) are well documented in many countries including Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, Singapore, and Thailand.

Gurumurthy Kalyanaram on Foreign Direct Investment (FDI) in Retail Business in India: Long-term benefit and Short-term dislocation

Gurumurthy Kalyanaram - Government of India's decision to permit 100 percent foreign direct investment in single-brand retail and a maximum of 51 percent such investment in multi-brand retail business has been received with ferocious opposition from various traders' associations and then entire gamut of political parties.

The proceedings of the Indian Parliament (Lok Sabha and Rajya Sabha) have been stalled, and there is a general strike that has been called by the traders' association. Gurumurthy Kalyanaram Lawsuit

Unfortunately, an important policy decision is lost in lot of noise -- both the proponents and the opponents of the proposal have merit in their arguments but all that is lost in the din.

On China and India: Governance and Economic Institutions

In addition to the democratization of its polity, and liberalization of its economy, the autonomy and democracy of India’s financial institutions and corporations make India a more alluring investment destination. The norms and regulations of the financial markets, and the enforcement and supervision by Securities Exchange Board of India of these regulations are credible, if not perfect. They have made the Indian stock and bond markets transparent and investor-friendly (Swamy 2005). India’s stronger infrastructure in terms of far more efficient and transparent capital markets is enabling the growth of entrepreneurship and free enterprise (Huang 2006).

Empirical research (Khanna, Kogan and Palepu, 2006) now shows that each successful society develops its own set of governance institutions, standards and practices. While there may some de jure similarity in standards, there is no de facto convergence. India has evolved fairly robust and indigenous governance institutions and standards (e.g., dispute resolution bodies such as courts, recognition and protection of private and intellectual property rights, a well-developed private sector, and a modestly better score on corruption and rule of law in World Bank’s governance indicators) over the last 50-60 years (Swamy 2005, Wolf 2006). It may take China the next 30-40 years to develop its own institutions and standards (North and Thomas 1971, Swamy 2005).

Evidence of Voter Switching Behavior in Indian Electorate

India is celebrating the establishment of robust and vibrant democracy. The country has begun a month-long voting process for the composition of the 15th term of the Lok Sabha -- Indian parliament. Over 700 million Indians are eligible to vote, and over 300 million voters are likely to be citizens with household income of less than $2 (US dollar) per day. Almost 60 percent of the electorate is expected to express its preference, and the ballots are printed in at least 25 different languages in different parts of the country.

Time and again, Indian electorate has shown resilience and maturity. The aspirations of the Indian citizens has been rising rapidly, and no political party or grouping is able to (and can) keep pace with such rising expectations. Therefore, a natural outcome has been discontent of the Indian electorate with the ruling political grouping.

Over the years, with the certitude of democracy and fundamental rights (particularly, after the refutation of imposition of internal emergency and suspension of habeas corpus in mid-1970s) the Indian electorate has become confident. Mobility caused by rise in income and freedom to relocate has also loosened the casteist and feudal constraints and fears.

So, the Indian electorate with rising hopes and confidence have been changing the ruling political grouping on every occasion that they go to the polls since 1984 i.e. for the last 25 years.

In 1984, the Indian electorate gave an overwhelming to the Congress party led by Rajiv Gandhi (this came at the heels of sad assassination of Mrs. Indira Gandhi). Then in 1989, it was a political grouping (led by V.P. Singh) opposed to Congress party. Subsequently, it was Congress party and its allies in 1991; non-Congress party, non-Bharatiya Janata Party political grouping in 1996; Bharatiya Janata Party and its allies in 1998 and 1999 (those elections came too close to be considered different mandates); and then Congress party and its allies in 2004.

So the empirical generalization suggests that a non-Congress political grouping will secure a mandate. This political grouping may or may not be lead by Bharatiya Janata Party, and it is likely to be as short-lived as the political groupings of 1989 and 1996 (both of which lasted only for about two years).

Tough economic times in India in the midst of ferocious Nuclear debate

As the Indian government's energies are absorbed in the debate over India-US Nuclear agreement (123 agreement), the country's economy is showing serious strains. India's economy is now faced with trio challenges -- rising oil prices, worrisome inflation, and depreciation of Indian rupee.

This is not good news for the country, and not for the ruling coalition of parties who have to face the electorate in the next 8-10 months.

Just look at some of the data. Inflation is at an alarming 10-11 percent annual rate corroding the purchasing power of all the citizens. Food and energy prices are skyrocketing. India is seeking a consensus for a regulated bandwidth of price for oil.

The Indian currency -- Rupee -- is depreciating because of the inflationary pressures. The trade deficit is growing.

For example, on Monday, June 30th, the market capitalization of the Indian financial markets was about one trillion dollars. So was the size of the Indian economy. But on Tuesday, July 1st that was not the case.

Bombay Stock Exchange closed on June 30th with a market capitalization of about $1.02 trillion. On Tuesday, a fall of 500 points in the Sensex and a gain of 32 Indian paise (100 paise = 1 Indian rupee) for the dollar against the rupee saw that figure drop to $970 billion.

Similarly, India's Gross Domestic Product for 2007-08, valued at Indian rupees (Rs) 43,02,654 crore, translated into just over $1 trillion as valued at exchange rate on June 30th. With the dollar appreciating against the Indian rupees and crossing the Rs 43 bench mark on July 1st, the India economy was down to $995billion.

High oil prices have seen India’s oil import bill rise to $16.5billion for April-May this year, up 49 percent from the figure for the same months of 2007. As a result, the overall import bill has risen by 32% to $48.8b. Despite the fact that exports have grown at 22%, the trade deficit has risen to $20.6 billion -- up about 48 percent.

The widening trade deficit has added to the demand for dollars as against Indian rupees. So while the U.S. dollar has been generally depreciating against most currencies, it has been appreciating against the Indian rupee. The exchange rate is over 43 Indian rupees.

The near implausibility of getting the India-US Nuclear agreement approved?

Let us put aside the substance and merit (or lack thereof) of the proposed India-US Nuclear agreement. Let us examine plausibility of getting the India-US Nuclear agreement done now that the Indian government appears to want to get the agreement done -- the United States government has been waiting on the Indian government.

But here is the timetable --

The next step is negotiations and discussions with International Atomic Energy Agency (IAEA), and getting the India-specific elements ratified by the Board of IAEA. This could take 2-3 months.

Subsequently, the agreement has to be discussed and approved by a Nuclear Suppliers' Group (NSG) for the exemption from the ban on supplying nuclear technology to countries that have not signed the Nuclear Non-proliferation Treaty (NPT.) NSG is a group of countries that would eventually supply the nuclear technology (fuel and hardware) to India. And this process could take additional couple of months.

Even if the IAEA and NSG approvals are processed simultaneously, the agreements cannot be completed till September.

So the U.S. Congress cannot consider the agreement -- 123 agreement, IAEA safeguards,and NSG exemption -- till after the November congressional elections which are certain to increase the majority of the Democratic party in the House of Representatives and the Senate, and may be even elect Barack Obama to the Presidency.

Given that the Democrats are strongly concerned about Nuclear Non-Proliferation (NPT), the Nuclear agreement may be received with lots of skepticism in the U.S. Congress. Though the Nuclear agreement would be considered by the lame-duck congress (so the additional electoral Democratic strength will not be reflected), the Democratic leadership can easily derail the consideration of the agreement -- it the leadership so chooses -- by the new congress as Democrats (by virtue of their majority status) control the flow of the bills for consideration.

So the plausibility of getting agreement ratified completely appears dim given this late-hour start.

The New York Times (in a recent editorial) criticizes the India-US Nuclear agreement as too generous and a give away of the the store to India. Of course, this is exactly the opposite of the objections raised by the Communists and the Bharatiya Janata Party in India -- their objections are that the Nuclear agreement potentially impinges upon India's sovereignty and restricts India's future options.

The agreement cannot be placed, if at all, before the U.S. Congress for its consideration and approval before the November elections when the Democratic party is likely to add to its majority in both the Houses of Congress, and may even capture the White House. The Democratic party leaders -- Joe Biden, Barack Obama -- have expressed serious reservations about the agreement.

Given all these facts, and the fact that President Bush's (the champion of the agreement) approval ratings are likely to be hovering in the low 30s, the chances of the agreement being approved by the U.S. Congress is diminishing rapidly.

In the meantime, Lal Krishna Advani is asking for a quick (short) parliamentary session of the Indian parliament houses (Lok Sabha and Rajya Sabha) where the nuclear agreement can be debated and voted either up or down. Congress party and its governing allies are averse to this.

If the Congress party, Mrs. Sonia Gandhi, and Prime Minister Manmohan Singh were willing to sacrifice power for the consummation of the nuclear agreement (and that is quite noble, indeed), how one wishes the party had moved ahead at least 3-4 months back!

The politics of India-US Nuclear agreement

Thus far, the political alignments in India in the so-called 123 agreement (India-US Nuclear agreement) have been clear.

Prime Minister Manmohan Singh and the Congress party has always seen the Nuclear agreement as strategically beneficial to India (after all, it was Manmohan Singh who negotiated the agreement with President Bush, and Mrs. Sonia Gandhi is obviously now persuaded that Manmohan Singh's analyses is quite correct.) They do so now with greater urgency and vehemence. The political and governing allies of Congress party such as DMK, NCP, RLD and others have also been persuaded that the Nuclear agreement is good for India.

The communist parties objected to the 123 agreement largely on the basis of Hyde Amendment which includes great uncertainty for ever because the President of the United states has to certify every year about India's compliance with respect to clear segregation of military and civilian nuclear programs in India. Here is the catch. Let us, say, India relying on the certitude of the 123 agreement goes on to build dozens of nuclear plants for industrial and domestic power. Let us, again say, some 30 years from now some President of the United States refuses to certify to the U.S. Congress India's compliance with the 123 agreement. What will happen? Nuclear technology and fuel supply to India will come to a grinding halt. What does India do then? That's the questions and the catch.

In any case, may be the communists have not been hopeful but they are at least analytical.

BJP and its allies have, most predictably, opposed the 123 agreement but not necessarily with much force of analyses.

So that has brought the Indian government in a predicament. Without the communists' support, the government could collapse.

Then came the savior in the form of Samajwadi Party with about 39 members of parliament. However, the Samajwadi Party developed cold feet when its political allies like Telugu Desam put political pressure. Then this grouping -- Samajwadi party and Telugu Desam and other parties -- announced that they will seek the expert counsel of former President Abdul Kalam.

Per newspaper reports, Abdul Kalam has affirmed that the nuclear agreement was beneficial for the country. So far, so good. But Kalam also purportedly advised that, “India can scrap nuclear deal anytime if warranted." Okay but what will that do? If 30 years from now, India feels harassed and wants to scrap the deal, where will the nuclear fuel and technology come from?

It does not matter who might abrogate the deal -- India or the U.S. -- the uncertainty and potential catch caused by the Hyde Amendment. It is that simple.

And finally, this -- the communist parties and the Prime Mininster are accusing each other of less-than-honest dialogue and conversation. The latest salvo comes from the Prime Minister, and here is the Prime Minister's chronology of events as reported in the media.

"Singh had concluded in August last year that the CPI(M)’s Prakash Karat was uninterested in the merits of the nuclear deal, that his opposition was ideological and not rational. When the actual nuclear text, the so-called 123 agreement, was being negotiated, Singh had ordered National Security Adviser MK Narayanan and atomic energy czar Anil Kakodkar to ensure all the nine demands regarding the deal raised by Sitaram Yechury in Parliament in 2007 were addressed. When the 123 agreement was finalized in late July last year, Singh called in leaders of both the BJP and the Left and showed them the text. The BJP leaders made no complaints. One of them even praised the Indian negotiators. The Left leaders only said they would study the text. Singh was watching TV several days later, and saw Karat demand the Congress “press the pause button” on the deal. At this point, the PM concluded that the Left would never be won over, though he did make one appeal to the Bengal communists in an interview to a Kolkata daily."

India-US Nuclear Agreement -- An Update

The India-US Nuclear agreement is the subject of hope and debate, yet again, in India. Apart from the substance of the pact, the politics (and timing) of the negotiations are mystifying.

First, the substance of the pact. The benefits -- immediate access to nuclear technology and nuclear fuel -- are very robust. India's need for energy is monumental and nuclear energy must form a part of the energy portfolio for India.

The United States -- President Bush -- has made an extra-ordinary offer to India. The President is championing exception (for India) to the 1978 congressional mandate that the non-signatories of Nuclear Non-Proliferation Act cannot under any circumstances receive any nuclear technology or fuel from the United States. The so-called Nuclear Suppliers Group follow the United States lead on this matter.

So this is truly historic. India owes a debt of gratitude to President Bush and the United States. However, the Hyde Amendment is troublesome.

The Hyde Amendment which requires the President to advise the Congress every year that India was not diverting nuclear technology and material for weaponry. While it is very true that President George Bush has high respect for India’s integrity and trust. However, what the political landscape would be in 10 or 20 years is anyone guess – it is not clear that a nation’s future can be so tenuously linked to certification by an individual. Look at what happened to Pakistan. The then President Bush in 1990 failed to certify Pakistan’s intentions regarding its nuclear ambitions, and the Pressler amendment called for economic and military sanctions which reverberated till recently.

But President Bush cannot do much about Hyde Amendment -- this is the requirement that the U.S. Congress is imposing for the extra-ordinary exception that it is ready to make for India. This requirement is entirely reasonable from the perspective of Congress, however troublesome that it may be to India or subject to the vagaries of time and the whims and fancies of a future President who may be annoyed with India on some other matter and may decide not to certify based on that irritation. There is no basis on which President Bush can push the Congress to do away with the Hyde Amendment -- President Bush is already facing strong opposition from the Congress, particularly from the Democrats.

Having said this, if India is ready to accept the risk with the Hyde Amendment the Indian Government must have moved with greater dispatch. It was India's responsibility to sign India-specific accords with the International Atomic Energy Agency (IAEA) before the U.S. Congress can approve the nuclear agreement.

But India has dithered on this matter for almost one year. That is because of the Communists parties who have about 60 parliamentary seats and who have been electoral partners with Congress party are strongly opposed the nuclear agreement -- their opposition is well thought-out, and it is mostly based on the Hyde Amendment.

The Congress party has spent one year trying to persuade the Communists parties -- and it has not been successful. Finally, the Congress party is threatening to go ahead with the negotiations with IAEA but why now? This is so late.

By the time, India concludes its negotiations with IAEA it will be atleast a couple of months. So the agreement cannot placed before the U.S. Congress before fall. But the agenda for fall for the Congress is set in place -- and the Congressional leaders have already said that it is too late for debate and approval of the nuclear agreement.

Unfortunately, President Bush can do only so much -- particularly with the U.S. Presidential and congressional elections looming ahead so close. Once the November elections take place (Democratic party is likely to gain substantial number of seats in the U.S. Senate and the House of Representatives, and quite likely even the White House), President Bush's influence will diminish dramatically.

So what is point of Congress party being so decisive so late? It appears that the Congress party did not want to risk alienating the Communist parties but now since the national elections are only 6-9 months away the Congress party appears ready to roll the dice. Politically, that is not in the self-interest of the Congress party. Unless the Congress party can hold the Communist parties in its fold for the next general elections, its probability of winning those elections will diminish dramatically.

So what is the point? It just does not compute. The nuclear agreement is most unlikely to be approved by the U.S. Congress given the serious time constraints and the dynamics of U.S. political environment. The Congress party is also likely to lower its odds of winning the next elections.

The Karnataka state assembly elections results, and the fortunes of Congress party

The recent Karnataka state assembly produced discouraging results for the Congress party and the United Progressive Alliance (UPA.) The Congress party secured about 80 assembly seats -- an increase of about a dozen seats from the last elections. The Janata Dal (secular) secured only about 28 assembly seats -- a substantial decrease in the number of seats from the last elections. And then there is Bharatiya Janata Party (BJP) which has secured 110 assembly seats -- a very sharp increase of almost 33 seats from the last elections. The BJP is set to form the government in Karnataka.

All this does not bode well for the Congress party and the United Progressive Alliance (UPA) as India prepares general parliamentary elections.

And here is why --

(1) Out of the 21 states that have gone to elections went to polls since the UPA took over, UPA has won only in eight of those elections.

(2) In spite of very strenuous efforts by Sonia Gandhi and Rahul Gandhi in Uttar Pradesh, Gujarat and Karnataka state elections, the electoral performance of Congress party and its allies in UPA has been most unimpressive.

(3) While the economic growth has been reasonable, the recent sharp increase in prices -- particularly of the food -- has taken much bite out of the benefits of economic growth.

(4) The series of electoral losses for the Congress party and its allies in UPA comes even after sustained populist policies including the Rural Employment Guarantee Scheme by the government. For example, the UPA government also implemented Rupees 60,000-crore farm debt relief package for Karnataka and that did not seem to help.

Of course, this does not mean that Bharatiya Janata Party and its allies (National Democratic Alliance, NDA) are going to win the next parliamentary elections. On the contrary, the next elections are also likely to produce a coalition out come -- and who will form the government (UPA or NDA) will be decided at the small margins.