Manmohan Singh’s policy reforms are finally getting some legs. After cutting fuel subsidies last week, India’s prime minister then went a step further and eased restrictions on foreign investors buying stakes in the civil aviation, retail, broadcasting and power trading sectors. These will be difficult to get past entrenched opposition, never mind implement. But with India’s fiscal deficit off course to meet the target of 5.1 per cent of economic output this year, Mr Singh needs to hold his nerve.
In truth, the appeal of the reforms for investors considering the Indian market is mixed. Consider aviation. The new rules will allow foreign airlines to buy up to 49 per cent of domestic carriers. They are not going to make Indian airlines attractive overnight, however. India’s aviation market has potential – barely 5 per cent of the population travelled domestically on aircraft in 2011. But passenger numbers have expanded just 2 per cent so far this year as fares continue to rise. Domestic airlines are also battling with jet fuel taxes that push fuel costs 40 per cent above international levels. At Jet Airwaysnet debt is already nearing 4 times earnings before interest, tax, depreciation, amortisation and rent. Kingfisher Airlinescannot even afford to pay its staff.
Retail may be another story. Tesco, Walmartand Carrefourare keen to tap India’s $435bn retail market. So reforms to allow foreign companies to take 51 per cent stakes in multi-brand retailers look like an invitation to join the party. If that happens, it could encourage more competition to bring down food prices and reduce agricultural waste (foreign investors must spend half of their investment on back-end facilities such as cold storage). But it is up to individual states to implement these retail reforms. Only a handful are so far enthusiastic. With the economy stalling, however, Mr Singh must fight the good reforming fight.