Retail Wars: India Plays an Economic Double Game

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Kevin Frayer / AP

An Indian vendor waits for customers at a market near Jama Masjid in New Delhi, India, Wednesday, Dec. 7, 2011.

In 1991, Manmohan Singh was finance minister of a struggling, fractious government that was running out of money and ideas. Under pressure from international lenders, he championed a sweeping program of economic reform that took some selling to his own government, as well as to big business, who worried that they would lose ground to foreign competitors. Singh persevered, and those reforms set the stage for the beginning of the “rising India” story.

Twenty years later, Manmohan Singh is prime minister of a struggling, fractious coalition government facing a new set of challenges—soaring inflation, allegations of corruption, slowing growth and burdensome public debt. But this time, Singh’s attempt to continue the 1991 economic reforms by opening up India’s retail sector more fully to foreign direct investment (FDI) have not fared so well. The move let loose furious protest in Parliament and, under intense political pressure, the government has put the proposal on the shelf.  Despite Singh’s revered place as architect of the reforms that sparked a decade-long boom, he was not able to convince even his allies in the government to support a measure that should benefit both farmers and consumers, ease inflation, improve productivity and fund much-needed rural infrastructure. This episode is more than just a political embarrassment; it may be remembered an inflection point in the “rising India” story, a moment when skepticism about India’s future finally started to overshadow optimism.

No one is more aware of that skepticism than Singh. A recurring theme in his rare public speeches is that economic growth can unleash individual potential. He is living proof, a boy who grew up in a village without piped water or electricity to become the leader of the world’s largest democracy. Since taking office as prime minister in 2004, his government has presented an appealing image to the rest of the world–a rising economic power that, unlike China, is governed by democratic ideals. But foreign investors are no longer buying it. Jim O’Neill, chairman of Goldman Sachs Asset Management and the man credited with coining the term “BRIC” to refer to the fast-growing economies of Brazil, India, China and Russia, was devastating in his assessment of India in a recent speech in London, calling it “the most disappointing” of the four countries and comparing its poor record on governance and corruption to Russia’s. “India has the risk of … if they’re not careful, a balance of payments crisis. They shouldn’t raise people’s hopes of FDI and then in a week say, ‘we’re only joking’,” O’Neill said. The Swedish retailer IKEA probably wasn’t amused. The Economist reported that, a few days after the announcement on FDI in retail, “an elated Mikael Ohlsson, IKEA’s boss, rushed to India. Yet once Mr Ohlsson saw the fine print of the reform and the political turmoil it is causing, his enthusiasm abated. An announcement of IKEA’s investment plans for India, planned for November 30th, was cancelled.”

It isn’t just retailers who are growing wary. For the last three years, since a highly controversial allocation of wireless spectrum, the telecom industry has been mired in regulatory uncertainty. Last week, Singh had to use his appearance at a conference of telecom industry executives to placate them: “I am aware of some concerns of the telecom industry regarding government policies in the telecom sector,” he said. “I wish to reassure industry of the government’s full commitment to sustaining growth, creativity and enterprise in this vitally important sector of our economy.” This, in a country that will eventually surpass China as the world’s largest mobile phone market.

What’s troubling isn’t the underlying health of the Indian economy; it’s a sense that the Indian government’s actions on encouraging free markets and economic growth don’t quite match its words. It plays a sort of economic double game, in which top officials talk up India’s dynamic economy and entrepreneurial spirit abroad while pandering at home to those who still see India as a poor country in need of protection from the evil forces of foreign imperialism. At its most absurd, this disconnect turns into spectacles like the one playing out over offensive content on the Internet. The New York Times reported that communications minister Kapil Sibal called in executives from several top internet companies to a private meeting in which he “showed attendees a Facebook page that maligned the Congress Party’s president, Sonia Gandhi.  ‘This is unacceptable,’ he told attendees, the executive said, and he asked them to find a way to monitor what is posted on their sites.” Since then, Sibal and others officials have publicly insisted that this demand for self-censorship does not amount to official censorship, merely an effort to “take care of the sensibilities of our people” from content that might inflame religious tensions.

Privately, even Indian businesses are frustrated with the double game, although they have developed the fortitude to wait it out. The head of one major conglomerate told me recently that he believes most Indian politicians, even those who have publicly opposed FDI in retail, accept that India needs economic reform, not just to foster growth but also to generate the tax revenue that funds its massive public-sector payrolls and social-welfare schemes. In this context, the silence of Congress Party leaders Sonia Gandhi and Rahul Gandhi is all the more galling. When she named Singh as prime minister in 2004, Sonia Gandhi left to him the details of governance while using the revenue generated by growth to fund politically popular (and, in some cases, truly progressive) subsidy schemes, regardless of the cost to India’s fiscal health. That strategy worked, and in 2009, the Congress Party coalition came back to power with an even stronger mandate. But in recent weeks, as Singh’s push for foreign investment turned into a political liability, Sonia Gandhi and her son have left him without any public statement of support. Their silence prompted an unusually anguished plea to Rahul Gandhi from the well-regarded economist and commentator Pratap Bhanu Mehta. “Your party is trapped in two illusions. First, governance and politics are different issues. Second, only those policies that specifically address poor people affect the poor. You wreck the macro-economy in the name of the poor, and then cheat the poor because you refuse to govern.”

When India refuses to accept those two illusions, will the game finally be up?

Jyoti Thottam is TIME’s South Asia Bureau Chief, based in New Delhi. Follow her on Twitter at @jyotithottam. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME .

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