Has Manmohan Singh got his mojo back? The Indian Prime Minister has recently suffered the indignity of being called “overwhelmed and out of steam” in the Indian magazine Caravan; a “dithering, ineffectual bureaucrat” by the Washington Post; and an “underachiever” on the cover of TIME.
And yet, there he was on Sept. 14, boldly pushing a major economic reform that would open up India’s vast retail market to greater participation by foreign companies. Singh tried the same move last fall, only to be shouted down by populists within his coalition, who threatened to bring down the government, claiming that the measure would threaten the livelihood of small shopkeepers. Unable to make his case, Singh backed down. This time, he all but dared them to call his bluff. Who’s dithering now?
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What looks like boldness is actually a deft finesse from a leader who has rarely been comfortable playing the role of politician. By leaving the implementation of this new reform up to the country’s states, Singh avoids having to push too hard while still getting credit for taking a proreform, progrowth stance that plays well with the foreign investors who have cooled on India.
It’s a canny move. States with big urban centers and enough middle-class consumers to actually shop at foreign retail outlets are likely to move forward on retail reform. Poorer, less urbanized states and those where India’s traders and merchant castes are politically powerful can opt out. So far, the two most vocal critics of the new measure are ideological opposites — Mamata Banerjee, a left-leaning populist, and Narendra Modi, a right-wing Hindu nationalist who styles himself as a business-friendly reformer. The rest of India’s ambitious chief ministers will end up competing with one another for a limited pool of big-ticket investment, creating an incentive to implement the reforms quickly.
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Once the reforms take hold, India could see some profound changes. India lacks the infrastructure like refrigeration and warehousing that most big retailers are used to, so Walmart, Carrefour, Tesco, et al. would have to build it themselves. That would benefit the entire retail-supply chain in India, decreasing spoilage and reducing time to market. To take advantage of economies of scale, those retailers will also — as Walmart does now on a limited scale — deal directly with farmers.
Don’t be fooled: these big-box stores will not suddenly replace India’s mom-and-pop stores by undercutting their prices. That’s the experience of retail in the U.S.: the small retailers that once served the middle classes could not match Walmart’s much lower prices. The Indian retail market is different. Yes, they may be locally owned, but those small retailers keep their prices low because they use only the cheapest possible casual labor and invest next to nothing in their stores. Prices cannot get any lower; in India, Walmart can compete only by offering higher prices — and better quality to attract the middle-class consumers who are able to pay. A handful of Indian big-box retailers and high-end specialty stores are already using that strategy.
The same goes for farmers. Under the current system, they are forced to sell their produce in government-supported wholesale markets where they have no pricing power at all. If big companies like Walmart enter the market, farmers can only benefit from the competition for the goods they supply.
Of course, no single company or single piece of economic reform has the scale to transform the lives of 800 million struggling farmers. Once Walmart is a full-fledged part of India’s market, it will become clear that even the largest company in the world isn’t big enough to change India. It will take broad-based change — in everything from water and electricity to education — to lift their livelihoods. Singh’s bold move is just a small first step.