Cost of politics

It has taken almost two years in power for the Bharatiya Janata Party (BJP) to muster the courage to open the retail sector in India to foreign direct investment (FDI) just a crack.

Presenting India's annual Budget, the finance minister announced that his government would allow 100 per cent FDI in agricultural food-processing, which covers the multi-brand retail of food products produced and manufactured in India.

The announcement marks the breaking of a taboo in the nationalistic BJP, which repeatedly pledged "no FDI in retail" in recent manifestos - a position that has now been reversed in the name of helping farmers.

The party's grudging conversion is, of course, better late than never, but India has paid the opportunity cost for the government's obstructionist foot-dragging. Even now, the opening of food-processing business to FDI comes with half-baked regulations that could blunt the positive impact of the initiative.

The reversal smacks of cynicism and political opportunism. As recently as 2012, the BJP and its allies were bitterly opposed to the then Congress-led government's efforts to open the retail sector to multi-brand FDI.

India has paid the opportunity cost for the government's obstructionist foot-dragging. Even now, the opening of food- processing business to FDI comes with half-baked regulations that could blunt the positive impact of the initiative.

In a memorable put-down of the Congress FDI plan, Prime Minister Narendra Modi, as Gujarat chief minister, had famously mocked Dr Manmohan Singh and Mrs Sonia Gandhi for caring only about foreigners: "What would be the percentage of businessmen from Italy who will come to India to run groceries?" Notably, for 12 years as chief minister of Gujarat, Mr Modi opposed goods and services tax legislation, the same initiative that he now desperately seeks to pass with Congress support.

The political games have left the rural economy in a sorry state. India's agriculture, which employs 65 per cent of the population but contributes only 16 per cent to GDP, has languished because of its dependence on fickle monsoons and acute infrastructure shortage.

Food worth 920 billion rupees (S$18.8 billion) gets wasted every year mainly due to lack of cold storage, proper transportation and poor roads and energy supply. The decision to allow 100 per cent FDI in multi-brand retailing of food products for the first time opens the riches of fruit, grains and vegetables to be processed and marketed in retail stores.

The move has been welcomed by companies such as Walmart, which operates cash-and-carry stores. Investment by foreign companies in developing cold storage, refrigerated transportation and retail stores to sell fresh produce may finally bring the conveniences of a modern economy, already enjoyed by other developing countries, to India.

The minister in charge of the food-processing ministry is right in saying that FDI will act as a catalyst for the processing sector as it would create jobs and uplift the condition of farmers as well as help in controlling inflation.

More significant for the long-term future of the economy will be the introduction of smart logistics that will be needed to move thousands of tonnes of fresh produce from field to cold storage and processing plants and finally to the store shelves. It will be a good preparation for the moment when the government will summon the courage to defy "patriotic" hardliners in the party and allow FDI in other multi-brand retail stores.

To begin, the government will need to clear some of the haze surrounding regulations for the new FDI regime. The plan announced in the Budget does not offer any solutions to bypass the logistical bottlenecks and high prices caused by the current mandi system, a trade cartel that has effectively stymied domestic investment in food processing.

Other obstacles - the lack of electricity and roads capable of handling heavy trucks - will also need to be addressed before FDI in food-processing can deliver its much-awaited catalytic spark.

  • The writer is consulting editor of  Yale Global Online, published by the MacMillan Centre, Yale University.
A version of this article appeared in the print edition of The Sunday Times on March 20, 2016, with the headline 'Cost of politics'. Print Edition | Subscribe