Trouble with Asean

Now, India's weakness on reform impacts trade openness

The United Progressive Alliance (UPA) government made a big deal out of pushing ahead with foreign direct investment (FDI) in multi-brand retail a couple of years ago. It even led to the departure of a major component of the alliance, the Trinamool Congress. Yet the compromises that the UPA made to the law - in particular, saying that states would have the final word on whether they would permit FDI in multi-brand retail in their territory - served to subvert the reformist intent of the law. It is important to note that the primary purpose of FDI in multi-brand retail was to allow more money to flow into crucial back-end supply chains. India's poor supply chain was held responsible for many supply constraints, and thus for a great deal of the persistence of uncomfortably high inflation more generally. The larger the canvas on which a multi-brand retail chain could operate, the larger the supply chain it would need and build - and so, allowing states to make up their own mind went against the spirit of the law. It is also unfortunate that the Bharatiya Janata Party (BJP) has chosen to make a political stand on the issue of FDI in multi-brand retail. This means many big BJP-ruled states have been denied the benefits it would provide. In addition, there is considerable uncertainty associated with the policy, since the BJP seems likely to withdraw it if it wins the general election - certainly, the party's manifesto singled it out as something the party opposed.

The unfortunate consequences of these developments are visible now also in India's trade negotiations. As this newspaper reported on Tuesday, a free trade agreement, or FTA, between India and the Association of Southeast Asian Nations, or Asean, is being held up because of India's confused stance on FDI in multi-brand retail. As a result, two major constituents of Asean, Thailand and Indonesia, are stalling on ratifying the agreement on free trade in services with India. Reportedly, they insist on allowing their companies to invest in multi-brand retail throughout India. Both countries have a thriving retail sector; Indonesian chains' expertise in dealing with high-inflation environments, in particular, might be useful for India. However, confusion, weakness and wavering on the reform on the part of India have caused both Thailand and Indonesia to put the ratification of the FTA on hold. India, which continues to be in need of ways to raise its exports and stabilise its external sector, needed Southeast Asia's vast markets to be opened to its vibrant services sector. Now it looks like this won't happen.

This is part of a pattern. In the past, a lackadaisical approach to reform and a desire to please too many domestic constituents have held up Indian exports excessively. For example, India's much-needed FTA with the European Union was held up because of too many demands being made by India's automobile, information technology and pharmaceutical sectors. The country needs to get its export engines working. In order to do that, it must work on preserving trade negotiations and internal reform from various interest groups and petty politics.