By Nigam Prusty
NEW DELHI, Dec 5 (Reuters) - India's fragile ruling
coalition won a vote on allowing foreign supermarkets to operate
in Asia's third-largest economy on Wednesday, in a key test of
support for Prime Minister Manmohan Singh and his flagship
It was a much-needed boost for Singh at a time when he is
trying to drive a second wave of reforms through a fractious
parliament. The debate over retail reform has proved a costly
distraction for the minority government, eating up two weeks of
the month-long parliamentary session.
The victory clears the way for voting on bills aimed at
attracting foreign investment to the ailing pension and
insurance industries, two measures seen by financial markets as
important steps in further liberalising an economy in the midst
of a slowdown.
Expectations the government would win had earlier driven
India's stock market to a 19-month high.
"FDI in retail was a barometer to test the government's
strength and the government has proved that they have the
support in the parliament to push through such reforms," said
Samiran Chakraborty, regional head of research at Standard
Chartered Bank India.
The vote in parliament's lower house - which the government
won thanks to abstentions by two powerful regional parties - was
non-binding. However, a loss would have made it harder for Singh
to defend the policy to bring global chains such as Wal-Mart
Stores Inc. to India's $450 billion retail sector.
Under threat of losing India's investment-grade credit
rating, and facing the prospect of fighting a general election
during the worst growth slump in a decade, Singh launched the
policy amid a flurry of long-delayed reforms in September.
Money has flowed into India's capital markets since, and
Goldman Sachs last week upgraded India's outlook, but formidable
hurdles remain to get the economy back on track.
RUNNING OUT OF TIME
The vote was the first big floor test for the government
since a partner pulled out of the coalition in protest at the
retail policy, which critics say will crush small shopkeepers.
"It is not over, we will fight on the streets," said
Shahnawaz Hussain, a lawmaker for the main opposition Bharatiya
Janata Party (BJP), which had called for the vote to challenge
The government says the reform will help modernise India's
dysfunctional food distribution system and slash inflation.
Exploitation by foreign traders was a key complaint in
India's independence movement led by Mahatma Gandhi and in the
debates leading up to the vote some opposition leaders said the
new policy harked back to Britain's former East India Company.
"They came as traders and become Rajas. Is America coming
through Wal-Mart to capture Indian power?" asked member of
parliament Saugata Roy of the Trinamool Congress party.
Wednesday ended in victory, but the vote underscored how
weak Singh's coalition now is. To pass legislation in the lower
house the government relies on support from the Samajwadi Party
and the Bahujan Samaj Party, two capricious regional rivals who
oppose many of the government's policies but abstained this
On Friday, the upper house will vote on the same issue.
There the government has fewer seats and is likely to lose the
Another vote on the same day on foreign exchange rules is
potentially more serious, since a loss could slow implementation
of the supermarket policy. The lower house passed the foreign
exchange vote on Wednesday, straight after the retail vote.
Ratings agency Fitch warned on Monday it could cut India's
sovereign rating if the government loosens fiscal policy in the
run-up to the election, due by 2014, or sees a more prolonged
slowdown in economic growth.
India's fiscal deficit is the widest among major emerging
economies due to huge spending on subsidies for items such as
food, fuel and fertiliser. Few economists believe the government
will meet its target of cutting the deficit to 5.3 percent of
GDP this year, and spending is likely to rise next year.
While markets have been heartened by Singh's new appetite
for reform, Fitch said there was concern the government would
lose its focus as electoral issues come to the fore next year.
Topping the government's to-do list are measures to ensure
faster decision making for infrastructure works, overhauling the
tax system and cutting the deficit to revive capital investment.