FDI- A classic example of why policy reforms are difficult to implement in India

Ankit Agrawal

The government wishes to allow FDI in multi-brand retailing to the tune of 51 percent which is being vehemently opposed by opposition/coalition parties and various interest groups. According to the rational actor model, the state is a monolithic unitary actor, capable of making rational decisions based on preference ranking and value maximisation.

In reality, the organisational behaviour model and the government politics model supplement this model and the latter only provides guidance to the ideal scenario. India follows a parliamentary system of governance which has a collective executive in the form of a cabinet so policy-making is joint decision-making. Decision-makers refract every policy through the prism of ideology and interest. A policy emerges only if harmonisation of multiple policy preferences can be achieved. India has had coalition governments for almost two decades now which makes persuasion and bargaining central to all policy-making and often results in no outcomes. Various parties weigh the potential benefits and impact on their electoral base while adopting positions on issues.

The same is being observed in the case of this reform proposal. Parties dependent on farmers, traders or the economically backward for votes are vehemently opposing the proposal. FDI in multi-brand retail may be economically rational on grounds of efficiency. But relative weights assigned to equity and efficiency and the question of what constitutes equity are points of contention between those advocating a neo-liberal approach and those who advise a people-centred approach to economic reforms. Currently, advocates of the latter seem to be enjoying the upper hand, even though it could be a matter of debate whether the supporting narratives they promote are spurious and irrational.

One can’t treat the government, its operating environment and the external environment in which the government is embedded as black boxes. The “window of opportunity” for reform is open only when the three streams of problem, solution and politics come together. Electoral compulsions like upcoming elections in states, threat of withdrawal of support by recalcitrant coalition partners and refusal on their part to negotiate has stalled this reform at various stages.

Given the current dominance of the politics of transparency and stakeholder consultation, public interest groups have acquired considerable influence on decision-making in the government. This is being observed in the FDI case where lobbies of traders, middlemen and farmers have sought to pressurise the government through high-visibility tactics ranging from demonstrations to outright violence. Technically, the proposed reform is an executive decision which by definition doesn’t need ratification by the Parliament and is non-binding on individual states since retail is a state subject. Yet, sustained pressure exerted through media outlets and the potential sweep of the policy has forced the government to suspend the proposal.

Even so, strategic incrementalism in the form of allowing cash-and-carry format stores and upto 100 percent FDI in single-brand retail is being practised, aimed at bringing elements from the realm of context of appreciation to context of influence. In sum, divergent interests and electoral compulsions of coalition partners, public interest groups, the reigning paradigms of governance and a free but hyperactive and sometimes irresponsible media, form a potent mix and make implementing reforms difficult.

Ankit Agrawal is an Equity Research Analyst based in Delhi

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