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Microeconomic Reform

The term microeconomic reform (or often just economic reform) refers to policies directed to achieve improvements in economic efficiency, either by eliminating or reducing distortions in individual sectors of the economy or by reforming economywide policies such as tax policy and competition policy with an emphasis on economic efficiency, rather than other goals such asequity or employment growth. "Economic reform" usually refers to deregulation, or at times to reduction in the size of government, to remove distortions caused by regulations or the presence of government, rather than new or increased regulations or government programs to reduce distortions caused by market failure. As such, these reform policies are in the tradition of laissez faire, emphasizing the distortions caused by government, rather than in ordoliberalism, which emphasizes the need for state regulation to maximize efficiency.

Latest Reforms
Corporate India is overwhelmed & the media is abuzz with the recent news of economic reforms announced by the Government of India. These reforms seem to have given a new lease of life to the fledgling Indian Growth Story & a respite to UPA-2 which has been drawing flak for the Coalgate scandal & various other corruption cases. Opposition parties, as usual are up in arms. But its the Prime Minister who is basking in the glory. Not long ago, the same international & domestic media which raised questions on Manmohan Singhs ability to take Indias economy out of the woods, are now heaping praises on him.The government finally pressed the reform button when it announced that it will implement FDI (Foreign Direct Investment) in multi brand retail, Aviation Industry & Broadcasting (which comes under Information & Telecommunication ministry). In a televised appearance, the prime minister explained the reason behind the diesel price hike. Bleeding oil companies heaved a sigh of relief & capital markets cheered as BSE breached the 18k mark & the Rupee strengthened against the dollar from 55 to 53 (resulting in the saving of a thousand Crores for the oil PSUs).

A long time over due: India Inc embraced the reforms & the common man was exultant.
Economic pundits had predicted another 1991 like situation, thanks to the subsidies offered in the name of socio economic development. Consequently, the fiscal deficit widened & state debts mounted. The number of naysayers doubting Indias growth story increased & those who had faith started to doubt. The economic reforms which were long overdue will certainly get India as close to its growth projection of 9 per cent in the twelfth five year plan as possible. Lets have a look at how these reforms can make things right for India.

Why reforms are needed? In the last few years, global slowdown & policy paralysis
have badly impacted the Indian economy. A number of economic policies were put in limbo. The government focused more on social schemes & kept on providing subsidies on diesel & food to BPL families. This years Annual budget was so short on expectations that the BSE tanked by 900 points. Despite high production of food, spoilage caused supply deficit which aggravated inflation. The Rupee depreciated by 20 per cent in the last two years, which further widened the fiscal deficit as India imports 80 per cent of its domestic oil demand.

Investors, who earlier were so optimistic about Indias story, started withdrawing their investments. Something revolutionary was needed & this flurry of reforms has certainly revived business sentiments as evidenced by the inflow of 13,500 crore in September so far.

How FDI will impact the economy? The government has put some stringent
conditions global retailers like mandatory investment of 50 per cent in the back end infrastructure, which will make the supply chain system efficient (cold chains, refrigeration, transportation, packing, sorting and processing). This will lead to lower prices benefitting consumers at large. International retail companies will have to procure 30 per cent of the raw material from SMEs (small & medium enterprises). Infrastructure in India is already in a very bad state; introduction of FDI will only improve it. The good news for the common man is that the number of jobs will increase by millions & the highly unorganized sector will begin to get organized, benefitting Indian economy eventually. Indian airline companies are in dire need of capital due to accumulation of losses & mounting debt levels; investment is what seems to be the need of the hour. In the long term, FDI may certainly help the Indian aviation sector. One can only hope that these reforms will pave the way for other reforms & put the Indian economy back on track.

Insurance & Pension


The announcement of allowing 51% FDI in multi-brand retail and 49% foreign holding in aviation is now followed by the recent decision of the Cabinet to approve 49% FDI in insurance and 26% in pension sector. However, the bill will be presented for legislative approval adding to the fact that BJP is opposed to a higher FDI ceiling in insurance. Insurance regulator IRDA predicted that the life insurance sector would require capital boost of around R40000 Cr for enough industry growth to account for 8% of GDP. Uptill now foreign investment was allowed up to 26% in the insurance segment and the pension sector was kept aloof from it. A host of foreign partners in the insurance JV had lost hope of a reform in the space and announced plans to exit the same over the past couple of years.

Seller HSBC AEGON Ageas

Insurance JV Canara HSBC Oriental Bank of Commerce Life Insurance AEGON Religare Life Insurance IDBI Federal Life Insurance

Status Planned Planned Planned Planned Completed

Generali Group Future Generali Life Insurance New York Life Max New York Life Insurance

That, along with factors like reduced return on reserves from the life insurance sector in comparison to other countries like China, low profitability margins, falling growth rates due to change in regulations on policies such as unit-linked insurance plans (Ulips) and problems in home markets have triggered majority of foreign players leaving the Indian insurance businesses. Couple that with the impressive growth projected by the segment over the past decade. The life insurance sector grew at a CAGR of 25.8% between 2000-2010 and the issued policies volume moved at CAGR of 12.3%. According to IRDA report, the country currently has 23 life insurers and 24 non-life insurers and a reinsurer. Among these, the life insurance market was dominated by LIC with 72.98% market share and the rest lying with private insurers. Indian insurance penetration vis--vis other countries

This reflects a market to be tapped given necessary regulatory approvals and conditional liberalization of the sector. The insurance sector in India, is expected to reach around $400 Bn in premium income by 2020, a Boston Consulting Group report stated. In the pension market, over 80% of the working people are in the unorganised sector without regular salary and benefits. Indian pension fund market is set to reach around R20 lakh Cr by 2015 from the present level of about R15.4 lakh Cr, according to ASSOCHAM and it also added that the country would be able to raise the share of pension fund assets to GDP from the current level of 5% to around 17% by 2017, resulting in assets worth $165.85 Bn.

Big-Bang Reforms Get Bigger


In a slew of big decisions, the Cabinet cleared two important financial sector reform Bills, aimed at increasing foreign direct investment (FDI) in the insurance sector to 49 per cent from the current 26 per cent and opening of the pension sector to FDI in line with the insurance sector. It also approved the Companies Bill, 2011, making spending on corporate social responsibility a mandatory provision for companies above a threshold. The Cabinet also gave the green signal to amendments in the Competition Act, bringing all voluntary mergers and acquisitions in all sectors under the purview of the Competition Commission of India (CCI). Specific cases such as the merger of a failed bank with another in the public interest will, however, be exempted from CCI purview and be in accordance with Reserve Bank of India directions. The Cabinet also gave its nod to the Forward Contracts Regulation (Amendment) Bill to give more teeth to the Forward Markets Commission and introduce more products in commodity futures. SEVEN GAME-CHANGERS The key decisions taken by the Cabinet and what they would mean Insurance Law Amendment Bill To raise the FDI cap in private insurers to 49% from the existing 26% Pension Fund Regulatory and Development Authority Bill To give statutory powers to the interim pension regulator and open the sector to FDI

Forward Contracts (Regulation) Amendment Bill To introduce more commodity futures, give more power to Forward Markets Commission Amendment to Companies Bill, 2011 To make spending on corporate social responsibility a mandatory provision for companies above a threshold Competition Act (Amendment) Bill To bring all voluntary mergers and acquisitions under the purview of Competition Commission of India International status to five airports To declare airports at Lucknow, Varanasi, Tiruchirapalli, Mangalore and Coimbatore as international airports Tripartite model for infrastructure debt funds To bring into operation a model agreement between the concessionaire, the project authority and infrastructure debt funds To give a boost to the infrastructure sector, the Cabinet committee on infrastructure approved a tripartite model agreement between lenders, the project authority and the concessionaire to operationalise infrastructure debt funds. The Cabinet also cleared a proposal to declare the airports at Lucknow, Varanasai, Tiruchirapalli, Mangalore and Coimbatore as international airports. It also approved the document for the 12th Plan, which aims at an average annual growth rate of 8.2 per cent during 2012-13 to 2016-17. The Plan document will be considered by the National Development Council later this month. The proposed National Investment Board was on the agenda but did not come up, as the Cabinet note on that was not circulated to all departments and ministries. The proposal to expeditiously clear big infrastructure projects is likely to be taken up in the next meeting. The Cabinet cleared a 49 per cent FDI cap in private insurance companies. The pension sector will have either a 49 per cent FDI cap (in case the insurance Bill is cleared by Parliament) or 26 per cent. Even as the Cabinet approved a higher FDI cap in the insurance sector through amendments in the Insurance Laws (Amendment) Bill and the Pension Fund Regulatory and Development Authority (PFRDA) Bill, the government may not find it easy to pass these pieces of legislation in Parliament.

That is because the main Opposition, Bharatiya Janata Party (BJP), opposed an increase in the FDI limit in the insurance sector and insisted the Bill be again brought to Parliament's standing committee on finance, headed by its senior leader Yashwant Sinha. However, Finance Minister P Chidambaram exuded confidence the Opposition would be persuaded to get the Bills passed. I have already included the insurance Bill in the list handed by me to two leaders of the Opposition. I will ask them to consult their colleagues and support the Bill. We will continue to engage all political parties in Parliament to get it passed, Chidambaram told a press briefing after the Cabinet meeting. He said he also took note of senior BJP leader L K Advanis statement that they were opposed to FDI in retail but in other sectors they supported it. However, a senior BJP leader said the party was going to oppose the amendments, as those were against the recommendations of Parliaments standing committee. The committee had recommended retaining the FDI cap in the insurance sector at 26 per cent. PFRDA Chairman Yogesh Agarwal said he would be happy with 26 per cent FDI in the pension sector. However, if it was to become 49 per cent in line with the insurance sector, he would welcome the move more, he said. He said a lot of foreign interest was seen from the US and Europe in the pension sector in India. Besides the opening of the pension sector, the PFRDA Bill gives statutory powers to the interim regulator, constituted through an executive order in 2003. Rajesh Sud, CEO & Managing Director, Max Life Insurance, said, The Cabinet's approval to allow FDI up to 49 per cent in the insurance sector will bring in domain capital to the industry. The insurance Bill has several other important elements which, once approved in Parliament, will have a long-term impact on the development of the sector. P Nandagopal, MD & CEO, IndiaFirst Life Insurance, explained that more capital was always welcome and the industry could leverage both financial and technical capital through the FDI route. FDI reform measures cleared by the Cabinet last month were all executive decisions. However, major reform proposals cleared today are Bills, which will require Opposition help to pass.

Govt allows 51% FDI in multi-brand retail, 49% in aviation sector


IMPACT: Late in 2011, the Central Government had put on hold its plan to open the
retail sector to foreign companies after opposition from several quarters. However, last week (partly to dismiss the notion of policy paralysis), Dr.Singh announced big ticket reforms such as allowing 51% FDI in multi-brand retail, 49% in civil aviation, 49% in two power exchanges and also raised the limit from 49% to 74% in the broadcasting sector. These measures are important to attract foreign investment as foreign investors would now be more comfortable to see that some reform measures are finally taking place in India. The move would allow global firms such as Wal-Mart Stores to set up shop with a local partner and sell directly to consumers for the first time, a move which supporters say could transform the $450 billion retail market and tame inflation. Retail stocks bounced up after this announcement on the hopes that the Government will not roll back the proposed reforms.

KEY PLAYERS: GoI, Major foreign players WHY IS IT IMPORTANT? The Government is planning to go ahead with these
reforms this time inspite of threats from its allies to withdraw support to the coalition and in the face of stiff opposition and protests. 51% FDI in retail will improve back-end retail processes such as cold chain, warehouses and packaging. Since retail chains will only be allowed in cities with a population of more than 10 lakh as per 2011 census, it will create much needed jobs in these cities. Allowing foreign investment in aviation is also a good move as most of Indian carriers are suffering losses because of high taxes on jet fuel, rising airport fees, costlier loans, poor infrastructure and cut-throat competition. This move might even help in improving the quality of our national carrier and making it comparable to the national carriers of developed countries. These announcements were hailed by the business community and boosted investor sentiments. In 10 years 10 million jobs will be created by FDI in retail IMPACT: Retail sector in India, driving on the boom provided by Foreign Direct Investment, will become the largest sector in organised employment, creating 10 million jobs in next 10 years. The projections are made by Indian Staffing Federation (ISF) which is the governing body of flexi staffing in India. According to the report, FDI in retail will create 4 million direct jobs, while 5 to 6 million people will indirectly benefit via staffing firms providing contractual employment within a span of 10 years. ISF complimented the government on its recent reforms comparing it with the IT boom that came in India a decade ago when it opened avenues for less skilled people in India. The growth will also benefit the supply chain and logistics companies which form a crucial link between the local manufacturers or processors, farmers and organized retail chains. At the same time staffing or recruitment firms will also see a surge in their business. KEY PLAYERS: Indian Staffing Federation, Government of India, Retail sector

WHY IT IS IMPORTANT? Global Retail Development Index 2012 places India at fifth position among top 30 emerging retail markets. It is expected to register an annual growth of 10-12 percent. The $450-billion retail sector employs the highest number of people in India after agriculture. At the same time people with managerial experience in retail consulting, mergers and acquisition, project management, supply chain and agro business will be in huge demand in coming days.

Wal-Mart plans to open its first outlet in India within 12-18 months Firstpost/ livemint IMPACT: India is the worlds second-most populous country and has a large (and growing) middle class and so, not surprisingly; it is an attractive destination for any sort of organized retailing. The Government on allowing 51% FDI in multi-brand retail has directed foreign players to use half their investment in infrastructure (such as warehouses, packaging, etc) as well as to source 30% of their products from SSIs. This might be hard as the business success of these companies depends on ultra-efficient management of a global supply chain to drive down prices. However, this move is expected to help in lowering product prices, reduce wastage of farm produce, ease supply-side inflation and reduce unemployment levels. It might even help in boosting the slowing growth rate and ease fundraising concerns. KEY PLAYERS: Wal-Mart and other global retailers WHY IS IT IMPORTANT? The Indian Government allowed FDI in multi-brand retail thus reacting positively to some of the worlds largest retailers lobbying to open up the country of 1.2 billion people to foreign store chains. Global chains like Wal-Mart and Carrefour had already entered the wholesale supply chain to prepare themselves for a potential move into Indias retail sector. Wal-Mart with its partner Bharti Enterprises already caters to vegetable vendors, restaurants, hospitals, etc. India as a market is important for Wal-Mart as it is facing slowing growth in its home country where it has hardly any presence in major cities. Its plans to open a store in NYC recently got shot down over financial issues and in the face of sharp opposition from unions and citizens who were not ready to let the worlds richest retailer enter their city.

Conclusion:
When the entire world is looking at India, the government needs to make sure that it lives up to their expectations. India is touted to become the next super power. Politics of self interest is the biggest hindrance, if they want the economic development of India. By deciding to allow FDI in critical areas, the government has taken the first step towards development & restoring its peoples trust. Its next focus should be to ensure that every spectrum of the society benefits from the reforms. Let holistic development be the objective!