An opposition motion to scrap an executive decision to allow foreign firms to own majority shares in retail enterprises was defeated by the lower house of the Parliament on December 2, 2012. Five days later the upper chamber did the same. In both cases, the opposition motion was defeated by a comfortable margin.

Although the parliamentary vote was symbolic, a defeat for the UPA government would more than likely have forced Prime Minister Manmohan Singh to withdraw the reform (as he previously did in 2011), or face a no-confidence vote that, given the government’s loss of its majority status, could have toppled the administration more than a year before the expiration of its mandate.

The outcome is a clear victory for Singh, and greatly increases the chances that the prime minister will be able to steer the rest of his reform package through the Parliament. However, it is worth noting that defeat of the opposition motions was made possible by the agreement of regional parties to abstain, thereby decreasing the number of votes the government needed to come out on top. That they agreed to do so is largely attributable to the fact that the retail reform is an enabling measure, rather than a mandate. As such, state governments can choose to maintain restrictions on the foreign share in retail operations.

By permitting the parliamentary vote, Singh has sent a clear signal that he is committed to pushing ahead on the reform front, including plans to raise the cap on foreign ownership in the undercapitalized insurance and pension industries. However, the fact that the TMC, a former UPA member that withdrew from the coalition to protest the retail reform, and its bitter rival, the Communist Party of India-Marxist, teamed up in support of the main opposition BJP’s effort to stall approval of amendments to the banking law is a possible portent of legislative difficulties for the government.

The setback in Parliament for banking reform coincided with the release of trade data that showed the external deficits continuing to widen in November, a combination that sent the NSE index plummeting by 300 points on December 11. The volatility of shares trading underscores the fragility of confidence in Prime Minister Singh. Although there is now little doubt that his commitment to reform is genuine, doubts about his ability to deliver remain, and a pause in the recent market rally is likely until those doubts are dispelled.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.

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