Signs India taking small steps on key reforms

US Secretary of State Hillary Clinton has called for India to further open up its economy for foreign investment and reduce barriers for trade.

Clinton's comments echo those of several other foreign leaders, businesses and analysts, who are often frustrated by the glacial pace of reforms in Asia's third-largest economy.

Few expect any speeding up of reforms, especially with Prime Minister Manmohan Singh presiding over policy paralysis after his government has been hit by high prices and a series of graft scandals.

But there have been small moves of late that suggest some efforts to regain the initiative to lift growth in India. Any such change will be welcomed by the markets.

Here are the main reforms in focus and answers to how quickly they are likely to be implemented.

Retail sector reforms

There is some movement in allowing foreign retailers like Wal-Mart and Carrefour to operate multi-brand stores to sell directly to consumers, instead of the current restrictions to the less lucrative wholesale format.

Since coming to power in 2004, Congress has pledged to open up the sector, but has faced resistance on concerns over the future of mom-and-pop shops which dominate the USD 450-billion retail sector.

Reformists in the government and business leaders say such a move would improve India's chronic supply and distribution bottlenecks that lead to 46% of fresh produce going to waste.

The government does not need parliament support for the move, but is seeking political consensus to avoid any possible fall-out. It has engaged with the opposition, business and civil society on the issue.

Senior government officials have started to agree on key rules on multi-brand retail and are set to make a decision soon.

High inflation in India -- a highly sensitive political and social issue -- is pushing the Singh administration closer towards liberalising rules for the sector, betting that foreign investment will ease pressure on agricultural supply chains and tame rising prices.

Indirect tax reform

There was movement this week on India's most ambitious indirect tax reform, the proposed nationwide Goods and Services Tax (GST), which would give the USD 1.6-trillion economy a boost by cutting business costs and enhancing government revenue.

The surprise appointment of a senior leader from the main opposition Bharatiya Janata Party (BJP) to head a panel on the tax is seen as a key step with Indian policy-making usually deeply mired by domestic political rivalries and considerations.

The law needs the support of half of all Indian states and two-thirds of parliament. The next few weeks will be key to watch as to whether the ruling Congress and BJP come to a deal.

The BJP agrees on the need for a GST but differs with Congress on its structure and how it should be implemented.

Any implementation would not come before 2012, due to the continued deadlock, but the small moves are positive, analysts say.

Fuel subsidies

The government has inched forward to cut its massive fuel subsidies, made worse by soaring global crude prices, an indication that when Singh wants, he can push through sensitive and deeply unpopular reforms.

His government raised the prices of diesel, cooking gas and kerosene in June after months of dithering, to provide some fiscal relief to state-owned oil companies.

But in a sign of the political compulsions that govern such decisions, the government also slashed taxes on fuel, reducing tax revenue and straining its fiscal position.

India budgeted a fuel subsidy of USD 5.3 billion for the current fiscal year and most of it has already been paid out to oil companies as compensation for selling fuel products at below-market prices set by the state.

However, with Brent crude prices soaring near USD 118 a barrel, state-owned oil firms face revenue losses of around USD 27 billion. Senior government sources say the government may seek approval for an extra USD 7 billion fuel subsidy payout next month when parliament opens.

The government may thus be forced again to look at raising fuel prices, but this remains a risky political move for Singh already on the back foot over a slew of graft scandals and with key state elections looming in 2012.