Indian economy needs Singh's retail therapy

Reform of the retail sector would cause short-term disruption but is exactly what the country needs. But can a weakened Prime Minister Manmohan Singh sell his plan?

Which way will Manmohan Singh swing? Mere days after announcing his plan to open up India's retailing sector to foreign investment, India's prime minister is facing tremendous opposition to it. There is already talk that, with elections looming, the proposal may be scrapped - just as it was when first mooted last year. That would be a mistake. India needs this reform, painful though it will be.

The controversial plan would allow international firms to buy up to a 51 per cent stake in domestic retailers, among other reforms.

Critics say the change will put small retailers out of business. They are correct, it will. But the long-term health of India's economy depends on more foreign investment, and more efficiency. People put out of work by these changes will find new jobs. India's overall economy, however, risks free-fall if investor confidence is not restored, and quickly.

The reform means a collision between the small stores of rural India and the globalised, urban world. There is also an element of social stability at issue: in rural areas - and most Indians still live outside big cities - small shops have symbolised stability, and are so numerous that their owners have real political clout.

But India is desperate for the economies of scale, in retailing and other sectors. Big companies can improve organisation and distribution, making goods cheaper for all. Large-scale food-handling, for example, could save millions of tonnes of staple foods per year from rats and rot.

But India's ruling coalition may prove unable to sell this policy. The central government is weak, crippled by corruption scandals and the inertia of the moribund Congress Party at the heart of the ruling coalition. With elections looming, many regional leaders are resisting the reforms, preferring short-term political profit to longer-term prosperity.

As India's finance minister from 1991 to 1996, Mr Singh won credit for pushing through reforms that opened the way to economic progress. Now he is trying to take another step along that road, and has shown that he understands the stakes, saying "the time has come for big bang reforms … If we have to go down, we have to go down fighting."

Or maybe not. The government has quietly suggested letting states opt into the new policy, or avoid it. Yet another short-term compromise - which is what this is - will do irreparable harm to all of India.