The reforms mirage.

The Congress supporting press has gone delirious over the " big bang " reforms announced by the Congress controlled government last week. The World Famous Economist is a " courageous reformer " who has unleashed a " political masterstroke ", we are told. So what are the reforms that have caused such cacophony? The price of diesel has been increased by Rs 5. However, at Rs 50/lit it is still cheaper than in the US where it is around Rs 60/lit. This will add 1% to inflation but was necessary and should have been done in 2007-8 when the rupee was strong. But with elections in 2009 it was shelved. To be really effective petrol price should be reduced by the same extent, by reducing taxes on petrol, as the rise in diesel. The attempt should be to approximate the prices of both so that there is no temptation to adulterate petrol with diesel or to buy cars with diesel engines. The second measure is that 51% FDI in multi-brand retail will be permitted. This will allow companies like Walmart and Tesco to open branches in India. The idea is that these giant companies with enormous cash reserves will invest in infrastructure such as cold stores, cutting down on food waste, and benefit farmers by sourcing produce directly from them and cutting out middlemen. In reality they are likely to be cautious because it takes years to set up the supply chain and elections are due in 2014 which might see a change of government. At present only the states with Congress governments will want to implement this measure so we will see how successful they are. In single-brand retail the government allows 100% ownership and has dropped its insistence on sourcing at least 30% of products locally from Small Scale Industries. The wording has been changed to " preferably from MSMEs ", but who is to decide how much is preferable. Naturally foreign companies are suspicious. Swedish home furnishings maker IKEA, which wants to set up 25 stores at a cost of 1.5 billion Euros or Rs 105 billion, has said," We are positive to the development and remain hopeful that we will soon be able to set up our first store in the country, subject to 100% approval of our application to the Government of India." That is diplomatic for," We do not trust you at all after what you did with GAAR so we want cast iron guarantees that you will not change the rules after you have trapped us into investing all that amount of money." The third measure is to allow foreign investment in our airlines. This is perhaps the most stupid. Who will want to invest in businesses making colossal losses with no hope of becoming profitable because the major share of ticket price goes to the government in taxes? The IATA has already said," Allowing foreign direct investment by global airlines is not a panacea. The critical problems of a high cost environment, insufficient infrastructure and crippling taxes must also be addressed...." The press is acting as Congress agent for the election in Gujarat. 2014 is still very far. Plenty of time for the mirage to disappear.