Aam Aadmi Party: Sweeping out Foreign Investment

Monday’s news that the new Aam Aadmi Party (AAP)-led Delhi government decided to opt out of a year-old policy opening India’s “multibrand” retail sector to foreign investment will give international businesses interested in India pause. Amidst the news of a promising and hopeful rise of a political party focused on accountability and governance for the common man, many people outside of India have wondered what the AAP’s stance would be on economic policy. This is as good a preview as any—and it’s troubling.

Unlike in many countries, the debate about “multibrand” retail (a store that sells many different brands, like a department or big box store, as opposed to a “single-brand” store like Louis Vuitton) has a long and politically contentious history in India. The sector was closed entirely to foreign direct investment, despite substantial national debate for many years, until the UPA government boldly changed the policy in 2011. Unfortunately the 2011 opening led to the withdrawl of West Bengal’s Trinamool Congress from the UPA coalition—one of its largest coalition allies—and the policy was suspended while the federal government returned to stakeholder consultation. When it again announced an opening to foreign investment for multibrand retail in late 2012, it allowed individual states to opt in or opt out, one of several compensatory measures to make the policy palatable to objectors. Delhi was among the first ten, largely Congress-led, states to opt in.

I can’t say it’s a surprise, given that “opposing FDI in retail” was contained in the AAP campaign manifesto for Delhi, that the new Delhi government wrote to the government of India to rescind Delhi’s permission for multibrand retail yesterday, but it still jars to read the news.   Leaving aside the merits (and demerits) of the multibrand retail debate for now, this news matters because of the signal Delhi’s decision sends to the world about India as an investment destination.

First, since no foreign multibrand retailers are operating yet anywhere in India, let alone in Delhi, this policy change does not require an expulsion of any foreign businesses—but what if it had? At best, the decision signals that policy changes are not institutionalized and can be abruptly undone. At worst, it marks what may well be the first example of an economic reform reversal in India. Policy changes move slowly and in due time in India, but it’s often said that they don’t go backwards. As of January 2014, one has.

Second, it’s worth remembering, in the context of larger debates about FDI in India, that AAP is hardly an outlier on this question. The BJP famously opposes FDI in retail, for example, as do numerous other regional parties. At a time when states are increasingly looking abroad to attract investment for their own growth, foreign investors may now need to add a new calculation to their models: the probability of any future state-level government changing the terms for their presence.

Add it all up and it sends a confusing, conflicted signal to interested foreign investors. Late Monday, Indian papers were reporting that an “angry India Inc” is worried that the Delhi decision would discourage investment. Indeed. At a time when the government of India has been pitching the world to invest in India, AAP’s message has to hurt.