Indian government bows to pressure, agrees to vote on supermarket reform

An activist of Shiv Sena, a Hindu hardline group, burns a pamphlet during a protest against Foreign Direct Investment (FDI) in retail sector, in Jammu November 30, 2011.

NEW DELHI (Reuters) - The Indian government bowed to intense opposition pressure and agreed on Thursday to a vote on its decision to let foreign supermarkets set up shop in India, taking a major step towards ending a deadlock that has paralyzed parliament for days.

In finally conceding to a symbolic vote on its flagship economic reform, Prime Minister Manmohan Singh's fragile coalition appears to have calculated that it has the numbers to overcome opposition demands for the measure to be rolled back.

A lot is at stake for Singh's minority government. If it loses the vote it would be more than just an embarrassing setback. It would likely face intensified pressure to reverse its executive decision in September to allow foreign direct investment (FDI) of up to 51 percent in domestic supermarkets.

"It is most crucial for government and the country at this stage that the vote on FDI musters a majority otherwise it will be a symbolic blow for the government," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank.

"India is a deficit country and needs all foreign flows to manage the rupee, to cut deficits and to push GDP," he said.

India's economy is set to grow at its slowest pace in a decade this fiscal year. Manufacturing is contracting and exports are falling. October trade deficit of nearly $21 billion was its worst on record.

Wal-Mart, the world's biggest retailer, plans to open its first supermarket in India in 12 to 18 months.

Meira Kumar, speaker of the lower house of parliament, or Lok Sabha, announced the vote would take place but did not say when.

GOVERNMENT NEEDS HELP

While the government could muster a majority there, a vote in the upper house, or Rajya Sabha, would be harder to win. The speaker of that chamber has not made a ruling on a vote.

The main opposition party, the right-wing Hindu nationalist Bharatiya Janata Party (BJP), and leftist parties have disrupted parliament for nearly a week with demands for a vote on the supermarket reform, which they strongly oppose. The government had resisted such a move and called instead for a debate.

The deadlock had threatened to derail the government's efforts to drive forward its stuttering economic reform agenda with new measures to allow greater foreign investment in the insurance and pension sectors.

After the speaker's announcement, the lower house of parliament resumed operating normally, if noisily. The upper house was disrupted again by BJP demands for a vote there.

Critics say allowing foreign players into the $450 billion retail sector will destroy the livelihoods of millions of small store owners. The government says the move will bring down waste and costs in a country where one-third of fresh produce rots and food inflation is a persistent worry.

For the government to win the vote in the Lok Sabha it would near the help of two major regional parties, which are not part of the coalition but often vote with it in parliament. While both parties oppose the reform, the government is banking on them abstaining, thereby depriving the opposition of a majority.

The two parties have not said explicitly how they will vote and have proven fickle allies in the past. But over the past week, the government has been lobbying hard for their support.

(Reporting by Nigam Prusty and Satarupa Bhattacharjya in NEW DELHI, additional reporting by Neha Dasgupta and Archana Narayanan in MUMBAI; Writing by Ross Colvin; Editing by Robert Birsel)