The development of an organised retail sector in India will be a vital component in the country's economic transformation but widespread protests show there is still significant opposition to the expansion of modern retail formats, whether home-grown or from overseas. Kevin Jacobs assesses the state of play.

The development of India's retail segment is both a reflection of the country's rapidly developing consumer economy and also one of the key factors enabling that economic transformation to take place. It has also become a major political issue.

Younger Indians and the country's growing middle classes may be taking to modern retail formats but the expansion and modernisation of the country's retail sector has elicited a fierce reaction from smaller, traditional retail businesses and suppliers who for obvious reasons are concerned at the developments. The recent protests and a political decision to close new stores in the Indian state of Uttar Pradesh underline the political sensitivities.

The organised retail industry in India is valued at US$350bn and is expected to grow by an average 35% a year over the next three years to a $450bn industry.

Direct foreign investment in the market is prohibited by the Indian government but a number of overseas retailers have made joint-venture moves into India. Earlier this year, Wal-Mart signed a deal to enter India's cash-and-carry sector in partnership with local group Bharti Enterprises. The US giant follows German retail combine Metro, which has operated cash-and-carry outlets in India for four years. Other multinational retailers, including Tesco and Carrefour, are keenly eyeing the market. However, opposition has not only been aimed at international investors, but at local groups too.

Indeed, one of the key players is the country's largest privately-owned conglomerate Reliance Industries. Its retail arm, Reliance Retail, plans to spend some US$6bn on expanding its presence across the country. In August, Reliance announced plans to expand its store network to around 5,000 outlets across India by 2011. At the moment, Reliance operates 250 convenience stores, one hypermarket and one "speciality store" in India.

But Reliance is expanding in the face of considerable opposition. Last month in Uttar Pradesh, India's most populous state, farmers and small-shop owners held protests against the opening of Reliance's first Reliance Fresh convenience outlet in the state.

Moreover, the mass anti-retail rally held in Mumbai earlier this month, organised by the Federation of Associations of Maharashtra (FAM) which represents around 750 unions and small business associations in India, have put the plans of many investors on hold.

Manu Kapoor, vice president corporate affairs at Reliance Retail, says the company had planned an investment of $200m in Uttar Pradesh over the next three years, providing employment for over 50,000 people in the state.

Nevertheless, this did not stop Uttar Pradesh's Chief Minister Sarla Mayawatti from taking the unexpected step of closing the first Reliance Fresh outlet in Lucknow, the state's capital, which was followed by the closure of other stores.

People power: Protests have halted Reliance Retail's expansion across India

Mayawati leads the Bahujan Samaj Party (BSP), which is in a coalition with the communist Samajwadi party, and Mayawati went ahead with the store closures after protests led by a Samajwadi MP.

It is thought that Mayawati had taken the view that adopting a heavy line on the Reliance store expansion would garner more popular support in advance of elections next month than allowing the openings to go ahead, in spite of the fact that there were counter-protests from Reliance employees who had lost their jobs.

Hundreds of young people who lost their jobs after Reliance's outlets in Uttar Pradesh were ordered to close protested against Mayawatti in Kanpur on the 29 September demanding the reopening of the closed stores. Subsequently, a top-ranking government committee was given 30 days from 23 August to submit a report on the matter, along with recommendations.

The concerns of small local retailers and suppliers in Uttar Pradesh typify the suspicion that traditional companies have towards the country's retail revolution. Neha Shukla, a small-scale vegetable vendor in Lucknow, is concerned about losing her customers and produce to the big air-conditioned stores. Meanwhile Anil Mehra, a farmer who has been supplying Shukla for two decades, says he will continue to supply her for as long as she has a market to sell his produce, and then would clearly have to look for another buyer.

Reliance insists that it is sensitive to the concerns of India's smaller traders. "Our retail initiative will in no way jeopardise the interest of small vendors who service consumers," Mukesh Ambani, the company's chairman, told shareholders at the company's AGM on 12 October. "Our initiative will in fact, over time, generate flexible and full employment, even in rural India."

Gibson Vedamani, president of the Retail Association of India (RAI), believes the hostility is borne out of a lack of awareness about the benefits of retail expansion, and therefore the problems can be solved through education. "This problem is new to us and we were not ready for it, but now we want to help state governments formulate awareness programmes," he says. "This is a problem of ignorance about the industry."

Not all local politicians have reacted like Uttar Pradesh's first minister. West Bengal's Chief Minister Buddhadeb Bhattacharjee believes that the expansion should be permitted, with sufficient safeguards and regulation. "My position is that we should allow Indian companies to operate but with some regulations," he says. "To start with they should not touch food grains. Secondly, they should not open shops in the city [urban areas]."

Los Angeles-based real estate investor, Kevin Kishor Kaul, chairman of the Friends of Asian American Communities (FOSAAC), also believes the opposition "will only be temporary as these farmers will also benefit in the long run".

Such sanguine projections are based on the fact that the Indian market appears set up for development. Indeed, with a rapidly growing economy and an expanding middle class, the Indian market could be said to have the perfect formula for such growth. Young Indians are very much in sync with western culture and lifestyles thanks to Hollywood and the Internet. They also have a higher disposable income than a few years ago, and are more outgoing and open to change than the previous generation.

India's National Council for Applied Economic Research (NCAER) divides the country's middle class into three segments, the upper middle class of around 40m people who earn annual incomes of $600,000; the next level of around 150m people, who earn an income of $20,000 per year; and the lower middle class of around 110m who earn just above $10,000 a year.

According to Suman K Berry, director general of the NCAER, the middle class is expanding by 13.7% a year, and by 2010 will number almost 500m. Moreover, using purchasing power parity as a point of reference, India's total spending currently stands at $8.2 trillion, making it already even larger than current US consumption of $7.8 trillion.

The biggest challenge expanding Indian retail groups therefore face is to educate the general population about the advantages a modern retaiI market offers. In addition, they will have to show patience, and live with the limitations that developing economies place on commercial expansion.