Comment: Indian retail reforms descends into morass

Faced with a third week of political protests that have stopped the Indian parliamentary process in its tracks, Finance Minister Pranab Mukherjee today (7 December) announced that controversial plans to allow more foreign investment in Indian retail will now be postponed. A consultation, which will involve opposition MPs, will now take place. Opponents have hailed the announcement as the final nail in the coffin for the governments plans. Sam Webb takes a look at the ramifications of the Indian government u-turn.

It all started out so positively. Two weeks ago India's cabinet announced it was easing rules on foreign ownership in the country's retail market.

The move was set to allow foreign companies to own 51% of multi-brand retail stores, which, the cabinet claimed, would bring investment into technology, rural infrastructure and supply chains, as well as reduce waste and create jobs.

Cue, perhaps unsurprisingly, enthusiastic statements of support from the likes of Carrefour and Tesco, as well as many domestic retailers keen to reap the rewards of foreign investment. Doug McMillon, president and CEO of Wal-Mart Stores' international operations, described the reform as a "win-win" for all involved, and even went so far as to thank the Indian government.

However, within days, PM Manmohan Singh was forced to defend the reforms, as politicians opposed to the move began protests that went on to cripple the country's parliamentary process for two weeks. One memorably threatened to personally burn down any Wal-Mart that opened in the country.

Now the government has announced a postponement of the reforms so it can consult with stakeholders, including opposition MPs, which even number some partners within India's ruling coalition. And it's a move many observers have described as a humiliating climb-down.

With the benefit of hindsight, Singh's cabinet's handling of the affair was poor. It appears it did not properly judge the strength of feeling against foreign investment, especially in a country with powerful socialist leanings. Forcing it through (as an executive decision, the reforms did not have to go to a parliamentary vote under Indian law) inflamed the opposition. It even failed to include its key allies in the decision.

As a result, a move that many market watchers said would ultimately benefit the developing nation runs a very real risk of falling by the wayside.

Raghuram Rajan, an economist at the University of Chicago is one of those who welcome foreign direct investment in Indian retail.

This week he spoke to the New York Times about the cabinet's failed attempt to pass the legislation without consultation.

He said: "The weakness is that you never sell the reforms. You don't build a broader constituency for it."

Singh and his cabinet allies will spend the next weeks trying to do just that. It will, however, be a very difficult task and, even if the reforms are waved through, they could be a watered down version of what supporters wanted.