People shop down the aisles of a recently opened supermarket in Mumbai on Dec. 1, 2011. In most of the country, India's 1.2 billion consumers endure high prices, shoddy goods and rotten vegetables.VIVEK PRAKASH
James Lamont is the Financial Times' South Asia bureau chief
Within hours of India deciding to throw open its doors to foreign retailers, Mikael Ohlsson, the chief executive of Ikea, was boarding a flight to Delhi.
The leader of the privately owned Swedish home furnishings retailer was eager to tell the world about its multimillion-euro expansion plans in one of the most attractive, untapped markets for big international retailers. After all, India is the fastest growing large economy after China. Incomes are rising and people are consuming more and more.
Invitations were sent, only for excuses to be made. Mr Ohlsson quietly returned to Sweden with his group's India investment strategy unannounced, just like those of other western supermarket chains Walmart, Carrefour and Tesco.
For about 48 hours, Manmohan Singh, the prime minister, appeared to have pulled off India's first major economic reform for years. A cabinet decision to allow foreign retailers to own majority holdings in local supermarket chains, and to own outright single brand stores, had promised to shake up a sector that universally condemns consumers to open vegetable markets and pokey stores.
The country's 28 states could choose whether to embrace the big-box store format that is popular in North America and the UK, or keep them out. Retailers had to locate in cities with populations of more than one million people, source 30 per cent of their wares from small and medium sized business and invest no less than $100-million.
This soon backfired spectacularly. A storm of political revolt quickly sapped the government's resolve. Then the decision, celebrated by the business community as a great leap forward, was put on ice.
The result is uncertainty on all fronts. In the array of arguments massed against retail reform, the needs of India's 1.2 billion consumers, who endure high prices, shoddy goods and rotten vegetables, come tellingly last.
The wreckage is plain to see. The shares of local retailers collapsed on Monday once the government's weak knees became plain. Shares in Pantaloons Retail, owned by Kishore Bayani, dropped 13 per cent. Koutons, a clothing chain, fell 7 per cent.
On Wednesday, Pranab Mukherjee, the finance minister, is expected to announce a face-saving compromise to parliament. This may allow Mr. Ohlsson and his rivals to come in on terms he finds acceptable, but it is likely to put added hurdles in front of the big multi-brand supermarkets.
Whatever Mr. Mukherjee says, it will be hard for even the most able of political fixers in the world's largest democracy to explain away a flip-flop of seismic proportions, or to tame domestic antipathy towards foreign business.
Tremendous damage has been done, and not just to the transformation of the retail sector. Emboldened, the anti-reform lobby is now more confident of nixing other proposed financial reforms, like opening up the insurance sector, until parliamentary elections in 2014 and beyond. A "closed to foreign investment" sign over one of the most dynamic sectors and worries about an unpredictable policy environment will do little to encourage badly-needed investment in other areas like infrastructure and financial services.
The possibilities of India will not dim. But they are in danger of remaining just that. For years, consultants have talked up opportunities of an expanded footprint for organised retail, both local and foreign. The annual turnover of India's retail market is expected to nearly double to $850-billion in a decade. It is remarkable that a nuclear-armed country of 1.2 billion people is afraid of conquest by the big box store and a business strategy directed from Bentonville, Arkansas.
Such fears of overnight market dominance underestimate the challenges any supermarket chain will face. Within 10 years, India may have a handful of big western-style supermarkets rather than hundreds. To succeed they would have to overcome rickety infrastructure, sourcing from a very fragmented farm sector and expensive urban property prices. They will also have to win over a section of public opinion convinced that they are demons.
The small shop, or kirana, is likely to provide stiff competition. In the first place, supermarkets will be learning from it, not vice versa, about shopping habits. It offers credit, lightning delivery even for the smallest item and is well-adapted to the frequent, small purchases of Indian households.
In the meantime, other markets beckon. China, Russia and eastern Europe have attracted the investment of global retailers. Organized retail accounts for about a fifth of the retail market in China, while in Russia and Brazil its share is about 36 per cent. India, which Jim O'Neill, the chairman of Goldman Sachs Asset Management, describes at the most "mysterious" of the Bric countries, trails with a barely visible 5 per cent.
Next time Mr. Ohlsson comes calling, India should shed the "mysterious" tag and overcome its fear of stepping into the mainstream.