12/07/2011 07:12 EST | Updated 02/06/2012 05:12 EST

Indian government backtracks, suspends plan to let in foreign big-box retailers like Wal-Mart

NEW DELHI - India on Wednesday suspended its plan to open its huge retail sector to foreign companies such as Wal-Mart in a reversal seen as a major capitulation to political opponents that further weakens the administration.

The business community had hailed the initial decision to let foreign firms own a majority stake in retailers here just two weeks ago, and the government and some economists said foreign retailers would bring better prices for farmers and lower prices for consumers.

But opposition parties and even some members of the governing coalition protested, saying the local mom-and-pop stores that are the heart of Indian retailing would be crushed. Opposition lawmakers disrupted Parliament for days in protest.

On Wednesday, the government met with all the parties in Parliament to hammer out a deal: It would suspend the decision if they would let the legislature function.

Afterward, Finance Minister Pranab Mukherjee told Parliament that the foreign retail plan was "suspended until a consensus is developed through consultations with various stakeholders."

It was not clear how long that process would take or whether the policy would be implemented or cancelled as a result.

Sushma Swaraj, an opposition parliamentarian, welcomed the government's move. "To bow before the people's feeling does not weaken the government, but strengthen the democracy," she told Parliament.

Other opponents claimed victory.

"It is a virtual rollback," said Gurudas Dasgupta, a Communist Party lawmaker.

"This is a signal that this government can't do anything with force," said Ashok Gulati, chairman of the Commission for Agricultural Costs and Prices in the Ministry of Agriculture. "It's the nation that loses."

The Cabinet announced Nov. 24 it would allow foreign companies to own 51 per cent of supermarket chains, but only in major cities. It also announced it would allow foreigners to own 100 per cent of single-brand stores, such as IKEA; the fate of that plan was not announced Wednesday.

The move signalled to business leaders that India was serious about economic reforms and welcomed foreign investment. Wal-Mart, British-based Tesco PLC, French-based retailer Carrefour and others had been eyeing India. Retail is the second-biggest industry sector, behind agriculture, in the nation of 1.2 billion people.

The initial decision also was seen as a forceful move to prove the government was still capable of making bold decisions, despite corruption scandals, soaring inflation and repeated anti-government protests.

Rajan Bharti Mittal, vice chairman and managing director of Bharti Enterprises, said the suspension was unfortunate because foreign retail would bring huge infrastructure investments that would save food from rotting, helping increase farmer profits while reigning in rising food costs.

"We hope that various stakeholders across the spectrum will take these facts into account, build consensus and allow this major reform to see the light of the day," said Mittal, whose company's joint venture with Wal-Mart has 13 wholesale outlets in India and sources produce from thousands of farmers.

Harsh Mariwala, president of the Federation of Indian Chambers of Commerce and Industry, branded the decision "deeply disappointing," but suggested compromises to make the plan more palatable.

He recommended the proposed foreign stake in multibrand retailers be reduced to 49 per cent from 51 per cent, and that the cities they be allowed to operate in be limited to those with a population above 1.5 million instead of 1 million.

Future Group Chief Executive Kishore Biyani, who has been likened in India to Wal-Mart founder Sam Walton, was optimistic the plan could still be implemented.

"We will have to work hard in convincing people it is good for driving economic growth. The consumer has to come forward and say it's good for us. Farmers will have to come forward and say it's good for us. I think that consensus will be built," he said.

Its rapid backtracking has only served to further weaken the government.

"The perception that the (coalition) can be easily cowed has been strengthened, that it does not have the guts to stand by its convictions or the political artfulness to sell what is essentially a decision that potentially improves the material well-being of many, many Indians," the Indian Express newspaper wrote in an editorial on the issue.

The suspension of the foreign investment plans also provided yet another example of the policy paralysis and inconsistency that has made investors leery of India.

Foreign direct investment slipped from $38 billion to $23 billion last fiscal year.

India's economy is showing other signs of distress as well, with growth slipping below 7 per cent for the first time in more than two years, a widening fiscal deficit, a plunging currency and skyrocketing prices, which 13 consecutive rate hikes have not tamed.

Economists say India urgently needs to push through difficult, but crucial, policy reforms that the government might not have the political strength to implement