Despite the political firestorm, the Indian government seems committed to pushing through a series of bold reforms aimed at boosting foreign inflows, but do the changes go far enough to convince investors to take the plunge?
Braving nationwide protests, the government of Prime Minister Manmohan Singh on Thursday formally opened India's supermarket sector to foreign chains and eased foreign investment rules in airlines and broadcasters, Reuters reported.
Business leaders inside and outside the country have applauded the move as a credible step towards fiscal consolidation, restoring growth and preventing a credit rating downgrade.
"The government has seen that they need to provide and continue to provide incentives for foreign investors to invest," William Strong, co-CEO, Asia Pacific, at Morgan Stanley told CNBC's “Squawk Box” on Friday. "It is in the interest of the Indian citizens that the government do that. You need to have an open architecture, open capital market system and allow the free flow of capital in and out of the country."
If the regulations go through, foreign investors "certainly want a piece of India," said Stephen Roach, senior fellow at Yale University's Jackson Institute of Global Affairs and former non-executive chairman of Morgan Stanley Asia. "They understand the potential for getting a toehold in this country but what we need from this Prime Minister is resolve."
The popular backlash against Singh's reform program will certainly test that resolve. Protests against India's pro-business overhauls intensified Thursday with a nationwide strike, but the Congress party-led government appeared to gather sufficient political support to avoid being forced from office, the Wall Street Journal reported.
If Prime Minister Singh succeeds with his “Big Bang” reforms, the payoff could be huge for India and the private sector. The Indian retail market, which accounts for nearly 15 percent of its GDP, is estimated to be worth $450 billion and ranks as one of the top five retail markets in the world, according to an August report by consultancy Corporate Catalyst India.
But the reforms come with "strict" conditions attached to make them more politically palatable, "most likely in order to win over skeptics in the Cabinet," wrote David Sloan, director Asia at political risk consultancy Eurasia Group, in a report on Thursday.
And that's raising doubts as to whether investors like Wal-Mart Stores , the world's largest retailer, Britain's Tesco and French retailer Carrefour will ultimately participate in India's expanding retail sector.
Under the reforms, "operations of foreign retailers are restricted to India's 53 cities with populations of 1 million or more. Another key provision requiring foreign retailers to win state government approval will further restrict market access and increase the time it takes to open stores," Sloan said.
Plus, only 10 Congress Party-ruled states and union territories — notably relatively wealthy Delhi, Maharashtra, and Andhra Pradesh — will initially welcome foreign retailers, "but much of the rest of India will likely keep its doors closed for some years to come," Sloan added.
"Furthermore, foreign retailers will be required to source 30 percent of their inventory of manufactured and processed products from small and medium-sized Indian industries. This restrictive sourcing requirement promises to be a major stumbling block for retailers focused on branded goods and electronic devices predominantly manufactured outside of India."
Retailers are therefore weighing up the risk-reward profile very carefully.
"We're glad about the progress that has been made in India ... but there are conditions," Tesco board member Lucy Neville Rolfe told India's Economic Times on the sidelines of the World Retail Congress in London. "We have to study the impact of the conditions."
First Step Taken
Raj Jain, president of Walmart India and managing director and CEO of Bharti Walmart, which operates 17 wholesale cash-and-carry outlets through a joint venture with Bharti Enterprises, was more optimistic, calling the reforms allowing 51 percent foreign direct investment in multibrand retail "an important first step" towards further liberalization.
"We are grateful that the government has realized and appreciated the value that we will bring to strengthen the Indian economy," Jain said in a statement. "This policy change will allow us to connect directly with the consumer and save them money."
Jain added Walmart is "willing and able" to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation.
Siva Govindasamy, Asia managing editor at Flightglobal said the likely entrants into India's liberalized aviation sector could be cash-rich Asian and Gulf carriers including Singapore Airlines (SIA), Emirates and Qatar Airways. New Delhi is allowing up to 49 percent investment by foreign airlines in Indian carriers.
"Indian airlines are still in lots of trouble, with plenty of debt and very poor prospects due to high costs and competition," Govindasamy said. If reforms are finalized, it's "logical for Gulf carriers as India is a big market but they won't put their money in there yet. SIA is a possibility, but they are looking more closely at China again. But they could re-look the Indian market if it improves."
An SIA spokesperson told CNBC, "We keep all investment options open, but at this point there are no discussions taking place on the purchase of a stake in an Indian airline."
Also Asia's largest low-cost carrier AirAsia "would love to" invest in the Indian market, "but the high cost base and stiff competition may put them off for a while," Govindasamy added.
By CNBC's Sri Jegarajah