India Leaves Foreign Investors Unamused

India has been treated over the past few days to a slightly comical corporate drama, in which a foreign multinational is for once accused not of bribery, poisoning the water supply or selling worm-infested fast food, but of secretly attempting to invest.

Why Are India's Retailers Afraid of Wal-Mart?
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The supposed villain of the piece isWalmart, the world's biggest retailer, now under examination by the central bank over an allegation that it "clandestinely and illegally invested" $100m in a supermarket venture that should have been closed to foreign investors.

India's suspicion of foreign capital goes back to colonial times, and those who question the unwelcoming official attitude to Walmart and Tesco are briskly reminded by Indian commentators of the commercial depredations of the British East India Company.

Yet the Walmart ontroversy – for the record, the company says it is in "complete compliance" with the country's byzantine foreign investment laws – has more to do with dysfunction and protectionism in the modern Indian economy than with any historical baggage.

Like other developing economies, India desperately needs investment in infrastructure and business. Its retail and distribution sectors in particular are grotesquely inefficient and wasteful, with farm produce routinely rotting before it reaches the often dark and grimy premises in which 98 percent of groceries are sold.

India is also a poor country with a current account deficit to finance. That was one of the reasons, along with the fear of a sovereign downgrade by credit rating agencies, for the recent burst of economic reforms announced by the government of Manmohan Singh.

These reforms included cuts in the fuel subsidies that have swollen the budget and current account deficits, and permission for foreign investors to own up to 51 per cent of supermarkets and department stores.

From the howls of protest that could be heard all the way to Bentonville, Arkansas (where Walmart has its headquarters), one would have thought that Mr. Singh's government had condoned a massacre of Indian children rather than offered Walmart, Tesco and Carrefour the chance to invest hundreds of millions of dollars of their own money in a risky attempt to run a profitable business in India.

Those protesting the loudest against the purportedly wicked foreign investors include the country's 50 million small shopkeepers, the high-margin middlemen who supply them and the opposition politicians who rely on their support. Walmart's Indian rivals may be working behind the scenes, too: who leaked the documents showing Walmart's complex arrangements with its local partner Bharti Enterprises?

Indian opponents of foreign investment found an ally in Joseph Stiglitz, the Nobel economics laureate, who harshly criticized Walmart's labor and business practices in interviews with the local media during a visit to India, and suggested the country did not need such investors because its own entrepreneurs were "globally savvy" and had "a lot of wealth".

Indian investors, unfortunately, have been putting much of this wealth to work outside India, heading abroad to buy everything from hotels to coal mines and car companies, in part because they find their domestic business climate almost as daunting as foreigners do. They know this to be a market where the government has imposed retrospective taxes on investors and where managers have been attacked and occasionally kidnapped or killed by angry employees.

Big retailers face a further discouragement: even in more developed foreign markets such as China, with relatively rich consumers and modern transport infrastructure, it has proved difficult for supermarkets to turn a profit.

Yet still the big brands keep coming to India. Last week, Starbucks, the Seattle-based global coffee chain, opened its first outlet in the country – a large café in Mumbai. Ikea, the Swedish home furnishing retailer, has applied to open shops in the country, taking advantage of rules allowing full foreign ownership of "single-brand" retail outlets.

In time, Indians may have reason to thank deep-pocketed foreign multinationals such as Walmart. These companies, after all, are sufficiently dazzled by the potential profits to be made from 1.2 billion consumers in the future that they are willing to overlook the immediate and very substantial obstacles and give the country a try.