India’s Retail Revelation; A year-old reform finally, slowly, starts to kick in

India’s Retail Revelation

A year-old reform finally, slowly, starts to kick in.

JOSEPH STERNBERG

Updated Jan. 1, 2014 3:16 p.m. ET

Well that was fast. Only a short 15 months after New Delhi announced its plan to open up the big-box retail industry to foreign investment, leaders have finally found their first taker. Britain’s Tesco TSCO.LN -0.93% last month unveiled a $110 million plan for a joint venture with the supermarket subsidiary of Tata to operate a string of supermarkets. And with atypical alacrity, regulators on Monday approved the deal barely two weeks after it was submitted to their consideration. A sign that India is finally (re)opened for business?Not precisely. Instead, recent developments in the country’s retail industry provide yet another in a long list of teachable moments for both Indian politicians and voters. One can only hope the lessons sink in before elections due in May.

The Tesco story confirms a warning highlighted in this column in September 2012. At that time, you’ll recall, New Delhi had finally, after years of wrangling and waiting, unveiled a plan to loosen investment rules for foreign retailers. Previously, single-brand retail (such asNike NKE -0.13% stores or Prada boutiques) had been restricted to 51% foreign ownership. Foreign investment in multi-brand retail—big-box stores such as Wal-Mart, Tesco or Carrefour that carry a range of products—was prohibited. The reform proposal allowed 100% foreign ownership of single-brand outlets and 51% foreign ownership of multi-brand stores in cities of a certain size, subject to local approval and various other conditions.

This was hailed as a breakthrough, given that investors had clamored for such measures for so long and Prime Minister Manmohan Singh’s failure to liberalize retail had come to represent his broader shortcomings as a reformer. But in key respects the breakthrough came too late.

By the time the reform was announced, the Indian economy had started slowing noticeably and investors were growing warier about the country in general. Key foreign players, such as Tesco and France’s Carrefour, were no longer in a position to launch major overseas investments as they emerged from periods of management turnover and faced balance-sheet retrenchments at home. Later was better than never as far as reform was concerned, but New Delhi was about to discover policy makers couldn’t simply flip a switch and expect a boom.

And so it has been. Delhi has waited until now to find an investment good-news story leaders can tout. Along the way, the details of the retail opening managed to trigger a political embarrassment when Wal-Mart announced in October it was abandoning plans to open retail stores in India. The U.S. chain had moved into India in 2007 with a wholesaling joint venture meant to give Wal-Mart a foot in the door whenever retail liberalization came. But when reform materialized, it came with a condition that 30% of the merchandise sold in big boxes in India be sourced in-country—a threshold Wal-Mart concluded was impossible to meet.

Nor has the opening of single-brand retail been an unambiguous success. Although retailers such as Swedish H&M HM-B.SK -0.27% and British Marks & SpencerMKS.LN +0.28% are preparing expansion plans under the new rules, others report being hampered by the many other heads of India’s bureaucratic Hydra. Italian handbag-maker Furla has waited since March to secure approval for its own investment in new stores.

This is bad enough given the role a healthy retail industry could and should play in India’s domestic-consumption-led growth story, but the damage from tardy and incomplete retail liberalization reaches other corners of the economy. The episode may be contributing to a broader loss of faith in New Delhi’s commitment to reform. Resource companies BHP Billiton BLT.LN -1.44% and Santos and steelmaker Posco have all scaled back or canceled high-profile Indian investment plans in recent months, citing various administrative hurdles to their projects that they apparently have lost hope can be fixed.

And there are widespread fears that another election season will bring a round of anti-investment regulations and proposals that supposedly play well with Indian voters. This only exacerbates the effects of global trends, such as the prospect of a normalization of monetary policy in the U.S., that are causing investors to rethink emerging markets around the world.

None of this is to suggest that India is a hopeless case. The growth slowdown of recent years appears to be moderating. A top contender to be the next prime minister is Narendra Modi of the more or less pro-business Bharatiya Janata Party, who has notched some economic successes in the Gujarat state he currently leads. Investors may be quick to seize on future glimmers of good news in India as China, Indonesia, Thailand and other Asian growth stories falter.

Rather, the retail story is a well-timed reminder both for politicians and for voters. Investment and growth can’t be summoned on command. The great shame about India is that New Delhi squandered a moment in the middle of the last decade when reforms could have sparked sustained growth. Instead it waited, and now has a sputtering retail marketplace to show for its efforts. One test of reformist credibility for Mr. Modi or any other candidate will be whether he is perceptive enough to make this case on the campaign trail.