Mumbai: On a recent evening at a luxury Mumbai hotel, shoppers tried on sequined sandals and handmade moccasins at Joy Shoes, an Indian family business that has sold out of its only shop for nearly 70 years.

Around the corner, a Moschino store stood empty.

New customers: Luxury brands such as this Lacoste showroom in The Metropolitan mall in Gurgaon have found new customers in an increasingly wealthy middle class that is not afraid to splurge. Harikrishna Katragadda / Mint

Despite a growing number of millionaires, India lags emerging market peers China and Brazil due to a lack of quality retail space, high import duties on luxury goods, a cap on ownership in local units, excessive red tape and piracy.

India had 123,000 millionaires in 2007 and showed the fastest pace of expansion, according to a Merrill Lynch/Capgemini report, but that was the smallest number in the Bric emerging markets quartet, with China already having at least triple that number of super rich. Bric comprises Brazil, Russia, India and China.

Luxury goods in India also make up the smallest portion of the overall retail market, just 0.4%, according to a Bain and Co. report, compared with 2.7% of China’s retail market.

“For luxury in India, the path is bumpy and long," said Mohan Murjani, chairman, Murjani Group, which partners such brands as Gucci, Calvin Klein and Jimmy Choo in India. “You need size, experience and?patience?for?the long haul."

Allowing global retailers access to India has long been a controversial topic because of concerns of job losses, and it was only in 2006 that foreign single brand retailers were permitted to take up to 51% in a local venture, opening the doors to brands such as Gucci, Versace, Chanel and Burberry.

But most brands have been forced to curtail their grand ambitions despite an economy that grew around 9% in the last three years, with Louis Vuitton only having four shops to show for its five years in the country, compared with 25 in China.

“In any emerging market, you can only target a very small part of the market for luxury," said Claudia D’Arpizio, a partner with Bain and Co. in Milan, and author of a recent report on luxury. “In India, in addition to that challenge is the regulatory framework and the undeveloped retail infrastructure," he says.

Once the exclusive preserve of maharajas and business tycoons, luxury brands in India have found new customers in an increasingly wealthy middle class—the growing ranks of working women and a youthful population that is not afraid to splurge. But challenges abound, such as high store rentals and taxes. New Delhi’s Khan Market was recently ranked among the world’s most expensive retail real estate, where monthly rental is Rs1,200 per sq. ft. The absence of quality locations has forced luxury brands to set up shop in top-end hotels, which is not ideal, said Murjani. Add to that the high tariffs on imported goods, which can bump up prices by around 25% compared with Dubai or Singapore, and a long-abiding suspicion of foreign brands from a time when local importers sold overpriced, outdated products.

“Brands have to satisfy the consumer on the price point, the offering, the total experience..." said Murjani, who last year opened the country’s largest luxury space, a 3,400 sq. ft Gucci store. “Consumers will simply shop in Paris or Singapore," he said, noting Indians still splashed out around $500 million (Rs2,450 crore) on luxury brands abroad a year, nearly the same amount they spend at home.

The money goes mainly on watches, fragrances, sunglasses, leather goods and menswear, with Indian women still favouring traditional apparel and jewellery, despite the growing numbers of Bollywood stars who get decked out in Western designer wear.

“India has a strong tradition in luxury apparel and jewellery so it should be easier to sell the concept," D’Arpizio said. “But the preference is for the intrinsic value of the jewellery rather than the brand, so a Cartier or a Tiffany’s will have a hard time cracking the market."

There is hope for luxury retailers, though. Trade minister Kamal Nath recently said he was “seriously considering" allowing foreign retailers to fully own units in the country. There is pressure from the European Union to cut taxes to meet World Trade Organization requirements and high-end retail spaces are coming up in Mumbai, Bangalore and New Delhi, including the Emporio Mall, the country’s first all-luxury complex.

India’s luxury market is likely to grow at an average annual rate of 25% over the next five years, D’Arpizio said, trailing only China’s 30% growth and Brazil’s 35%.