New Delhi: The Congress-led United Progressive Alliance (UPA) government did a flip-flop on Monday that could effectively make foreign investment in retail less attractive, even as political opposition against the move to liberalize the foreign direct investment (FDI) regime in retail gained momentum.

Even as some of its own state units, such as the one in Kerala, publicly raised the banner of revolt, the Congress party refused to back down and accept the demand for a rollback of the initiative that will allow firms such as Wal-Mart Stores Inc. to own 51% equity in retail ventures—a move viewed by the stock markets as a sign of the government’s commitment to economic reforms.

Changing landscape: A retail store in New Delhi (Pradeep Gaur/Mint)

Rating firm Crisil Ltd said in a report that FDI in retail would aggregate $2.5-3 billion (Rs 13,000-15,600 crore today) in the next five years. The number compares poorly with the $160 billion in overall FDI India attracted in the past five years.

After a meeting on Monday evening, the core group of the party, headed by Congress president Sonia Gandhi, decided to stay the course. Despite the brave face, the disquiet within the Congress party, especially among some cabinet ministers mindful of the impact of the decision on key electoral contests for the assemblies of Uttar Pradesh, Punjab, Gujarat and Delhi, was palpable. In Uttar Pradesh, the Congress’ main rival, Mayawati, chief minister and head of the Bahujan Samaj Party (BSP), has already made it an electoral issue.

Both Houses of Parliament were adjourned on Monday, the fifth day of the winter session, with opposition parties in the Lok Sabha demanding an adjournment motion. An adjournment motion means Parliament will have to vote on the resolution. Political opposition to the move is based on the belief that the entry of foreign retailers will hurt small Indian stores.

The reversal

Cornered over the issue, commerce minister Anand Sharma did an about-turn and claimed on Monday that foreign supermarket and store chains will have to buy at least 30% of the products they sell from Indian small enterprises with fixed assets less than $1 million. Thursday’s press note released by the ministry that said the 30% sourcing from small enterprises “can be done from anywhere in the world and is not India-specific"—ostensibly to be compliant with World Trade Organization rules.

The caveat could effectively cap or link the turnover of retail ventures to the capacity of Indian suppliers and also deny them flexibility in sourcing. Analysts say this could make the business less attractive to foreign investors.

And while the clarification is unlikely to soothe political feathers ruffled by a decision that seems to have been rushed, it could temper the euphoria with which Indian businessmen and foreign retailers reacted when the announcement was made late last week.

“Although it (allowing foreign investment in retail) is a welcome move, we have to wait for the notification to understand the details. Companies will need to do a lot of homework before they can actually announce their plans," said Pinakiranjan Mishra, partner and national leader (retail and consumer products) at audit and consulting firm Ernst and Young India.

“Several clarifications will be sought. How will these stores differentiate themselves from others since the products will be the same? They will either discriminate on pricing or quality. But since 30% sourcing has to be from small-scale industries, how will they get scale and compete on price?" he asked.

Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce and Industry, an industry lobby, denied that the change in norms announced by Sharma would have an adverse impact. “They (foreign retailers) would anyway seek recourse to SMEs (small and medium enterprises) for producing their private labels. This (the change) is notional, the government would have anyway done it. No large foreign retailer has objected to this," he said.

Meanwhile, another industry lobby, the Confederation of Indian Industry (CII), sought to reach out to the political opposition.

“We will request political parties to support the government’s decision as it would help SMEs... There should be a minimum sort of an agreement in such areas," CII director general Chandrajit Banerjee told reporters in New Delhi.

The politics

In order to break the political logjam over the issue, Prime Minister Manmohan Singh convened an all-party meeting on Tuesday after the main opposition Bharatiya Janata Party (BJP) announced that it will allow Parliament to function only after the move was reversed.

On 24 November, the Union cabinet allowed 100% FDI in single-brand retail, raising it from 51% and capped FDI in multi-brand retail at 51% with riders. Most apparel, fashion and luxury companies fall under the first category, and all supermarket and department store chains, under the second.

Meanwhile, a section of the Congress expressed concern about the political backlash and the fact that once again the UPA had been reduced to firefighting a crisis instead of focusing on policy.

According to a Congress minister in the council of ministers, Gandhi, who in 2007 had written to the prime minister cautioning him against such a move, reiterated her concern, especially on the political fallout in poll-bound states. This person didn’t want to be identified.

While Congress allies, the Trinamool Congress and the Dravida Munnetra Kazhagam (DMK), which have 18 representatives each in the Lok Sabha, demanded a rollback, even parties such as the BSP and the Samajwadi Party that extend issue-based support to the UPA, came out in opposition of the policy.

DMK chief and former chief minister M. Karunanidhi said in Chennai: “The Centre’s insistence that states should go by the decision cannot be justified. DMK had opposed FDI in retail trade even when the idea was originally mooted."

Ministers as well as leaders from Kerala also expressed their strong resentment against the cabinet decision, pointing out that it will have a “serious impact" on the crucial bye-election in Piravam, where the Congress-led United Democratic Front (UDF) has to win the seat to stabilize its government. The UDF has a razor-thin majority—it has 71 seats against the Left Democratic Front’s 68, excluding the speaker—in the 140-member assembly.

In the cabinet meeting on 24 November, aviation minister Vayalar Ravi, rural development minister Jairam Ramesh, and micro, small and medium industries minister Virbhadra Singh had opposed the decision. However, finance minister Pranab Mukherjee argued for it passionately, saying that it was an important reform measure that would boost stock market sentiment; a similar defence was mounted by agriculture minister Sharad Pawar.

According to the member of the council of ministers cited above, Mukherjee also engaged in a heated argument with Trinamool Congress leader and railway minister Dinesh Trivedi. None of the ministers could be immediately reached for comment.

At least two other Congress leaders pointed out that the move was politically ill timed.

“First of all, states that are important for Congress are going to polls. In Uttar Pradesh, no one less than (party general secretary) Rahul Gandhi (considered to be party’s future prime ministerial candidate) has staked his political fortune (on the outcome of the election). Anybody should have realized that it would be a hot political issue. Besides, the Parliament session has just begun and the government should have waited for at least the most important legislations to be passed before taking such a controversial step," a senior Congress leader said, speaking on condition of anonymity.

Major reform Bills have been pending as the opposition had disrupted proceedings over a series of scams and controversies involving UPA leaders and ministers in the last winter, budget and monsoon sessions.

Asit Ranjan Mishra, Abhilasha Ojha and Vidhi Choudhary in New Delhi, and Sapna Agarwal in Mumbai, and PTI contributed to this story.