A senior minister has confirmed the previous discretionary rule allowing foreign firms to own a 51 per cent stake in single-branded retail operations may face "hurdles" as the government tightens its control on the lucrative grocery sector.
Rumours that the government is about to lessen barriers to entry in the sector have been quelled as opposition parties in the Indian parliament call for a new FDI review and a tougher stance.
The government has responded by indicating it will implement strict FDI regulations to maximise opportunity for local retailers, using foreign firms only where their input will improve infrastructure and distribution methods.
"Our purpose is to develop a modern retail sector in the country. Companies like Wal-Mart would set up limited number of stores in major metros, whereas Indian firms would open 350 stores at a time", a senior government official was quoted as saying.
"This would help in creating necessary infrastructure including developing an efficient supply chain and marketing network. Our objective is to modernise the retail sector and not to allow FDI in retail."
Wal-Mart, Tesco and other global retail players have been lobbying the government hard over the past year to gain access to the €172bn sector, and had previously been told by the government they would be allowed to invest in the country in the near future, albeit subject to certain stringent conditions.
This is now looking doubtful, as the government looks to domestic retailers Bharti, Reliance and Pantaloon to modernise the country's fragmented and dated grocery sector.
Currently, branded retail makes up just three per cent of the total food retail industry, worth around €5.78bn.
But analysts predict this is all about to change. PricewaterhouseCoopers states that the organised branded retail sector, comprised of regional or national chains, is set to grow to 10 per cent by 2010.
This represents a huge opportunity for prospective players to tap what may become the world's fifth largest consumer market by the end of the decade.
Recent legislative changes brought improvements to the FDI ration in wholesale, but foreign retailers are still restricted from building supermarket networks.
They can own 100 per cent of their Indian wholesale operations, which is a major breakthrough for foreign investors keen to have a presence in the country, even though it is through the backdoor.
To many, this first phase of legislative relaxation marked an economic trend towards a liberalised retail sector and increased FDI, but recent government actions indicate a reversal of this trend.