Walmart divorce highlights pitfalls of business in India

The divorce between US giant Walmart and its Indian partner, the latest in a string of foreign corporate alliances to founder, will have a further "chill effect" on vitally needed foreign investment, analysts say.

Mumbai: The divorce between US giant Walmart and its Indian partner, the latest in a string of foreign corporate alliances to founder, will have a further "chill effect" on vitally needed foreign investment, analysts say.

Citing restrictive foreign investment rules, the world`s biggest retailer scrapped a partnership last week with Indian telecom heavyweight Bharti Enterprises and suspended plans to open supermarkets which could have tapped a potential market of 1.2 billion shoppers.

Foreign investors are already spooked by worries over a number of issues: pervasive corruption, red tape, stop-start efforts to open up Asia`s third-largest economy, tax battles, decade-low growth and a weak currency, analysts say.

Strict regulations for outside firms include a requirement to source 30 percent of goods from small industry -- a deal-breaker for Walmart, which said the goal was impossible to meet.

"This will have more of a chill effect," Saloni Nangia, president of management consultancy firm Technopak, said.

"From a destination perspective, foreign firms want to be in India. But from a policy and doing-business perspective, it`s different," she said.

"The government needs to make this country investment-friendly. So far it`s been pure posturing."

The Walmart-Bharti break up is one of a long saga of unhappy endings to marriages between foreign and Indian partners, Nangia noted.

"It can be mismatched expectations to blame, disappointing returns, government vacillation on implementing policies, legal and regulatory concerns, ambiguities about what can be achieved -- sometimes a mix of elements," she said.

Walmart president Scott Price said the company would "continue to advocate for investment conditions" that would allow it to invest in multi-brand retail while it focused on its wholesale operations in India.

Many foreign firms had high hopes of India`s liberalisation drive and voiced strong interest in entering the country.

But those plans have soured in the face of failure to improve infrastructure, long approval delays, bureaucratic hurdles and graft -- which has its tentacles in all sectors of the economy.

"No company can operate without greasing a palm here or shelling out unaccounted amounts there," said The Economic Times in an editorial.

That issue has become increasingly crucial, especially in the United States, where laws like the Foreign Corrupt Practices Act are making it tougher for India to absorb foreign direct investment (FDI).

"Corruption is one of the most significant challenges adversely affecting the Indian economy," Toby Latta, head of Control Risks in Asia-Pacific, said.

Walmart`s woes in India go beyond sourcing troubles, with Indian authorities probing whether a loan by the retailer to Bharti broke foreign investment rules. Both firms deny wrongdoing.

Walmart is also under US scrutiny over its overseas operations amid bribery allegations -- which it rejects -- in Mexico, Brazil, China and India.

"This scrutiny by their home countries is a big deal for foreign companies," Alina Arora, a partner at Luthra and Luthra Law Offices, said.

Alleged corruption led to Norway`s phone giant Telenor snapping ties last year with Indian partner Unitech after India`s Supreme Court revoked 122 mobile licences following charges they were illegally issued.

UAE mobile operator Etisalat closed its India business and split from local ally, DB Group in a decision also stemming from the ruling, and accused its ex-partner of "fraud" -- a charge DB rejects.

While Telenor, which took a USD 720-million writedown, has pursued its operations in India, Etisalat said it would only reconsider re-entry when there is "greater legal and regulatory certainty".

Also last year Italian carmaker Fiat ended a distribution pact with Indian vehicle giant Tata Motors which said the joint venture was not generating expected sales.

Automotive major Mahindra & Mahindra has seen three global vehicle partnerships go sour -- with Ford, Renault and most recently in January with US engine maker Navistar International.

"The Indian market has not expanded as we originally expected," Navistar president Troy Clarke said at the time.

Now, with elections to be held by May 2014, analysts say there is scant hope the scam-tainted and unpopular Congress-led government will take significant steps to make India more appealing to foreign investors.

The government says it has no plans to relax its sourcing rule on foreign supermarkets.

Even though India aims to attract $1 trillion in FDI by 2017 to upgrade shabby infrastructure in order to boost growth, foreign investment faces hostility from many politicians who say it threatens jobs, especially in the retail sphere, which is dominated by small family-run stores.

"We`re going to be in wait-and-watch mode at least until after the elections" in the first half of next year, said Technopak`s Nangia. "It`s only India which is losing out in the meantime."