New Delhi: The government has suspended its move to open the country's USD 450 billion supermarket sector to foreign firms such as Wal-Mart Stores Inc, backtracking over one of its boldest reforms in years in the face of a huge political backlash.
Coming less than two weeks after it announced the move, the retreat is another nail in the coffin of Prime Minister Manmohan Singh's economic reform programme, just as Asia's third-largest economy suffers from a growth slowdown and falling investment.
Both ruling Congress party allies and opposition parties, fearing massive job losses for millions of small shopkeepers, had disrupted parliament for two weeks in protest, stalling some key bills such as increased food subsidies for the poor.
The suspension will help cement a view that the world's biggest democracy is an emerging market slowcoach slowly losing economic clout to other BRIC nations like China and Brazil.
"The image, the credibility of the government is lost," said D H Pai Panandiker, head of the RPG Foundation think-tank.
"The business community is frustrated anyway. In fact, many of the companies are cash rich, but still don't want to invest. The decision-making process by the government has almost come to a stop. That's the problem."
The government gave no timeframe for the suspension of the reform, which would have allowed foreign firms a 51 percent stake in supermarket ventures, to be back on track.
Allowing foreign direct investment into a retail industry dominated by small shops was trumpeted by Congress as a policy that would help ease stubbornly high inflation, improve supply-chain infrastructure, and create millions of jobs.
"This decision has certainly delayed creating new economic activity," said Kishore Biyani, CEO and managing director of Future Group, the parent company of retailer Pantaloon.
"We are convinced that good sense will prevail at some point, and a consensus will emerge in some form, maybe not in the initially proposed form."
With important state polls next year, including India's politically most important state Uttar Pradesh, the window for reform may be closing quickly. One leftist party called the suspension a "virtual rollback".
"From now until the UP elections, I think it will be a stalemate again, except for populist measures," said Panandiker.
The silver lining is that the opposition will now stop disrupting parliament after two weeks of adjournments, allowing the government to pass other key reform bills.
But the quick about-turn -- and obvious disarray among government ministers -- has raised questions as to who is running India.
The prime minister is 79 and his cabinet are mostly septuagenarians seen as out of touch with this globalising nation. Sonia Gandhi, Congress party chief and India's most powerful politician, suffers from an undisclosed illness reported to be cancer.
The government has stumbled amid corruption scandals this year and has not passed a single major reform bill.
The economy grew at its weakest pace in more than two years in the quarter to end-September, revealing the toll that stubborn inflation, rising interest rates and crisis-hit global capital markets are having.
The biggest factor in the decision to suspend the reform was the opposition of coalition allies like Mamata Banerjee, the firebrand leader of West Bengal, highlighting the kind of messy coalition politics that competitors like China are free from.
Business leaders had already rounded on the government for flip-flopping.
In an open letter earlier this week to "the saner sections of Corporate India", former Hindustan Unilever chairman Ashok Ganguly and Deepak Parekh, chairman of Housing Development Finance Corp, said opposing the reform was "to the detriment of the vast majority".