Wal-Mart Drops Ambitious Expansion Plan for India

Saurabh Das/Associated Press

A Bharti-Walmart store in Chandigarh, India. Wal-Mart Stores is ending its joint venture with Bharti, buying out its stake.

MUMBAI - Wal-Mart Stores gave up on India's huge market on Wednesday, announcing that it had indefinitely delayed its once-ambitious plans to open hundreds of superstores across the country.

The announcement adds to the gloom enrobing the Indian economy. Growth has slowed sharply and the value of the rupee has fallen starkly in recent months. It also suggests that the government's efforts to lure more foreign investment are failing, but the governing United Progressive Alliance's plan has never been popular with India's politically vocal retailers.

Wal-Mart, the Bentonville, Ark., company that is the world's largest retailer, also announced that it was ending its joint effort with Bharti Enterprises of India to operate 20 wholesale “cash and carry” stores that sell to other businesses like retailers, hotels and restaurants. Wal-Mart plans to buy Bharti's 50 percent stake in the venture, and the two companies will operate independent businesses in India. That Wal-Mart kept the wholesale business, long seen as a way to learn about India's fragmented retailing sector, suggests it has not entirely ended its hopes of eventually selling at a retail level.

In 2007, Wal-Mart announced with great fanfare that along with Bharti, it planned to open “hundreds” of stores, the kind of ambitious proposition that many international companies hatched early in the century as hopes blossomed that India would soon join China as an emerging economic colossus. But many of those same companies have quietly shelved their expansion plans after complex market conditions - spotty electricity, poor roads and government ineptitude - frustrated hopes of rapid profits.

Wal-Mart's chief executive for Asia, Scott Price, said this week that the Indian government's regulations requiring foreign retailers to buy 30 percent of products from local small and midsize businesses were the “critical stumbling block” to opening its trademark consumer stores.

“I don't understand how this 30 percent small and medium enterprise can be executed,” Mr. Price said in an interview on Monday at the Asia-Pacific Economic Cooperation forum in Bali, Indonesia, The Associated Press reported.

He said that Indian retailers were not required to follow the same rule, which made it too difficult for outsiders to make money, because no enterprise small enough to meet the government's requirements had the capability to produce on the scale that a giant retailer requires.

“For Wal-Mart, there has been frustration brewing for a long time about the obstacles to doing business in India and the changing configurations of what it could do and what it couldn't do,” said Devangshu Dutta, chief executive of Third Eyesight, a retail consulting firm based in Bangalore. “To just continue to pump in money without reflecting on this would be pointless.”

American executives and politicians have been expressing growing impatience with India's fitful efforts to open and modernize its economy. The government sought to address some of this frustration with a series of overhauls over the last year that ministers hoped would lead major international retailers to invest substantial sums in improving the country's retail infrastructure, which is predominately mom-and-pop shops. So far, no company has.

Only 4 percent of India's $500 billion retail market is controlled by large, Western-style chain stores. In China, the share is about 20 percent and in Brazil 36 percent. India's tiny operators have few of the inventory controls of their larger brethren, and much of the country's food spoils before reaching consumers - an unfortunate reality in a nation in which nearly half of all children are malnourished.

With national elections scheduled for next year, there is little hope that any new policy changes will be put in place any time soon. Looser rules enacted last September led an important regional political party to withdraw from the governing coalition, briefly threatening the coalition's viability. India's main opposition party, the Bharatiya Janata Party, has opposed efforts to loosen foreign investment rules. Critics say that Wal-Mart would put thousands of small retailers out of business, increasing unemployment.

“I don't see any big foreign retailers entering the market at least for the next nine months, until after the general elections, when we know what the direction will be of the policy,” said Saloni Nangia, president of Technopak, a management consulting firm based in Gurgaon. “It is a wait and watch for many international retailers who want to be in India eventually.”

Wal-Mart's problems in India extend well beyond the government's procurement rules. The Indian authorities are investigating whether Wal-Mart violated foreign investment rules by giving Bharti Retail an interest-free loan of $100 million that could later be converted into a controlling stake in the company. Both companies deny wrongdoing.

Last November, the joint venture between Wal-Mart and Bharti suspended several senior executives and delayed some store openings as part of an internal bribery investigation, one of a series of bribery inquiries that have shaken Wal-Mart's international operations. In June, the joint venture replaced its chief executive.

Girish Kuber, a former political editor of the Indian newspaper The Economic Times, called the dissolution of the Wal-Mart and Bharti partnership “inevitable.”

“It is a sad story,” he said. “The reforms are going nowhere, and there is no investment coming in.”

Many foreign companies have found India's endemic corruption difficult to keep out of their operations. Since American law requires top executives to ensure that their international operations remain free of corruption, executives in the United States have taken an increasingly dim view of doing business in India, with its low profits and constant legal worries.

Neha Thirani Bagri contributed reporting from Mumbai, and Malavika Vyawahare from New Delhi.

A version of this article appears in print on October 10, 2013, on page B3 of the New York edition with the headline: Wal-Mart Drops Ambitious Expansion Plan for India.