FDI In India Retail: Parliament Backs Delhi's Move To Let States Decide On Foreign Retail Competition

India Prime Minister Manmohan Singh won a victory Friday when parliament's upper house voted for a controversial measure to let states decide whether their larger cities can allow multibrand retailers like Wal-Mart, Carrefour and Tesco to plant their flags in the Subcontinent.

The now-approved reforms were part of New Delhi’s large package of economic liberalization measures aimed at spurring economic growth, shrinking a large fiscal deficit and taming inflation. But opposition from nationalist and leftist lawmakers led to what would have been essentially a vote of no confidence.

As it turned out, parliament this week gave Singh a thumbs up and, thus, foreign companies like Wal-Mart Stores Inc. (NYSE: WMT) and France's Carrefour SA (EPA:CA) a green light to access India’s $450 billion retail market.

"We showed that we have a clear majority,” said Finance Minister P. Chidambaram, according to India’s Business Standard. “The government has demonstrated that in both the Houses ... we have the majority."

On Friday, the Rajya Sabha, India’s upper house, voted 123 to 109 in favor of foreign direct investment (FDI) in the country’s largest and wealthiest cities. The law grants 28 states and seven territories the power to decide in their legislatures whether to invite these large foreign companies into cities with populations greater than 100,000.

On Wednesday, India’s lower house, the Lok Sabha, voted 253 to 218 in favor of the measure in an exuberant, nationally televised debate that featured shouting matches and walkouts. One lawmaker falsely claimed that McDonald’s doesn’t source Indian potatoes because they’re too small. McDonald’s India quickly fired back that it does in fact source potatoes locally.

The vote was a blow to the nationalist Bharatiya Janata Party (BJP) and smaller leftist parties that formed an opposition bloc. The ruling Indian National Congress Party, headed by Sonia Gandhi, relied on the support of the centrist Bahujan Samaj Party (BSP) whose lawmakers voted in favor of the deal. The BJP has vowed to continue to support protectionist policies, especially in upcoming debates about liberalizing the insurance market.

So far, five of 28 Indian states and the capital New Delhi have approved allowing FDI in retail. Of them, Maharashtra, the western state with Mumbai as its capital, has 11 cities with more than 100,000 people and would likely be the starting point of entry.

This parliamentary session will also be taking up other important economic reform bills, including reforms to pensions, labor and corporate regulations. Earlier this year single-brand retailers were given a green light to enter the country while still retaining 100 percent ownership, meaning they don’t require a local partner.

Multibrand retailers can operate under local minority stake partnerships with Indian companies. They are also required to source 30 percent of their products locally and invest in infrastructure, such as cold storage facilities.

Wal-Mart Stores Inc. (NYSE: WMT) already manages commercial wholesale clubs in partnership with New Delhi-based conglomerate Bharti Enterprises.