Key India coalition ally says Indian government has shelved its controversial decision to allow foreign retailers into the country; government has not officially announced change but has not clarified its position

Cindy Allen

MUMBAI, India , December 5, 2011 (Associated Press) – Stock prices of Indian retailers plunged Monday after a key coalition ally said the government had shelved its decision to throw open the country's huge retail sector to foreign investors, in a potentially damaging setback for India's beleaguered ruling party.

The government has not officially announced a change in its policy on foreign direct investment, but a reversal would be an embarrassment for the Congress party, which has been scrambling to reassert its leadership and kick-start investment in the deteriorating economy.

The government's failure to clarify its position by midday Monday wreaked havoc with shares of Indian retailers. Jittery investors drove shares in Pantaloon Retail down 9.1 percent. Shoppers Stop fell 3.7 percent and Trent was down 2.5 percent.

The furor over whether to allow chains such as Wal-Mart to open supermarkets in major cities has deadlocked Parliament, with many politicians slamming the decision as a job killer for India's small retail shops. Proponents say it would bring needed investment into India's infrastructure that would bring higher prices to farmers selling their produce and lower prices to consumers buying it.

An about-face on such an important decision would raise serious questions about the ability of India's ruling party to effectively govern. Analysts say sustained opposition may force the government to water down the policy or delay its implementation, even if it manages to avoid a full reversal.

Trinamool Congress party chief Mamata Banerjee said Saturday that Finance Minister Pranab Mukherjee had assured her the changes would not go through over her party's dissent.

"He informed me that the Cabinet decision on FDI entry in retail will be suspended until and unless a consensus is evolved. If this is so, the issue is settled," she said in a message posted to her party's website.

The Congress party would neither confirm nor deny Banerjee's assertion.

"The official announcement will have to be made in Parliament," Mukherjee told reporters.

On Sunday, Congress spokesman Manish Tewari said the party "welcomes any steps which can lead to a conducive resolution of the issue and break the deadlock."

Business leaders slammed the Congress party for potentially bungling a crucial policy change that has been a decade in the making, and bemoaned the weak leadership of Prime Minister Manmohan Singh in the face of a parliamentary revolt.

"It makes the position of Manmohan Singh even more weak. Clearly the man carries no authority," said Arvind Singhal, founder of Technopak Advisors, a New Delhi-based consulting company.

He said India's lack of leadership was eroding much-needed investment, from domestic businesses as well as foreign. "The impact on investors will be very negative in terms of confidence," he said. "We need FDI, but India needs significantly more investment from within."

The change in foreign investment rules for retail does not require parliamentary approval, and many questioned the government's wisdom in announcing the controversial plan while Parliament was in session, in the buildup to crucial state elections.

"It was bad planning," said agriculture analyst P.M. Sinha, a former PepsiCo executive in South Asia. "They could have waited a few weeks and nothing would have happened."

He said he believes the government will prevail and the changes will ultimately go through.

"The middlemen have a pretty strong lobby, but it is just a matter of time now before they're pushed aside," Sinha said.

Dismay over the government's inability to implement long-promised reforms that could spur economic growth has intensified as India's economy slows. The economy grew just 6.9 percent in the September quarter, the slowest in more than two years.

India's flagging growth is seen by many as a crisis of governance.

"A slowing economy seems to pale in comparison to the larger crisis at hand — that of a Parliament that is completely unable to function in the way these sacred institutions were set up to be," HDFC Chairman Deepak Parekh and former Unilever chief Ashok Ganguly said in a joint statement Sunday.

"Opposing investment in modern retail for the sake of it is only defending vested interests to the detriment of the vast majority," they said. "The farmers, the consumers and the common people must raise their voices against this false drama of apprehension against investment and modernizing trade in agriculture and consumer goods."

Foreign direct investment flows into India fell to $23 billion in the fiscal year ended March from $38 billion the prior year, and remain lower than flows to Brazil, Russia and China, according to Moody's.

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