The decision by US-based retailer Wal-Mart Stores to end its six-year-old joint venture with India-based retailer Bharti Enterprises is a setback to the Indian government’s decision to allow 51% FDI in multi-brand retailing. Wal-Mart will acquire Bharti's 50% stake in Bharti Walmart, which runs about 20 wholesale and cash-and-carry stores in India under the Best Price Modern Wholesale brand.

"We created a franchise in retail with Bharti in the hope that there could be a potential freeing up [of FDI] that would allow it to potentially be the base of the business. But frankly, the FDI has passed," stated Wal-Mart Asia CEO Scott Price on the sidelines of an Asia-Pacific Economic Co-operation summit in Bali.
 
The joint venture broke up for several reasons, but an important one was India’s restrictive FDI rules for multi-brand retailing. The partnership was said to have been under strain for many months. Wal-Mart had not opened a wholesale store in India for about a year, despite earlier plans to open eight in 2013, due in large part to an ongoing internal bribery probe relating to its Indian operations. This resulted in the exit of its key executives, including its CFO in November and CEO in June. As early as July, a Reuters story indicated the prospect of Bharti walking out of the joint venture, “given the heavy investment requirement and distant prospects for returns”. Bharti Walmart lost Rs2.77bn ($48m) on sales of Rs18.8bn in 2011.
 
Wal-Mart's efforts to enter multi-brand retailing in India was also impacted by restrictive FDI conditions such as the requirement that 30% of its goods had to be sourced from Indian small and medium-sized enterprises. The US retailing giant wanted this to be reduced to 20%, but this has not been agreed to by the Indian government.

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Indian FDI rules also stipulated that at least $100m of investment should be made in new facilities, with half of that put into building back-end infrastructure, this ruled out Wal-Mart utilising Bharti’s retail business to get an early mover advantage in India’s $500bn retail market.

Wal-Mart appears committed to staying in the Indian market and growing its wholesale cash-and-carry business, therefore it must choose another Indian partner. Bharti, for its part, intends to invest $2.5bn every year to build its retail business and also start its own cash-and-carry venture.

N Chandra Mohan is an economics and business commentator based in New Delhi.