Last December, Prime Minister Manmohan Singh pledged to open India’s retail industry to foreign giants such Wal-Mart Stores Inc. (WMT) and Carrefour SA. (CA)

Seven months later, the foreigners are still waiting, stalled by populist politicians who say their arrival would threaten the survival of India’s legions of small shopowners. The delay has done little to change the perceived threat to mom and pop shops, though, as local conglomerates controlled by India’s richest families have been busy shoring up their position in retail.

The Birla, Ambani, Tata and Raheja business houses -- which already dominate sectors such as energy and automobiles --have spent the past several months opening new outlets or taking over existing retailers to gain an edge in an industry that Technopak Advisors Pvt estimates will expand more than 40 percent to $725 billion by 2017.

“The attraction of the retail segment for most Indian corporate houses is they see consumer-oriented industries as the next logical platform for growth,” said Hemant Kalbag, head of the consumer and retail practice for Asia at consultancy A.T. Kearney.

Stores and supermarkets are a switch from the traditional businesses of India’s billionaires, most of whom got their start in steel, oil, cotton, spices, and other commodities. Today, the country’s wealthiest families are betting that they can prosper by catering to a growing middle class seeking higher quality goods in cleaner stores.

‘Highest Earnings Potential’

A unit of billionaire Kumar Mangalam Birla’s Aditya Birla Group, which produces aluminum and copper, in April agreed to buy part of Pantaloon Retail India Ltd. (PF) by purchasing 8 billion rupees ($146 million) worth of debentures and taking on another 8 billion rupees in debt.

Reliance Industries Ltd. (RIL), primarily an oil-refining business run by India’s richest man, Mukesh Ambani, last month announced a joint venture with Brooks Brothers to sell suits, sportswear and accessories in India. That adds to the more than 1,300 Reliance stores offering products from groceries to Apple computers.

Ambani, who ranks 22nd on the Bloomberg Billionaires Index with a net worth of $21 billion, last month pledged to boost revenue from his retail operations at least fivefold from the current 76 billion rupees ($1.38 billion) within four years. Reliance Retail will have some of the company’s “highest growth rates and earnings potential,” Ambani told a June annual meeting.

Political Opposition

DLF Ltd. (DLFU), India largest real-estate developer based in Gurgaon and run by billionaire Kushal Pal Singh, in May opened its first retail outlet selling multiple brands. The company’s retail unit, DLF Brands, plans to expand to as many as 500 stores in the next four or five years, said Dipak Agarwal, chief executive for operations and strategy at DLF Brands.

Shoppers Stop Ltd. (SHOP), a unit of billionaire Chandru Raheja’s K Raheja Corp., added 54 new stores in the fiscal year ended March 31, the most openings the company has ever made in a year. Trent Ltd. (TRENT), a publicly traded unit of the Tata Group that operates supermarkets and clothing stores, added 17 outlets in the year ended March 2012.

India’s government on Nov. 24 agreed to allow overseas companies to own as much as 51 percent of supermarkets. Two weeks later it reversed that decision because of political opposition from critics who said the multinationals would destroy mom-and-pop businesses.

In a December interview with Bloomberg, Prime Minister Singh pledged to overcome that opposition, possibly after March state government elections. That hasn’t materialized as his Congress party faced a setback in the regional voting and contended with surging inflation and a plunging rupee.

“I don’t sense any consensus has been built,” said Sonal Varma, India economist at Nomura Holdings Inc.

Indian Partners

An opening of the retail sector wouldn’t necessarily hurt India’s big business houses. Overseas retailers will likely be required to have local partners, giving Indian companies room to negotiate tie ups. India allows global retailers with multiple brands to have wholesale operations, although they can’t sell directly to consumers. Existing partnerships in the wholesale industry could extend into retail if the market opens.

Wal-Mart has 17 wholesale outlets in India, set up in partnership with billionaire Sunil Mittal’s Bharti Enterprises Pvt. Ltd. Bharti, which owns India’s largest mobile phone operator, Bharti Airtel Ltd. (BHARTI), runs its own chain of over 170 Easyday supermarkets.

“Even if foreign companies are allowed they would like to have a tie with somebody who is local,” said Arun Kejriwal, director of Kejriwal Research. “It gives them access to the Indian market, logistics, everything else at one shot.”

Indian conglomerates have said they support foreign investment in retail. When the government in November said it would allow the overseas brands in, Bharti issued a statement praising the decision.

The conglomerates’ immediate payouts have been limited as they invest in new stores. Reliance Industries’s 76 billion rupees in retail revenue is a fraction of the conglomerate’s total sales of 3.4 trillion rupees. Tata’s Trent had a loss of 377.6 million rupees in the fiscal year ended March, according to data compiled by Bloomberg.

Small neighborhood stores still dominate Indian retail. Foreign investment “is not going to really eradicate the nearby shopowner,” said Kumar Rajagopalan, chief executive officer for the Retailers Association of India. “If it had to happen it would have happened even with the large business houses in the country opening up more stores.” Organized retail, where conglomerates such as Tata and Reliance operate, accounts for just 6.5 percent of the retail sector, Technopak estimates.

“There is huge potential,” said Pranab Barua, head of retail and apparel at Aditya Birla Nuvo Ltd. “Penetration is very low even now for modern retail.”

Bloomberg