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FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8054
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHCG/AMCONSUL CHENNAI 1388
RUEHKP/AMCONSUL KARACHI 8116
RUEHCI/AMCONSUL KOLKATA 0793
RUEHLH/AMCONSUL LAHORE 4115
RUEHBI/AMCONSUL MUMBAI 0502
RUEHPW/AMCONSUL PESHAWAR 4637

UNCLAS SECTION 01 OF 03 NEW DELHI 004076 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDA PASS FAS/OCRA/HIGGISTON 
 
E.O. 12958: N/A 
TAGS: BTIO EAGR ECON EINV IN
SUBJECT: INDIAN RETAIL ENVIRONMENT GROWS MURKIER 
 
NEW DELHI 00004076  001.2 OF 003 
 
 
SUMMARY 
------- 
 
¶1.  (SBU) The developments of the past two weeks in Uttar 
Pradesh (UP) and Kerala have further complicated an already 
volatile environment for retail investors.  The UP government 
ordered several newly opened retail outlets closed following 
violent protests by traders, and Kerala is pushing for a 
revision of a law that will tightly restrict retail 
investment in the state.  India,s central government has not 
yet taken action in defense of big retailers, but Minister 
for Agriculture, Food and Consumer Affairs Pawar said 
publicly that permanent bans on retail operation might 
violate the constitution.  West Bengal has promised to 
protect retail outlets, and Punjab has said that it welcomes 
retail investors but will not give them free land.  End 
summary. 
 
BACKGROUND 
---------- 
 
¶2.  (U) This year has seen several attacks on organized 
retail in India.  In Ranchi, Jharkand, groups of armed street 
vendors attacked three Reliance Fresh stores on May 12.  On 
May 24, another such attack occurred in Indore, Madhya 
Pradesh, and then on August 18, the Forward Bloc organized a 
raid on a Reliance Fresh store still under construction in 
Kolkata.  Playing on Gandhi,s "Quit India Day," the umbrella 
organization India FDI Watch (www.indiafdiwatch.org), which 
is affiliated with an American anti-globalization NGO, 
coordinated "Quit Retail Day" rallies on August 9 in cities 
throughout India.  Protestors chanted slogans against 
organized retail in general and foreign investment in retail 
in particular.  Wal-Mart made for a popular target after 
signing a deal with Bharti earlier that week to open as many 
as 15 wholesale outlets in India over the next seven years. 
 
¶3.  (U) While the small retailers and supply-chain middlemen 
who stand to lose business to organized retail have found a 
number of outspoken advocates, retail investors have received 
some quiet support from high-end produce farmers, who get 
higher return on their crops from organized retailers. 
Farmers in West Bengal put up a roadblock to protest attacks 
on Reliance Fresh outlets, and UP farmers have demonstrated 
against the closure of Reliance Fresh stores in their state 
(see paragraphs 4 and 5).  (Comment:  We expect retail chains 
to get support especially from vegetable farmers located 250 
kilometers or less from an outlet, the radius within which 
Reliance has said it will purchase locally available produce, 
as well as from middle-class consumers looking for lower 
grocery prices.  End comment.) 
 
MAYAWATI PUTS HER FOOT DOWN...SORT OF 
------------------------------------- 
 
¶4.  (U) Despite the protests and attacks, ambitious 
retail-development plans for India marched ahead until big 
retailers suffered a significant setback in UP on August 23. 
Chief Minister Mayawati ordered organized supermarket 
retailers in the state to close shop, purportedly to restore 
peace following the ransacking on August 22 of new Reliance 
Fresh and Spencer,s outlets in Lucknow and Varanasi.  The 
attacks were part of protests organized by the opposition 
Samajwadi Party.  The Chief Minister subsequently formed a 
five-member committee, headed by Cabinet Secretary Shashank 
Shekhar Singh, to evaluate the feasibility and impact of 
organized retail in UP and report back within a month. 
 
¶5.  (U) The UP government stated that the order applied only 
to stand-alone outlets, not to those located in malls.  It 
was unclear, though, whether the order applied throughout the 
state or just to Lucknow and Varanasi.  Densely populated 
Noida and Ghaziabad raised particular concern.  They lie 
within UP borders, but they are essentially suburbs of New 
Delhi and offer flourishing retail markets.  Illustrating the 
confusion, Reliance closed its doors in Noida at noon on 
August 24 but reopened them four hours later, and Reliance 
stores in each city have been operating since on an ad hoc 
basis. 
 
¶6.  (U) Meanwhile, Spencer,s outlets have remained open even 
in Lucknow.  Vice Chairman Sanjiv Goenka of RPG, which owns 
Spencer,s, indicated that the chain will not close unless 
 
NEW DELHI 00004076  002.2 OF 003 
 
 
the company receives an official communiqu from the 
government.  Goenka denied that Spencer,s outlets were ever 
attacked by protestors, suggesting that the rumor might have 
been spawned by competitors. 
 
¶7.  (U) The Federation of Indian Chambers of Commerce and 
Industry (FICCI), the Confederation of Indian Industry (CII), 
and the Associated Chambers of Commerce and Industry in India 
(ASSOCHAM) have all spoken out against Mayawati,s decision, 
arguing that the closures are bad for consumers, companies, 
and farmers, who stand to get higher prices for their crops 
by selling more directly to large retailers.  Union Minister 
for Food and Consumer Affairs Sharad Pawar has stated that 
while preservation of law and order is within the purview 
state governments, he does not see how UP could legally make 
the closures permanent. 
 
¶8.  (U) Mayawati, however, insisted that the closure order 
would remain in effect until she receives a report from her 
committee, which will look at issues of location, licensing, 
health, and of course law and order. 
 
¶9.  (U) On the same day the closures were ordered, Mayawati 
scrapped the agricultural reforms she had announced on August 
¶3.  The abandoned policy would have allowed farmers to 
contract with companies whose net worth exceeded INR 5 
billion (USD 122 million).  Mayawati intended the policy to 
encourage large retailers to invest in UP,s rural areas, but 
she altered course after a state-sponsored survey showed that 
60 percent of farmers opposed the policy, another hit to 
retailers, investment opportunities in the state.  The UP 
government did not offer any detail on which parts of the 
policy farmers opposed, the reasons for their opposition, or 
the government's methodology in conducting the survey. 
 
INVESTORS SURVEY THE LANDSCAPE 
------------------------------ 
 
¶10.  (SBU) Reliance Industries has plans to invest USD 6 
billion in organized retail in India, but they have now 
announced that they will slow development in the states of 
UP, Kerala, and West Bengal, which they now perceive to be 
problem areas.  A Reliance contact told Emboff that the 
company will respond to recent developments by proceeding 
cautiously with their plans, with a constant eye towards 
law-and-order concerns, and fight bans or problematic 
legislation in the courts, if necessary. 
 
¶11.  (U) Kerala,s communist government has justified 
Reliance,s concern with a proposed reinterpretation of the 
Essential Commodities Act that would bar the entry of 
organized retailers into rural areas and limit operations in 
cities.  C. Divakaran, Kerala,s Minister for Food and Civil 
Supplies, anticipates that a new state-level interpretation 
will be formalized by the end of the year.  Though the 
Financial Express reported that the central government asked 
both Kerala and UP for an explanation of their policies, 
noting possible violation of the Indian constitution, 
Divakaran indicated that Kerala,s government has received no 
such request.  Divakaran,s Ministry is also planning to 
upgrade existing "ration shops" to help them compete with new 
retail outlets. 
 
¶12.  (U) West Bengal's government, also communist, has taken 
a different stance.  On August 26, there were attacks 
reported on the same Reliance Fresh outlet in Kolkata that 
was attacked on August 18.  Rather than ordering the closure 
of retail outlets to restore peace, Chief Minister Buddhadeb 
offered "full police protection and security to all Reliance 
installations in West Bengal," per The Economic Times. 
 
¶13.  (U) The press has reported that Punjab might be the next 
state to take action against organized retail, but the 
working president of Punjab,s ruling Shiromani Akali Dal 
(SAD), Sukhbir Badal, stated on August 28 that while SAD 
opposes the concessions offered by the Congress Party leaders 
who preceded his administration, the party supports 
investment of any sort in the state and would not discourage 
large retailers. 
 
¶14.  (SBU) Indeed, a contact at Wal-Mart told Emboff that 
Punjab would be home to the first Wal-Mart-Bharti 
cash-and-carry outlet, both because of the friendly 
 
NEW DELHI 00004076  003.2 OF 003 
 
 
government and because it is the home of Bharti head Sunil 
Bharti Mittal.  The contact added that Wal-Mart considers 
press coverage of the Bharti pact "not too bad" so far, but 
Wal-Mart is paying close attention to the retail environment, 
as it will affect Wal-Mart's front-end partners. 
 
COMMENT 
------- 
 
¶14.  (SBU) Whatever comes of the situation in UP, these 
developments are likely to damage investor confidence in the 
state.  Mayawati,s Bahujan Samaj Party seems unwilling to 
resist pressure from special-interest groups advocating for 
small retailers, no matter the damage the investment climate 
might incur or the opportunities farmers might lose.  We 
expect that Mayawati will at least make allowances for 
organized retail in Noida and Ghaziabad, but if UP,s 
committee yields anti-retail policy advice, intercession by 
the central government on constitutional grounds would be 
helpful in protecting the interests of retail investors. 
That said, given the central government's tenuous hold on 
power and the possibility of general elections in the near 
future, it is doubtful that the Center will offer any strong 
response on such a controversial subject. 
 
¶15.  (SBU) Buddhadeb,s actions are no guarantee of support 
down the road for foreign companies.  West Bengal's Chief 
Minister has a record of soliciting foreign investment in 
West Bengal, but the traditionally protectionist attitude of 
Indian communists may still prevail in the state when the 
delicate issue of FDI in retail comes into play. 
 
¶16.  (SBU)   The protests to this point are no greater than 
one would expect with such a dramatic potential shift in the 
economic landscape, and they are largely occurring in less 
progressive regions, whereas in New Delhi, Maharashtra, 
Andhra Pradesh, and other progressive areas, people generally 
recognize the benefits of organized retail and welcome its 
development.  It is also important to note that there are two 
distinct drivers behind these protests.  One is a fundamental 
opposition to organized retail, as in the cases of some of 
the isolated attacks by traders and the August 9 protests 
orchestrated by an NGO laying the groundwork for its fight 
against FDI in retail in India.  The other is political 
opportunism, as in West Bengal and UP, where opposition 
parties arranged protests and attacks not on principle, but 
because an opportunity to undermine the governing party 
presented itself.  End comment. 
 
¶17.  (U) Visit New Delhi's Classified Website: 
http://www.state.sgov.gov/p/sa/newdelhi/. 
 
MULFORD