Indian retailers retrench as reform hopes dashed By Nandita Bose MUMBAI (Reuters) - India's largest supermarket operator, Future Group, is having a clearance sale: its financial service business and flagship clothing brand are gone, and more deals are in the pipeline. Six months after the government backtracked on plans to allow foreign retail giants such as Wal-Mart Stores (WMT.N) and Carrefour (CARR.PA) to form joint ventures, cash-starved domestic chains are selling assets, shutting stores, and scaling back expansion plans. It seems improbable that retailers could be in such trouble in India. They have the world's second-largest population, increasingly affluent consumers, and limited competition. But things are tough for supermarkets, a relatively new business sector in India, with every major chain losing money. The economy has lost momentum, compounding problems of high food inflation and low retail prices, and expensive real estate. Foreign partners would bring experience, expertise and funds, but many in the industry do not expect a decision on foreign investment in supermarkets before elections in 2014. "These companies have realized there is no point standing still and bleeding more, waiting for the government to act," said Debashish Mukherjee, partner and vice-president with consultancy AT Kearney. With foreign investment ruled out, many supermarkets, which account for 70 percent of organized retail in India, are looking to private equity investors or hitting up their billionaire owners for more capital as they continue to bleed. Foreign private equity firms are in talks with smaller businesses which are less capital intensive. So this option is ruled out for the big boys," said an investment banker who did not wish to be identified. Last November, after years of delay, the prospect of a foreign partner appeared tantalizingly close for the domestic chains. India said foreign supermarket operators would be able to own up to 51 percent of a joint venture. Industry euphoria proved short-lived. Under pressure from ruling coalition allies, the government backtracked in an embarrassing reversal that has come to symbolize the inability of Prime Minister Manmohan Singh's administration to enact reforms. Indian traders and middlemen vehemently oppose allowing foreign chains into a $450 billion retail industry where 90 percent of sales are made by informal "kirana" stores, which are generally family run. Proponents argue the infrastructure and investment that can be brought by the likes of Wal-Mart would go far to ease crippling food inflation and a high rate of food spoilage. "We are going cautious with our expansion plans," said Mark Ashman, chief executive of Hypercity, the hypermarket arm of Shoppers Stop (SHOP.NS), which, like many of its rivals, hopes to join forces with an overseas retailer once the rules change. "If foreign direct investment was allowed, the appetite for expansion for us would certainly be higher," he said. Future Group, controlled by Kishore Biyani, known as the father of Indian retail, recently sold control of its financial services arm Future Capital (FCHL.NS) to private equity firm Warburg Pincus WP.UL. Future (PART.NS), which sells groceries under the Big Bazaar and Food Bazaar brands, announced the deal days after it sold a controlling stake in its flagship clothing brand Pantaloon. The two deals will wipe about $1 billion in debt from its books. "Our intention is to exit from non-core businesses and focus on core retail business," a company spokesman said, adding Future Group aims to be debt-free by the end of the fiscal year in March 2013. Two recent deals are not the last ones from us. Future is now in talks to sell a stake in its food processing and manufacturing business to Japan's Lawson Inc (2651.T), Japan's No.2 convenience store chain, a source with direct knowledge said, adding a deal would be finalized soon. Lawson spokesman Shin Ichikawa said the company was in talks with several potential partners about entering India, but declined to name them and said nothing had been decided. Future Group also plans to exit its insurance joint venture with Italy's Generali (GASI.MI), although a possible deal is further off, said the source with direct knowledge who declined to be identified. As well as selling assets, Future Group, which operates more than 1,300 grocery stores covering 16.5 million square feet (1.5 million square meters) across its different formats, is also scaling down growth plans. The source said the group will only open 2 million square feet of retail space this fiscal year, instead of a previously announced 2.5 million square feet (230,000 square meters). Future is not alone. Aditya Birla Retail has shut 50 of its More supermarkets and is closing loss-making outlets in Mumbai, Delhi and Pune to focus on hypermarkets, a company source said. The company, part of the Birla conglomerate, has also sought another 3 billion to 4 billion rupees ($55 million-$75 million) from controlling shareholder Kumar Mangalam Birla, the source said. Even mighty Reliance Industries (RELI.NS), the conglomerate controlled by Mukesh Ambani, India's richest man, has been unable to make money in retail after six years in the business and 1,300 stores. Still, it has no plans for a foreign partner and is pushing ahead with expansion of its supermarket chains. "Food and grocery retailers have been suffering in most of the major markets," said Devangshu Dutta, consultant with Third Eyesight. Many believed India to be insulated, but that's not the case. Additional reporting by James Topsham in Tokyo; Editing by Tony Munroe and John Mair