Tesco's Leahy presses India to lift block on foreign investment

Tesco is lobbying the Indian government to open its vast domestic market to overseas supermarket groups. Sir Terry Leahy, the chief executive, will make his first business trip to India this month to promote the company's case.

The supermarket chain is one of several big foreign retailers jockeying for position in India and is being backed by the British High Commission in its attempts to break into the market. Last month the US giant Wal-Mart sent a delegation to Delhi.

At present, India is closed to big foreign retailers and has no culture of supermarket shopping. Almost all food is sold in street markets, corner stores or by travelling hawkers on bicycles. Foreign retailers must rely on licences and franchise partners to do business there. But India's coalition government is under pressure to allow in companies such as Tesco to meet the demand from the country's burgeoning middle class, estimated at about 100 million - or 10 per cent of the population - and growing at the rate of 20 million a year.

The Indian economy is expanding by 7 per cent a year, mobile phone subscriber numbers are increasing by 2 million a month and a café culture is well-established, not just in cities such as Mumbai and Bangalore, but in scores of "secondary" cities.

Sir Michael Arthur, the UK's High Commissioner in India, said all the big Western supermarket groups were vying to be first into the market. A high-level document arguing the pros and cons of creating a supermarket industry in India is circulating within the cabinet and a decision is hoped for in the not too distant future.

If Tesco were to break into the Indian market, it would have to go in as a junior partner in a joint venture with an Indian company. There would probably be a cap on its initial shareholding. In the case of the insurance sector, overseas investors are limited to a maximum stake of 26 per cent in joint venture companies.

The German supermarket group Metro - one of four overseas food retailers bigger than Tesco - is the only foreign supermarket to have a toehold in India, through a wholesaling venture. But it is not allowed to sell direct to consumers.

Tesco has long sourced many of its goods from India, and 18 months ago it began outsourcing back-office jobs to the country. Sir Terry will visit the group's Bangalore-based operations, which comprise the sourcing office and IT centre, a spokesman for the supermarket giant said.

The group is keen to deflect attention away from its dominant market position in the UK by expanding overseas. It moved into China 18 months ago and analysts believe Vietnam is also on its radar.

Among the issues the Indian cabinet is grappling with is whether supermarkets should be allowed to sell non-food items as well as food and what restrictions there should be on the supply chain. Tesco and other retail giants have been criticised in the past for the way they treat their suppliers.

Sir Michael said there were also opportunities for UK companies to assist in the expansion of infrastructure such as airports. Delhi and Mumbai are about to be privatised and, although BAA is not bidding, UK companies are involved in one of the leading contenders, led by the Australian bank Macquarie.

The UK and Indian government are also about to sign a deal to give UK film-makers access to Bollywood, the biggest film industry in the world.