India will soon celebrate Diwali — traditionally a time for lavish presents and a boon for the nation's shopkeepers — but this year's Hindu festival of lights appears unlikely to brighten up a retail sector already dangerously close to tipping from boom to bust.

A stock market collapse, double-digit inflation, a tighter jobs market and expectations of a housing slump have left much of India's middle class feeling less wealthy than they did a year ago. Among those set to suffer from the slowdown are British retailers: everybody from Stella McCartney to Tesco have plans to set up shop on the sub-continent.

There is already evidence that the middle class are tightening their belts. High interest rates helped to push car sales down by 5 per cent in August. “Everyone in this business has turned cautious,” Kishore Biyani, the chief executive of Future Group, India's biggest retailer, said. “Sales of electronics and mobiles are lower. People are down-trading from expensive brands.”

As retailers struggle to pay the rent, landlords are renegotiating deals, according to Shubhranshu Pani, head of retail property at Jones Lang LaSalle Meghraj, the consultant. Some shopping centre owners are settling for a share of tenants' profits.

Industry forecasts that had predicted a doubling of India's £175 billion retail market in the next seven years are being reviewed. Few saw this reversal coming — India hosts the world's fastest-growing population of dollar millionaires and groups from Armani to Wal-Mart have cut deals with local partners — but at the same time, India's third-world infrastructure, regulatory hurdles and the unfamiliar habits of its shoppers have bamboozled the West's finest retail brains.

“Nobody has got the model right in India,” Abheek Singhi, of Boston Consulting Group, said. Vast Western-style hypermarkets are ill-suited to a country where most people do not have freezers to store goods bought in bulk, he suggested.

Mr Biyani said: “India is a very heterogeneous market. Modern retail is about homogeneity. This may take generations to change.”

Some plans already look to have stalled. Wal-Mart, the world's largest retailer, trumpeted its plans to enter the market two years ago but has yet to sell as much as a bag of rice. Others have overcharged — this year Marks & Spencer was forced to cut its clothes prices by 30 per cent in India.

No wonder that Tesco is taking it slowly. It announced a £60 million investment in August in a cash-and-carry business that will serve India's kiranas, or small shops. Regulations prevent Tesco from controlling a supermarkets business of the type that it runs in Britain, but executives admit privately that they would struggle to compete. “Your typical independent Indian vendor will deliver a single egg to a valued customer's door,” one said. “Not quite our style, is it?”

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