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The Indian business press is a little like science fiction. The "pink pages" are full of stories related to the hundreds of millions of dollars that investors are pouring into India's technology industry. All that money is a bet on a future in which more than a billion people conduct their lives on a smartphone. The stakes are huge: The winners will be the next Facebook or Alibaba. It makes for exciting reading.

One is left with the impression that the future is right around the corner. It's not. The billion-dollar tech companies in Bangaluru, Mumbai, and New Delhi don't make money. India is still a poor country: More than 20 per cent of the population lives below the poverty line, and the gross national income per capita is only about $1,600 (U.S.), compared with more than $52,000 (U.S.) in Canada, according to the World Bank. Even Narendra Modi, the Prime Minister, says he will need a decade to turn around an economy that is recognized widely as one of the hardest in the world in which to do business.

The future hinted at in the papers will be delayed in part because old habits die hard.

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Observers of the international business scene will be familiar with the row over the attempt by India's tax office to apply the local Minimum Alternative Tax (MAT) – a levy meant to foil overly dextrous use of the tax code by domestic companies – to international portfolio investors. This was "old India," talking, not the dynamic emerging economy that Mr. Modi promises to create. The tax notices landed like a sucker punch. Finance Minister Arun Jaitley said in his February budget that the MAT no longer would apply to international investors. It turned out that he was speaking prospectively. Past profits were fair game.

The decision of bureaucrats to so blatantly ignore the stated intent of the government raised serious questions about governance. Why did tax officials feel so empowered? And why didn't the Finance Minister or the Prime Minister bring them to heel? International investors responded to the MAT episode by fleeing India's capital markets. This is a serious blow to Mr. Modi's reputation. There are fresh doubts that Indian officials can be trusted.

India's economic future also will be hindered by entrenched business interests. Take billionaire Kishore Biyani, the founder and chairman of Future Group, a traditional retailer with some 1,200 stores that sell everything from food to furniture.

Mr. Biyani has reason to fear the future. The hottest thing in Indian technology is e-commerce. A company called Flipkart, an online marketplace modelled on Amazon, has attracted some $2.5-billion (U.S.). Snapdeal, a local rival, has raised about $1-billion, while Amazon chief executive Jeff Bezos last year said he would spend about $2-billion to ensure the company's Indian unit kept pace.

A well-funded e-commerce industry will force Mr. Biyani to work harder to retain current profit margins. Flipkart, Snapdeal, and Amazon regularly seek to outdo the other with impressive discounts. For shoppers with access to the Internet, there is little need to pay full price for anything. A flash sale by one of the big e-tailers is always in the offing.

Mr. Biyani could meet this challenge head-on and invest in his business. He also could complain loudly, knowing that politicians and other authorities will hear. This week, Mr. Biyani went public with a gripe that his virtual competitors are violating the "spirit and the letter" of India's ban on international investment in online retail by calling themselves "marketplaces." He didn't name names. He simply said any company that owns warehouses and retains merchandise for resale are retailers, just like he is. "Any retailer can be a marketplace and any marketplace is also a retailer," Mr. Biyani told the Economic Times newspaper.

Of course, he has a point.

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As with Uber and other Web-based taxi services, India's e-commerce companies have exploited loopholes in existing laws that would otherwise impede their rapid growth. For most people, Flipkart, Snapdeal and Amazon are no different than a Future Group store – all are simply a place one goes to buy things. But for the virtual retailers, the distinction is very important. Their business models in India rely on regulators continuing to agree that they are "technology companies" that happen to run websites and mobile apps that allow sellers to connect to buyers.

Mr. Biyani might accept that definition if Flipkart, Snapdeal and Amazon didn't run such steep discounts, which he says are subsidized by their foreign investors. The law bars Future Group and other traditional retailers from obtaining such funding. (It also has limited competition from big international retailers such as Walmart and Ikea, but that's another matter.)

Mr. Modi is facing another uncomfortable decision. The lobby group that represents traditional retailers such as Future Group filed a complaint on the matter at the Delhi High Court, which in turn gave the government four months to clarify its policy.

The Prime Minister can't afford to botch this one like he did the MAT.

E-commerce is a magnet for the international investment Mr. Modi needs to fuel the rapid economic growth he promised voters in 2014. A sudden application of the rules to the "spirit and the letter" of the law would further undermine confidence. What Mr. Modi should do instead is rewrite the law to allow more international investment in retail. That would make investors forget about the MAT. It would also force executives such as Mr. Biyani to compete for customers rather than seek to retain privileged positions.

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.

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