When Ermenegildo Zegna in 1999 set up shop in Mumbai at Crossroads, India's first shopping mall, he expected to mimic his success selling designer wear in China. But the Italian luxury suitmaker closed up last year, just when India was on the cusp of a retail revolution, because of low-end neighbours and poor foot traffic.

Zegna was promised a high-end mall: Crossroads was a poster child for premium retail in India, showcasing luxury goods for the south Mumbai elite. Instead he found a shop selling Indian spices on the same level and a McDonald's elsewhere in the building.

Now Crossroads itself may be yielding to pedestrian reality. This summer Mumbai's Urvi Piramal, whose family business had hoped to mine gold from one of its old pharmaceutical plant sites, sold the would-be luxe emporium to Future Group, India's biggest mass-market retailer.

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Whether Future Group chief Kishore Biyani will continue pushing premium products remains to be seen. All he reveals are plans to sell shares in the property to foreigners once regulations on REITs are in place later this year--and to lease space to a Future Group retail arm, Pantaloon [Get Quote] being a listed example. He intends to not overdo jewelry and clothing, though. "You need a right mix of tenants," says Biyani.

Crossroads 1.0 epitomises the difficulties the carriage trade is having in reaching India beyond a few pockets of inherited wealth. Luxury boutiques remain ensconced at five-star tourist hotels.

Yet a recent study by Delhi's Technopak shows that 1.6 million Indian households earn more than $100,000 per year--a number that is growing at 14 per cent a year--creating a $14 billion business for luxury goods. Such growing affluence has not rubbed off as yet on the luxe shops because Indians, after decades of deprivation and absence of social security, are spending more on homes, travel, education, high-end autos and electronics, leaving little for luxury goods.

Yet the Communist-backed national government further encouraged indulgence this past February by allowing foreign single-brand retailers, largely luxury brands, to own their operations outright. None has taken the plunge as yet. Most, like Zegna, have thus far relied on franchisees.

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But Zegna is likely to be the first luxury brand with an Indian subsidiary, says Rahul Prasad, managing director of Zegna India. It is opening a new flagship next January in the Taj Mahal Hotel, on Mumbai's seafront, where it can be content with neighbours such as Fendi, Louis Vuitton and Bulgari.

Only in such rarefied redoubts have luxury boutiques in India been able to meet their niche's international standards for parking, uncluttered walkways, expensive flooring and perfumed toilets. Barely any of the 300 malls proposed to open in the country in the next few years will meet that test, reckons Vivek Kaul, retail head for India of Jones Lang LaSalle, a real estate broker. Most Indian thoroughfares are grimy and smelly affairs.

Crossroads' disappointment may not be the last word. Two new luxury-brand malls are destined for Delhi, with one by K.P. Singh's DLF group likely to open next year. Leasing is said to be strong.

The Piramals aimed high in 1999 when looking at how to convert the 150,000-square-foot space in Mumbai's affluent Haji Ali. With some persuasion from US consultant McKinsey they chose to spend $20 million to connect three isolated buildings on stilts with walkways and a retractable Teflon roof.

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The experiment at organised retail initially drew huge traffic, or "footfalls"--120,000 on weekends--as many visitors loved the air-conditioned corridors, imported escalators (then a first for shoppers in India) and McDonald's. But fewer than 15 per cent bought goods, says Krish Iyer, then CEO of Crossroads and now with AS Watson group in Hong Kong. That number rose eventually, but in the meantime total visits dropped as other midrange malls opened.

Lack of quality retail space alone is not what crimps the luxury business in India. The problem has much to do with the way Indians shop.

For instance, Louis Vuitton does not sell women's wear in India because Indian women, with a preference for embroidered local wear, or saris, rarely wear skirts or gowns. And Western fits of garments do not quite suit Indian torsos.

Also, many wealthy traders and businessmen in small towns, who will buy a pricey home theater or a Mercedes-Benz, care little for a Gucci or Louis Vuitton. "There is little awareness of what luxury is," said Sachin Vaish, who clothes ambassadors and industrialists from a 66-year-old tailoring shop in Delhi. And new tax laws that track purchase patterns of expensive goods discourage most of India's rich, whose tax returns are often at odds with their lifestyles. Of the few who indulge, most shop abroad.

Prices are certainly no incentive for domestic luxe sales. For instance, a 125ml bottle of Cool Water Davidoff fragrance costs no more than $40 in Singapore but $68 in a Chennai department store. An Omega watch is 10 per cent to 15 per cent more in a Mumbai boutique than in the Far East--a price difference equal to the cost of a flight back from Singapore. Markups are higher in India because a slew of import and local taxes can add 40 per cent to 70 per cent; also, lower volumes mean higher distribution margins.

(China, for all its relative advances in luxury retail, also suffers from cost boosters. No wonder that 80 per cent of Chinese luxe purchases are made off the mainland.)

As long as luxe goods remain absent from highly trafficked centers such as Crossroads and are kept tucked away at swank hotels, their market in India will suffer an additional limitation: Wide distribution creates awareness and encourages the upper middle class in developed countries to shop for designer wear. In India it's mostly out of sight, out of mind.

"We have 1 billion [Indians] waiting for us," Vuitton Chief Yves Carcelle said at the opening of the world's biggest luxury maker's first store in Delhi in 2003--in a ritzy hotel, of course. There, it remains. The likes of Vuitton need to redo the math, and wait a while.