NEW DELHI (Reuters) - India threw open its $450 billion retail market to global supermarket giants on Thursday, approving its biggest reform in years that may boost sorely needed investment in Asia's third-largest economy.
The world's largest retail group, Wal-Mart Stores Inc (WMT.N), and its rivals see India's retail sector as one of the last frontier markets, where a burgeoning middle-class still shops at local, family-owned merchants.
Allowing foreign retailers to take stakes of up to 51 percent in supermarkets would attract much needed capital from abroad and ultimately help unclog supply bottlenecks that have kept inflation stubbornly close to a double-digit clip.
Wal-Mart hailed the decision, but said it would take a close look at the fine print to see what the decision entails for its ability to do business in India.
"We believe this is an important first step," said Scott Price, president and chief executive of Walmart Asia in a statement.
Raj Jain, who heads Wal-Mart India, told CNBC TV18 the decision will "redefine the way consumers shop in India, but more importantly, the way supply chains in India run."
Under fire for a slow pace of reform, Prime Minister Manmohan Singh's embattled government appears to be slowly shaking off a string of corruption scandals to focus on policy changes long desired by investors.
"This is a very bold move and the economic reforms process is back on track." Rajan Mittal, vice chairman of India's Bharti Enterprises, which is Wal-Mart's partner in that market, told reporters.
Millions of small retail traders vigorously oppose competing with foreign giants, potentially providing a lightning rod for criticism of the ruling Congress party ahead of crucial state elections next year.
Food Minister K.V. Thomas said the government will allow
foreign direct investment of up to 51 percent in multi-brand retail - as supermarkets are known in India. It will also raise the cap on foreign investment in single-brand retailing to 100 percent from 51 percent, he added.
The new rules may commit supermarkets to strict local sourcing requirements and minimum investment levels aimed at protecting jobs, according to local media.
A heavyweight member of Singh's coalition government warned on Thursday it unequivocally opposed opening the sector.
The move is politically risky.
Fears of potential job losses could heighten popular anger at the Congress party ahead of key state polls next year that will set the stage for the 2014 general election.
But slowing growth and investment in India, with the rupee currency around historical lows and government finances worsening, may have spurred the government into action.
"Manmohan Singh, after all the scams and the impression of government paralysis, has realized it's time to take some bold steps. This is a very bold step that will please the middle class," said political analyst Amulya Ganguli.
India previously allowed 51 percent foreign investment in single-brand retailers and 100 percent for wholesale operations, a policy Wal-Mart and rival Carrefour, among others, had long lobbied to free up further.
"For international retailers, it will open up a $1.6 trillion market growing at 8-9 percent so it's a big business opportunity for all of them," said Thomas Varghese, CEO of Aditya Birla Retail, an Indian supermarket chain.
For Wal-Mart, it's a very big opportunity to reach further abroad, said Moody's senior retail analyst Charles O'Shea.
"There are 1.2 billion people and if you're Wal-Mart, it's a place you need to be," O'Shea said.
Indian retailers have operated supermarket chains in India for years, but their expansion has been hampered by a lack of funding and expertise as well as poor infrastructure, which makes the cold storage of food transported around the country practically impossible.
Political opponents of the proposal, with an eye to the ballot box, argue an influx of foreign players - which could include France's Carrefour (CARR.PA) and Britain's Tesco Plc (TSCO.L) - will throw millions of small traders out of work in a sector that is the largest source of employment in India after agriculture.
India's biggest listed company, Reliance Industries (RELI.NS), was forced to backtrack on plans in 2007 to open Western-style supermarkets in the state of Uttar Pradesh after huge protests from small traders and political parties.
The main opposition Bharatiya Janata Party (BJP) opposes opening up the retail sector, arguing that letting in "foreign players with deep pockets" would bring job losses in both the manufacturing and service sectors.
"Fragmented markets give larger options to the consumers. Consolidated markets make the consumer captive," the BJP's leaders of the upper and lower houses of parliament said in a statement before the decision. "International retail does not create additional markets, it merely displaces (the) existing market."
Additional reporting by Nigam Prusty and Krittivas Mukherjee, and Phil Wahba in New York; Editing by John Chalmers and Jan Paschal