The cabinet's decision -- after a similar proposal was withdrawn under withering criticism last year -- immediately generated optimism that a government plagued by scandal was finally breaking out of the political paralysis that had stifled reforms for months.
"This is a landmark decision in India's economic reforms process," said Rajan Bharti Mittal, whose retail company, Bharti Enterprises, has a joint venture with Wal-Mart.
Prime Minister Manmohan Singh said the reforms were made to spur economic growth and to attract foreign investment.
''I believe that these steps will help strengthen our growth process and generate employment in these difficult times," he wrote on his Twitter account, appealing for public support.
However, political opponents and even some allies, decried the decision to allow in international supermarket chains, saying it would hurt small retailers and farmers.
"(It) will lead to job losses for millions of our people," D. Raja, a Communist Party lawmaker, told the NDTV news channel.
The Cabinet also agreed to allow foreign investment in airlines and to sell stakes in state-owned companies. On Thursday, the government decided to reduce fuel subsidies and allow the price of diesel to rise, a move hailed by the business community but criticized by political allies and opponents.
The decision on retail investment Friday would allow foreign firms to own a majority stake in multi-brand retailers here for the first time. However, individual states would have the right to decide whether to let the retailers operate from their territory.
States led by the ruling Congress party would be most likely to allow them, meaning the big cities of New Delhi and Mumbai would have new shopping options.
Wal-Mart, French-based retailer Carrefour, British-based Tesco PLC and others have been interested in entering India, a country of 1.2 billion people where retail is the second-biggest industry behind agriculture.
Commerce Minister Anand Sharma said India badly needed the infrastructure investment that would come from these firms. Currently, about 35 to 40 percent of produce rots before it gets to the stores, he said.
Under the cabinet decision, at least 50 percent of the foreign investment would have to be in back-end infrastructure, such as processing, distribution and storage.
''It will generate large numbers of jobs in rural India for our men and women," Sharma said.
The government said farmers would benefit because less of their produce would rot, small retailers would become more competitive and efficient and consumers will get lower prices and better quality. The policy also would bring in badly needed inflows of investment and foreign currency.
The government had agreed on the same proposal last year but then withdrew that decision because of protests from coalition partners, a capitulation that badly damaged its credibility with international investors.
Since then, economic growth has fallen, with business leaders and analysts blaming the government's inability to make needed reforms.
Kunal Ghosh, a spokesman for government ally Trinamool Congress, said his party continued to oppose the plan but would not say whether it would withdraw support from the coalition.
The government relaxed rules on foreign investment in the broadcast industry and in power exchanges, which provides a platform for companies to buy and sell power.
The government also agreed to sell minority stakes in its oil, copper and aluminum companies as well as its Metals and Minerals Trading Corporation.
The main opposition Bharatiya Janata Party criticized the surprise decisions.
''We consider it as a betrayal of the country, betrayal of the Parliament by this government," said Balbir Punj, of the BJP.
The government also made a key change to its decision earlier this year to allow foreign retailers selling only a single brand to own 100 percent of their stores, a decision largely seen as aimed at bringing furniture retailer IKEA to India.
The previous decision forced the company to source 30 percent of their products from small cottage industries. Now, it can source that 30 percent from any Indian industry.
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