The government approved 51 percent foreign direct investment in supermarkets, paving the way for firms such as Wal-Mart Stores Inc, Tesco and Carrefour to enter one of the world's largest untapped markets.
The move may breathe new life into the government of Prime Minister Manmohan Singh, who ushered in free market reforms 20 years ago but has been bogged down by corruption scandals and was starting to be seen as a lame duck.
As well as appealing to India's burgeoning urban middle class the reform will draw in much-needed new investment to a sputtering economy. Policymakers say spending on cold-storage and warehousing will ease supply-side pressures that have driven inflation close to a double-digit clip.
"It's important not only for raising overall growth, but also for containing inflation and improving the quality of life for over 50 percent of the population," said central bank Governor Duvvuri Subbarao.
Investment could exceed $5 billion in the next 5-7 years as hundreds of hypermarkets are opened, said Vijay Karwal, head of retail at the Royal Bank of Scotland.
"There may be a degree of 'catch up' with foreign flows into India retail possibly starting to match, if not exceed, those into China as development picks up pace," he said.
The move carries risk for Prime Minister Singh, whose party must contest five state elections next year. It is opposed by millions of small shop owners who fear for their livelihoods, and prompted an uproar in India's parliament.
Some politicians threatened extreme action to prevent supermarkets opening.
" If Wal-Mart tries to open its mall anywhere, I will burn it myself," said Uma Bharti, a former state chief minister from the opposition Bharatiya Janata Party (BJP), local media reported.
An India-wide group representing small traders said it was planning protests for next week.
"They should have worked on some kind of protectionist mechanism for smaller traders," said Praveen Khandelwa, the head of the confederation of all India traders.
RIDERS
To appease its opponents, the government insisted foreign retailers source almost a third of their produce from small industries, invest a minimum of $100 million in India and spend half of that on "back end" infrastructure.
An official at one major international retailer said the company was concerned about the numbers the government had mentioned.
"Some of the conditions look quite stringent. The investment in particular -- it's all quite big money. We'd need to know the details, and how that would be accounted for," the official said on condition of anonymity.
Foreign stores will only be permitted in cities of more than 1 million people, and individual states will decide whether to allow the global giants on to their patch.
That could, for example, exclude investor-favorite states like Gujarat, which is run by the Hindu nationalist BJP that opposes new foreign supermarkets.
Sharma said new investment would create 10 million jobs in the next three years and would not affect small shops, a claim scorned by parties on both the left and right who predict that millions of jobs will be lost.
"We are sitting on a time bomb in terms of employment," said economist Jayati Ghosh. She said India should upgrade public and cooperative supply infrastructure, not rely on corporations.
The head of Wal-Mart's local cash-and-carry joint venture praised the move, but also struck a note of caution.
"We will need to study the conditions and the finer details of the new policy and the impact that it will have on our ability to do business in India," said Raj Jain, CEO of Bharti Wal-Mart.
Tough Going
Domestic retail chains have operated in India for years but have struggled to expand due to funding difficulties, a lack of expertise and poor roads and cold storage facilities.
