Powerful chief ministers of several government-allied states and some legislators within the ruling Congress party are pressing the government to reverse the decision.
The Press Trust of India reported that Sonia Gandhi, Congress party head and India's most powerful politician, discussed how to end a standoff which threatens some key bills.
The government, with a parliamentary majority of around 18 seats, may call a meeting of the main political parties.
"There has to be some kind of rollback," said one government minister, who declined to be named.
In a statement, the government said foreign retailers would have to source 30 percent of their goods from small Indian industries, after previously saying these purchases could come from any small industries globally.
Vote of Confidence?
The uproar could force a vote on one of the government's biggest reforms in years, one that would allow global chains like Wal-Mart Stores Inc and Carrefour up to a 51 percent stake in retail ventures.
Losing that vote could, in theory, spark a wider vote of no-confidence in the Congress party-led ruling coalition.
The DMK and Trinamool Congress parties, two of the government's crucial parliamentary allies, oppose the reform, and the main Hindu nationalist opposition party, the Bharatiya Janata Party (BJP), said it will push for a vote, known as an "adjournment motion", over the new retail regulations.
The reform briefly breathed new life into the government of Prime Minister Manmohan Singh, who ushered in free market reforms 20 years ago, but who has since been bogged down by corruption scandals and increasingly has been seen as a lame duck leader.
The reform was always seen as a politically risky move, coming ahead of major state elections next year that could redraw the political map ahead of 2014 general elections.
The opposition claims the retail move will cost millions of small shopkeepers' jobs. Supporters say it will draw in much-needed investment to a sputtering economy, with more spending on cold storage and warehousing that will ease supply-side pressures that have driven inflation close to double digits.
"The government has lost its mind. Does it not know what its impact on the U.P. elections will be?" a Congress party lawmaker said, referring to elections next year in Uttar Pradesh state. (Reuters)
