The foreign investment regulator has approved a $110 million investment plan by Tesco, formally paving the way for the British retailer to venture into Asia's third-largest economy.
Tesco this month took the initial steps to becoming the first foreign company to set up a chain of supermarkets in India's $500 billion retail sector after announcing it had applied to buy a 50 per cent stake in Tata Group's Trent Hypermarket.
The deal was widely expected to be cleared without much political opposition thanks to Tesco's low-profile approach and its decision to expand at a slow pace, consultants said.
The Foreign Investment Promotion Board (FIPB) also approved a proposal by British telecoms group Vodafone (VOD.L) to take full ownership of its Indian business in a $1.6 billion deal. That proposal, however, needs final approval from the cabinet.
Economic Affairs Secretary Arvind Mayaram told reporters that Tesco and Vodafone's proposals had been approved.
Tesco's decision to invest in India is seen as a vote of confidence in an economy that grew at its slowest pace in a decade in the past fiscal year and is struggling to attract foreign investors.
The venture also provides a boost for the government after its decision to open up the supermarket sector in September 2012 received a muted response from overseas retailers put off by ambiguous foreign participation rules and political opposition.
A senior Tesco official, who spoke on condition of anonymity, had told Reuters it took months of arm-twisting and assurances by the government to persuade the company to take the plunge.
In October the world's biggest retailer Wal-Mart called off a joint venture with India's Bharti Enterprises, citing unfriendly regulations.
Tesco has had a franchise agreement to provide support to Trent's Star Bazaar chain since 2008, but is now expected to open three or four stores a year under a slow expansion plan designed to comply with sourcing regulations.
Tesco's India investment follows declining third-quarter sales in all nine of its continuing overseas markets for the second consecutive quarter.
The world's third biggest retailer, which makes about two thirds of its revenue in Britain, is currently in the midst of a $1.6 billion turnaround plan.