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The government on Tuesday took a tentative step towards opening up the organised retail sector to foreign companies but steered clear of suggesting a specific investment cap.

A discussion paper, issued by the commerce and industry ministry, will test the appetite in Asia's third-largest economy for a politically sensitive reform closely watched by retail giants such as Wal-Mart Stores and Carrefour.

India's retail sector is largely closed, with 51 percent foreign direct investment allowed only in single-brand retail and multi-brand retail restricted to cash-and-carry outlets.

The reform is seen as a way to ease massive supply bottlenecks that have helped keep inflation stubbornly high.

Proposals to open up multi-brand retail stalled during Prime Minister Manmohan Singh's first five-year term amid vocal protests from his former leftist allies and fears over the future of small family-run outlets.

But Singh's ruling Congress party has lately signalled its resolve to push bold reforms, deciding to free up fuel prices despite fears of a voter backlash. The discussion paper could pave the way for another major policy shift.

"Watch this space," a ministry source told Reuters in the run-up to the paper's release. "Something is definitely happening in multi-brand retail that was not happening even a year ago."

Tuesday's paper is the second to test attitudes to lifting investment caps in sectors eagerly watched by investors. The first suggested almost tripling the foreign direct investment cap on defence equipment to 74 percent.

The latest paper will explore issues such as whether to stipulate minimum local sourcing requirements for retailers or a minimum of 50 percent of all foreign investment being spent on back end infrastructure.

"Keeping in view the large requirement of funds for back-end infrastructure, there is a case for opening up of the retail sector to foreign investment," it said.

Global operators such as Wal-Mart and Carrefour have long coveted India's fast-growing $450-billion retail sector, which is dominated by mom-and-pop shops.

"Some movement on retail is better than no movement," said Rajiv Kumar, head of the New Delhi-based think-tank ICRIER.

"Finally it's dawning on the government that food price inflation can be tackled. One way to tackle food price inflation would be to modernise the post-harvest logistics and supply chain, and retail can contribute to that."

But recent evidence suggests there is a long way to go before the paper shapes government policy.

The defence minister tempered expectations of lifting investment caps in the sector immediately after the first discussion paper was released. A separate proposal to introduce the first GM food into India was put into cold storage after an outcry from environmentalists and some farmers.

Wal-Mart is already present in India through cash-and-carry stores supplying in bulk to fuel Indian giant Bharti's retail stores, but it wants to enter India's retail market.

"This would be a good reform measure to have completed before President Obama's visit (to India) in November," ICRIER's Kumar said.

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