In its most significant economic reform in years, the Indian government has moved a step forward to open up retail sector to foreign investors with the key decision making body comprising of top ministers approving foreign investment upto 51 per cent in multi-brand retail and 100 per cent in firms engaged in single brand retail in the country.

The union cabinet approved the proposal in a meeting on Thursday, Food Minister KV Thomas disclosed to news reporters. Further details of riders that will come along with the opening of the sector are expected to be announced on Friday.

The proposal that has been hanging for almost a decade, now faces a far bigger hurdle. While it will face hot debate in the Parliament, the actual implementation would depend on whether the state governments allow it, since retail is a state subject. While the key opposition political party BJP besides the Left parties are likely to oppose the move, already some political allies of the ruling UPA government have started making noises of opposing the reforms. Given that more than half of the states are ruled by regional parties or political parties not alligned to the ruling coalition in the centre, it's going to be a while before we see a national level retail chain with majority foreign ownership.

The main issue is the feeling that opening retail to large foreign investors would kill the mom-and-pop stores that throng the length and breadth of the country. They also happen to be a large vote bank.

The move that is politically sensitive, will allow giants like Wal-Mart, Carrefour, Tesco among others to open multi-brand retail stores in various formats in India. It also marks the first step to allow Amazon, the world's largest online retailer, to commence business in the lucrative Indian ecommerce market that has just started gaining traction.

B Muthuraman, president of India’s largest industry body CII, said in a statement that the introduction of FDI in multi-brand retail would benefit the consumers, producers (farmers) and small and medium enterprises besides generating significant employment.

“This would open up enormous opportunities in India for expansion of organised retail and allow substantial investment in backend infrastructure like cold chains, warehousing, logistics and expansion of contract farming.  India with a 8 – 9 per cent growth in GDP is a consumer driven economy and modern retail has to step up to be able to meet up consumer aspiration not only in metro cities and towns but across the Indian sub-continent,” he added.

The stock market had already sensed the move much before the announcement came from the government. The 30-stock benchmark index Sensex bounced back after hitting a 2-year low in the last hour of trade to rise over 1 per cent on Thursday. Analysts attributed the positive undercurrent to expectations of big-bang reforms after the government was repeatedly accused of policy paralysis. Incidentally the cabinet also cleared the new companies bill that shall lay out norms for regulation for the corporate sector.

One of the sectors that saw clear impact of these expectations was retail. India’s largest public listed retail firm Pantaloon (that operates hypermarkets under the brand Big Bazaar and electronics retail chain under ezone among other retail formats) saw its share price shoot over 12 per cent to its highest level in months. Incidentally, India’s second largest (by assets under management) home-grown private equity firm ICICI Ventures was one of the early investors in Pantaloon Retail.

Macquarie Bank was among the major buyers acquiring around 3 per cent (to add to its existing 3 per cent holding) of the firm on Thursday, making it the largest institutional shareholder of the company.

The investors exuberance also had a rub-off effect on firms such as Vishal Retail, even as the firm is no longer involved with retail, as buyout giant TPG and South India-based Shriram Group acquired the wholesale and franchise undertaking and the retail business, respectively, of the ailing Delhi-based company early this year. Vishal Retail scrip rose over 10 per cent. Shares of oil & gas behemoth Reliance Industries, that owns Reliance Retail one of the other large players in the organised sector, however, ended the day almost unchanged.

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