* Cabinet opens up supermarkets to global giants
* Seen helping investment; tie-ups for local players
* Conditions may mean no early rush of investment
* Shares of local retailers gain on tie-up hopes (Adds quotes from retailers, government and analysts)
By Matthias Williams and Abhijit Neogy
NEW DELHI, Nov 25 Global supermarket chains welcomed a long-awaited invitation from India to invest in the country's $450 billion retail market, but they fear the policy's small print may keep a lid on investment in the short term.
The government late on Thursday 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.
Shares in Indian retailers jumped -- bucking the weaker stock market trend -- in anticipation of interest from those big foreign retailers.
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.
But the move also carries risk for 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, which was forced to close until Monday.
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.
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.
"I believe because of this move costs to consumers will come down while producers will get a better price," Trade Minister Anand Sharma said after announcing the provisos.
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, Industry Secretary P.K. Chaudhery told Reuters.
That could, for example, exclude investor-favourite states like Gujarat, which is run by the opposition Hindu nationalist Bharatiya Janata Party that opposes new foreign supermarkets.
Sharma said new investment will create 10 million jobs in the next three years and will 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 corporates.
The head of Walmart'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 Walmart.
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.
If political opposition mounts, foreign firms could find the going tough.
India's biggest listed company, Reliance Industries , was forced to backtrack on plans in 2007 to open Western-style supermarkets in the state of Uttar Pradesh after huge protests from small traders and political parties.
Bijou Kurien, a senior executive at Reliance Retail, said the mood had changed now, and predicted new arrivals would have a smoother ride.
"The regulatory and non-regulatory pressures in India are the way of life," he said. "So any person running a business in India has to be able to figure out how to steer their way through all the obstacles that can be in their path."
He said the back-end and sourcing rules may stop big-box electronics stores from coming into India for now, but said the rules would likely soften in the medium term.
The conditions could also deter smaller international retail chains, said Himanshu Pal, global data manager at consultants Kantar Retail. However he said India should appeal to budget chains.
"The Indian shopper is at the moment starved of a discounted, value product offer. A Lidl or an Aldi could be very successful in India."
Thomas Varghese, CEO of another Indian retailer, Aditya Birla, said the power given to states could be a short-term hurdle, but he predicted most would say yes to supermarkets.
"It most definitely will have an impact and reduce the number of places where foreign retailers can set up shop, but it will still not reduce the interest because 51 cities have a million plus population," he said.
In the past, big-ticket reforms have been held back by the devil in the detail.
In 2008, the government passed the U.S. civilian nuclear deal aimed at opening up India's nuclear power market to foreign players, hailed as the cornerstone of India's warming ties with the United States.
But investments have since languished due to stringent accident liability clauses that U.S. companies say make it too risky to invest. (Additional reporting by Henry Foy and Nandita Bose in Mumbai and Mark Potter in London; Writing by Frank Jack Daniel; Editing by John Chalmers and Ian Geoghegan)
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