MUMBAI (Reuters) - India's government will put a plan to open up its retail industry to foreign supermarkets on hold until it reaches consensus within the coalition, risking a possible dilution of the policy rather than a change of heart.
The decision to allow global giants such as Wal-Mart (WMT.N) into India's $450 billion (288 billion pounds) retail market, the first major economic reform since Prime Minister Manmohan Singh's graft-riddled term began in 2009, has been met with fierce opposition from some parties who say it will destroy the livelihood of millions of small traders.
Mamata Banerjee, who is against the policy and whose Trinamool Congress brings 19 votes to the ruling Congress party-led coalition, said that Finance Minister Pranab Mukherjee had told her that the policy would be put on hold.
Banerjee has previously pledged not to use the issue to bring down the government, and refrained from saying that consensus was impossible.
"(Mukherjee) has told me that the centre has decided to suspend implementation of the decision to allow FDI in retail," Banerjee, chief minister of West Bengal, told reporters in Kolkata in a press conference broadcast on local television.
"He has told me that the decision will not be implemented unless there is consensus on the issue," said Banerjee, who has announced her opposition to the policy.
It was not immediately clear what the postponement would entail or whether negotiations were continuing on Saturday. A Congress spokesperson was not reachable for comment.
In India's multi-party democracy, major parties are often forced to rely on fickle coalition allies, who often use the importance of their votes in New Delhi to negotiate concessions or support for the regions or states they represent.
Possible dilution of the policy could include lowering the 51 percent foreign investment permitted under the current rules, or increasing the percentage of products to be sourced locally, or the amount firms must spend on developing infrastructure.
With a thin parliamentary majority, the government is dependent on allies but does not face any immediate threat of losing power. Trinamool's votes would be required to bring the policy into law.
Any retreat on the policy would be seen damaging India's image with foreign investors as Asia's third-largest economy shows signs of slowing, and would add to a basket of key economic reforms that have been shelved by Singh's government.
A senior leader of the main opposition Bharatiya Janata Party (BJP) said the government was fooling the country about the benefits of foreign supermarkets,
"Wal-Mart may be fine for (the West) but Wal-Mart does not serve us," L.K. Advani, a former president of the BJP and leader of the opposition from 2004 to 2009, told a summit in New Delhi.
"We should not be envious of Wal-Mart," Advani said.
Allowing foreign direct investment (FDI) into the retail industry is one of a basket of reforms, seen as key to sustaining India's continued growth, that have been postponed over the past 18 months as the government reeled from scandal to scandal.
The controversy has drawn on some deep-seated nationalism in the right-wing BJP, which appeared to support the policy in 2004 but has now jumped to the support of millions of small shopkeepers that they see as a key vote base.
The BJP has led protests in parliament that have paralysed both chambers every day since the 21-day winter session opened last week.
Its opposition to the policy stands in stark contrast to its free-market stance and is the latest move by an increasingly populist opposition that has sought to portray Congress as out of touch with common Indians as elections loom in 2014.
"To give an impression that FDI in retail will solve all problems like inflation, price rises, unemployment... whosoever is saying this is fooling people that FDI will get millions of jobs," Advani said. "It cannot happen."
Singh this week rejected calls to roll back the policy amid media reports that some of his coalition partners were thinking of adding their voice to the opposition.
"Local retailers have been content thinking small and doing little. It's time to change that mindset by opening up to FDI in retail," the Economic Times said in an editorial on Saturday.
The reform, as it stands, would allow global chains like Wal-Mart, Tesco Plc (TSCO.L) and Carrefour (CARR.PA) to own up to 51 percent of retail ventures and allow foreign firms to fully own single-brand retail operations.
Congress ministers have strongly defended the decision, saying that it will create millions of jobs, improve creaking supply-chain infrastructure and bring down stubbornly high inflation which is crimping economic growth.
The controversy comes as the party fights to fend off accusations of corruption and a failure to tackle high prices before state elections due next year.
Additional reporting by Frank Jack Daniel in NEW DELHI; Editing by Nick Macfie