India's government has suspended its plans to throw open its huge retail sector to foreign companies such as Wal-Mart in a decision seen as a major capitulation to political opponents that further weakens the administration.

The initial decision last month to allow foreign companies to own 51 per cent of supermarkets in major cities and 100 per cent of single-brand stores was hailed by the business community as a long overdue reform. The government said foreign retailers would bring better prices for farmers and lower prices for consumers by cutting out middlemen and upgrading the country's infrastructure.

The world's largest retailer faces suspension of its plan to move into one of the world's biggest potential retail markets after India's government bowed to protectionist pressures. Amy Sancetta/Associated PressBut opposition parties and even some members of the governing coalition protested against the deal, saying it would crush local mom-and-pop stores that are the heart of Indian retailing. Opposition lawmakers disrupted Parliament for days in protest.

On Wednesday, the government held a meeting with all the parties in Parliament to hammer out a deal: It would put the decision on hold if they would let the legislature function.

Afterward, Finance Minister Pranab Mukherjee told Parliament that foreign retail was "suspended until a consensus is developed through consultations with various stakeholders."

It was not clear how long that process would take or whether the policy would be implemented or canceled after it was over.

Opponents claim victory

Sushma Swaraj, an opposition parliamentarian, welcomed the government's move.

"To bow before the people's feeling does not weaken the government, but strengthen the democracy," she told Parliament.

But other opponents claimed victory.

"It is a virtual rollback," said Gurudas Dasgupta, a Communist Party lawmaker.

"This is a signal that this government can't do anything with force," said Ashok Gulati, chairman of the Commission for Agricultural Costs and Prices in the Ministry of Agriculture. "It's the nation that loses."

Future Group Chief Executive Kishore Biyani, who has been likened in India to Wal-Mart founder Sam Walton, was optimistic the plan could still be implemented.

"We will have to work hard in convincing people it is good for driving economic growth. The consumer has to come forward and say it's good for us. Farmers will have to come forward and say it's good for us. I think that consensus will be built," he said.

The government's initial decision to allow in foreign investment was seen as a forceful move meant to prove it was still capable of making bold decisions, despite a series of corruption scandals, soaring inflation and repeated anti-government protests. The move also sent a signal to business leaders that India was serious about economic reforms and welcomed foreign investment.

'Easily cowed'

Its rapid backtracking has only served to further weaken the government.

"The perception that the (coalition) can be easily cowed has been strengthened, that it does not have the guts to stand by its convictions or the political artfulness to sell what is essentially a decision that potentially improves the material well-being of many, many Indians," the Indian Express newspaper wrote in an editorial on the issue.

The FDI suspension also provided yet another example of the policy paralysis and inconsistency that has made investors leery of India.

Foreign direct investment slipped from $38 billion US to $23 billion last fiscal year.

India's economy is showing other signs of distress as well, with growth slipping below 7 per cent for the first time in more than two years, a widening fiscal deficit, a plunging currency and skyrocketing prices, which 13 consecutive rate hikes have not tamed.

Economists say India urgently needs to push through difficult, but crucial, policy reforms that the government might not have the political strength to implement — not just in FDI but also in land acquisition and environmental clearances.