one of a series of moves the ruling Congress party hopes will help spur India's economy out of a deep slump ahead of a general election due by May in which it is expected to struggle to hold off the challenge of the opposition BJP.
Railway ministry officials expect interest from Chinese firms such as CSR Corp Ltd, Germany's Siemens, as well as Japanese manufacturers that already work in India as contractors and suppliers to the railways.
The proposal was greeted enthusiastically by Canada's Bombardier, which in 2008 set up a 33 million euros ($44.88 million) factory in Gujarat state to build trains for Delhi Metro and plans exports to other Asian markets.
"Bombardier is bullish about the demand and the future prospects of Indian rail transportation industry," said Harsh Dhingra, chief country representative, Bombardier Transportation.
"Multinational companies from North America, Europe, the U.S. and Japan have shown a long-term commitment to set up a base and invest in India to cater to the future demand in the sector."
India's rail wagon manufacturers were also enthused by the plans and expect to set up joint ventures with foreign players.
"Obviously we will be interested in a joint venture. We are positioning ourselves for that. We expect it will bring very good business opportunity for us as well as for the country," said Sandeep Fuller, the CEO of Texmaco Rail & Engineering Ltd, a Kolkata-based wagon manufacturer.
India has opened industries including retail, civil aviation, pharmaceuticals, telecommunications and defence to foreign investors in recent years, with the goal of improving the nation's finances and driving economic growth.
The liberalisation has had mixed results, with supermarkets especially complaining that red tape, politics and corruption make it difficult to do business in India.
FDI inflows during the April-October period were down 15 percent from a year earlier at $12.6 billion, despite the opening of new sectors.
The involvement of foreign firms in the main rail network is currently restricted to exporting rolling stock, signalling systems and engines to Indian Railways, a state-run behemoth that employs around 1.4 million people.
Trade unions and many political parties oppose allowing foreign investment in railways, and Chinese participation in particular could raise suspicion in security circles. India, which fought a brief war with China in 1962, is cautious about its growing role in the Indian economy.
In the past, the government of Prime Minister Manmohan Singh has backed off liberalisation policies in the face of public and political