After deregulating petrol prices and cutting subsidies on other fuels, including kerosene, the UPA government on Tuesday seemed to take the bull by the horns, pushing the politically sensitive proposal to allow unrestricted foreign direct investment (FDI) in the retail sector.

?Keeping in view the large requirement of funds for back-end infrastructure, there is a case for opening up of the retail sector to foreign investment,? the industry ministry said in a discussion paper released on Tuesday. The ministry set an early deadline of July 31 for all stakeholders to comment on its views, signalling the government’s plan for immediate policy action.

The government move drove up the stocks of retail companies by as much as 5% on a day when the benchmark 30-share BSE Sensex rose 0.99%. Pantaloon Retail closed 4.84% higher, while Provogue closed up 3.98%. Other retail stocks like Shoppers Stop (2.02%) and Trent (3.19%) too moved up.

Official sources told FE that FDI in retail could be allowed in three phases. The industry ministry has already resumed discussions on allowing FDI in consumer electronics and sports goods retail and this would constitute the first phase. In the second phase, FDI in single-brand retail may be hiked from 51% to 100%.

After assessing the impact of the first two phases, the government would take a call on allowing FDI in the sensitive area of multi-brand retailing.

Calling FDI in retail an efficient measure to address the concerns of farmers and consumers, the ministry said in the paper that it would not only help farmers earn more but also keep the price-line under check.

At present, FDI in multi-brand retail is prohibited in India. In multi-brand retail, a retailer can sell different brands under the same roof. However, the government allows 51% FDI in single brand retailing and 100% in wholesale trade. This has led to global giants like Metro of Germany taking the ?cash & carry? route to establish business in India. In the cash & carry route, retailers are allowed to sell multi-brand goods to institutional buyers like hotels, restaurants, caterers and traders. Since the opening of single brand retail to FDI in April 2006, the sector has seen FDI of around Rs 900 crore.

?The government would always take local vendors, kirana stores and traders into confidence before moving ahead on the retail FDI policy. We would try and overcome resistance from factions opposing the move. We would do it gradually,? a commerce and industry ministry official told FE, on condition of not being named.

The paper also sought to make a strong case in favour of small retailers in the unorganised sector, saying their growth was constant at around 15% annually compared to the decline in profits recorded by organised retailers. ?It is therefore clear that organised retail cannot have a cake-walk and will face a growing challenge from the unorganised sector,? it said, allaying fears of threat to the livelihood of the kirana shop owner from corporate giants and multinational corporations.

The ministry’s paper however acknowledged that there was a need for enough safeguards for domestic traders as also employment opportunities for them.

?This is positive well-thought document. The government has set a reasonable deadline for getting responses from various stakeholders. It shows that there is a clear intention for opening up the sector for foreign investment. The opposition that we saw two years ago and may be even earlier has come down to a large extent because I think it?s finally dawned on the consumers that modern retail actually brings great value to them and of course brings great value in terms of employment potential,? said Arvind Singhal, chairman of retail consultancy Technopak Advisors.