The cabinet may decide by next week to allow supermarket chains such as the world's largest retailer Wal-Mart Stores Inc to operate in the country with a majority stake under strict local sourcing rules, a senior government source told Reuters.

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Will India open doors to Supermarket Chain?

A draft cabinet note suggesting so-called multi-brand retail foreign firms could hold up to 51 percent ownership has already been reviewed, a senior government source said on Friday. We have already sent it to the cabinet for their approval, the source said, adding that a decision could come next week.

Inadequate road, rail and storage facilities mean significant logistical hurdles and extra expense in moving farm and factory goods to consumers, driving up prices nationwide.

Wholesale inflation in India has remained stubbornly high for more than a year and is now close to 10 percent despite 13 interest rate rises by the Reserve Bank of India (RBI) since March last year. Small shop owners that account for more than 90 percent of India's $450 billion retail sector oppose the entry of foreign players, fearing that they will be put out of business.

India currently allows 51 percent foreign investment in single-brand retailers and 100 percent for wholesale operations, a policy that Wal-Mart and Carrefour among others have lobbied to change for years.

Another government source said the finance ministry had thrown its weight behind a second proposal to raise the cap on single-brand retail to 100 percent from 51 percent. The cabinet note also stipulated businesses would have to source at least 30 percent of manufactured and processed goods from local small industries, the Business Standard newspaper reported on Saturday.

It also said the minimum amount a foreign retailer would have to invest was $100 million, at least half of which would go to back-end logistics and storage infrastructure. Those conditions are in line with those first agreed by a group of senior civil servants in July.

An executive of UK retail giant Tesco Plc told Reuters on Monday the company plans to build on its existing tie-up with Tata Group to expand if foreign operators are allowed to invest in multi-brand retail.