By Nigam Prusty and Nandita Bose
NEW DELHI (Reuters) - India relaxed sourcing and investment rules for the retail sector on Thursday in a renewed attempt to attract foreign supermarket chains such as Wal-Mart Stores and Tesco .
Foreign companies have been keen to enter India's $500 billion retail market since the country allowed foreign investment in its supermarket sector in September 2012 but ambiguity around entry rules has kept them away.
The issue remains politically controversial because of worries that millions of small shopkeepers could go out of business and India has so far not received a single application from any global retailer.
A previously announced rule that foreign chains must source 30 percent of their products locally when they enter had been a major sticking point.
In the new announcement, the government retained the 30 percent sourcing requirement but said it can be met over a period of five years initially and after that it has to be met on an annual basis.
It also said that global chains will only have to invest 50 percent of an "initial" mandatory investment of $100 million in setting up cold storages and warehouses as against the earlier policy, which said half of the entire investment by foreign chains in india had to be in building back-end infrastructure.
"The new rules have removed some major stumbling blocks and should encourage foreign retailers to enter India," said Devangshu Dutta, who heads retail consultancy Third Eyesight.
"Although most retailers are still likely to wait for the outcome of the elections next year before they make a decision."
National elections in India are due by May 2014 and a change in government could result in the controversial retail reform, being reversed and any newly opened supermarkets being shut, according to industry officials.
A Wal-Mart spokeswoman said the company was studying the revisions to the foreign direct investment policy.
"We appreciate the government's willingness to consider our requests for clarity on conditions contained in the new FDI policy," she said in a statement.
The revised policy also allowed global retailers to procure from small businesses that have intial investment in plant and machinery not exceeding $2 million - up from the limit of $1 million set out earlier to ensure modestly-sized Indian companies benefit from the influx of foreign firms.
These businesses can continue to remain suppliers even if they grow and cross the $2 million investment cap at a later stage, an essential requirement for global retailers who want to be sure of maintaining a stable supply chain in the country.
The government allowed Indian states that have decided to support foreign direct investment in retail to make a decision on where they would allow foreign retailers to set up shop. The earlier rule stated foreign chains can only open stores in cities with a population of more than a million.
Several Indian states oppose moves to allow foreign supermarkets and currently only 11 out of 28 Indian states have agreed to let foreign operators in.
(Additional reporting by CK Nayak; Editing by Anthony Barker)