New Delhi: Prime Minister Manmohan Singh’s decision to backtrack on plans to let overseas retailers expand in India may undermine efforts to revive growth and curb inflation, while deepening a year-long paralysis in government.

The 79-year-old Singh, credited with sparking India’s economic transformation when he was finance minister two decades ago, on Wednesday bowed to opposition protests that had forced repeated adjournments of Parliament since the 24 November move to allow foreign investment in multibrand retail. Finance minister Pranab Mukherjee told lawmakers the decision was suspended until a consensus could be reached.

The reversal indefinitely puts off an influx of foreign investment from companies including Wal-Mart Stores Inc. and Tesco Plc that are bidding to enter the $396 billion market, at a time when the rupee is already trading near a record low. It also adds to a list of unfinished economic initiatives that includes a proposed tax overhaul and changes to how land is acquired for infrastructure projects.

India’s $1.7 trillion economy expanded last quarter at the slowest pace in nearly two years after the central bank raised interest rates to slow inflation. The rupee has fallen nearly 14% this year as investors sold emerging market assets on concern Europe’s debt crisis will lead to a global recession.

In an attempt to kick-start the economy, Singh had approved allowing overseas companies including Carrefour SA to own as much as 51% of retailers selling more than one brand, as long as they sourced 30% of products from local suppliers. International retailers are currently restricted to wholesale operations.

Singh argued that opening the retail sector to foreign investors would tame inflation and reduce food wastage in a country where 40% of vegetables rot before they can be sold. Foreign companies would bring expertise in growing crops and developing a supply chain to keep food fresh, he said at a rally of his ruling Congress party in New Delhi last month.

The government immediately ran into resistance from its two largest coalition partners, the Trinamool Congress and the Dravida Munnetra Kazhagam, as well as from opposition parties. Small shopkeepers, who said the plan would wipe out their jobs, joined a one-day strike on 1 December to protest the move.

“For anyone hoping that this government would do something, it’s effectively another nail in the coffin," said Robert Prior-Wandesforde, Singapore-based head of India and South-East Asia economics at Credit Suisse Group AG. “They will be even more cautious in taking reforms forward than they were before."

The government has just 10 days left of a crucial session during which it’s seeking to sign into law proposals to set up an anti-graft agency with power to punish civil servants. Transparency activists say they will renew protests that roiled the government in August if the Bill isn’t passed this year.

The government has failed to push through any major pieces of legislation since the middle of last year after being embroiled in corruption charges, including allegations against a former minister, bureaucrats and businessmen over the 2008 sale of mobile phone licences. Opposition lawmakers’ protests against the government’s failure to check graft had disrupted the previous three sessions of Parliament.

While Singh may have bought breathing space for his administration, both have been badly damaged, said Surjit Singh Bhalla, chairman of New Delhi-based Oxus Fund Management.

“This is political suicide on the part of the Congress government," Bhalla said in a phone interview. “The only conclusion one can draw is that this government has lost any moral authority to lead. It is completely inexplicable."

Shares of Indian retailers that could have tied up with foreign companies fell in Mumbai trading on Thursday. Shoppers Stop Ltd dropped 4.4% to 345.25 and Trent Ltd fell 1.66% to 942.35. The benchmark BSE’s Sensex fell 2.3% to 16,488.24 points.

The government’s decision was “deeply disappointing" and “highly regressive", Harsh Mariwala, president of the Federation of Indian Chambers of Commerce and Industry, said in a statement.

The rupee touched a record low of 52.73 to the dollar on 22 November as overseas funds turned net sellers of stocks amid slowing growth, rising interest rates and the failure of policy makers to rein in prices. Benchmark inflation has stayed above 9% all year.

“We currently have a run on the rupee because we have a total loss of confidence in the government’s capacity to govern," said Prem Shankar Jha, an independent political analyst and former aide to former prime minister V.P. Singh. “The failure to push through FDI (foreign direct investment) in retail is symbolic of the government’s lack of ability" to win arguments.

Reliance Industries Ltd chairman Mukesh Ambani, India’s richest man, last month urged the government to prioritize laws to bolster the economy.

Major economic changes in the remaining two years of Singh’s second term are unlikely, said Jay Shankar, chief economist at Religare Capital Markets Ltd in Mumbai. That may rule out opening the pension, insurance and aviation sectors to foreign investment, he said.

“The government is now facing more challenges from its coalition partners to carrying out reforms than it is from opposition parties," Shankar said in an interview.

After leading the Congress to its biggest victory in two decades at elections in 2009, Singh has disappointed the businesspeople and analysts who expected him to build on his 1990s’ dismantling of India’s state-dominated economy. Instead, his government has continued a focus on direct support for the nation’s poor, in a country where more than three-quarters of the people live on less than $2 a day.

Singh enacted a jobs plan in 2006 that gives 100 days’ work to any rural household that requests it, and this year indexed the pay rates to the pace of inflation. Welfare systems, which include a food security Bill that will provide cheap grain to nearly three-quarters of India’s 1.2 billion people, have been promoted by Congress party general secretary Rahul Gandhi.

He probably will lead the ruling party into the 2014 elections, according to Eurasia Group, after taking over as party president from his mother, Sonia Gandhi. She was treated overseas in August for a medical condition neither the family nor the party will discuss.

Faced with at least five regional elections next year, including one in Uttar Pradesh, India’s most populous state, the government may refrain from taking controversial decisions, said Religare’s Shankar.

After those regional ballots, “we will be heading into the general election and the closer we get to that, the less likely you are likely to bring out reforms", Shankar said.