Shares of retailers fell sharply on Monday after a key ally of the ruling Congress party voiced fresh opposition to government efforts to open India's $450 billion retail sector to foreign supermarkets like Wal-Mart Stores Inc.
The latest protest came during what is seen as a narrow political window for Prime Minister Manmohan Singh to push reforms seen as key to reviving India's flagging growth.
Shares in companies including India's top retailer, Pantaloon Retail, Shoppers Stop and Tata Group's Trent, which are keen to tie up with foreign companies and gain fresh capital for their cash-strapped businesses, ended down between 2.5 per cent and 8.1 per cent.
The head of the Samajwadi Party, Mulayam Singh Yadav, who recently supported the government in the presidential election, wrote to the prime minister urging him not to proceed with reforming the retail sector and said it would result in job losses, according to media reports.
The Samajwadi Party was seen by markets as key to helping the government push through the policy. While the party does not support the reform, its leader, Mulayam Singh Yadav, told Reuters in June that he would not let the government fall over the issue.
The Samajwadi Party is not formally part of Singh's coalition, but lends it outside support. Efforts to reach party officials for comment on Monday were unsuccessful.
"This is particularly negative because the market was hopeful that the Samajwadi Party will support the government on this decision," said Neeraj Dewan, director, Quantum Securities.
"But a letter like this coming from them is very disappointing. Now it looks very unlikely the government will be able to make any announcement on retail before the monsoon session starts," he said, referring to the next sitting of parliament.
Opposition to supermarket reform is not new.
In December, the government backtracked on its decision to allow foreign supermarket chains to own 51 percent in India's multi-brand retail sector after a huge backlash, including from a powerful regional ally, the Trinamool Congress party.
Singh's ruling Congress party must balance the need to keep parties onside ahead of the next parliament session in August and for state elections later in the year.
The government has also come under intense pressure from investors to revive growth and it remains unclear whether the latest protest to supermarket reform will slow its progress.
"This is quite shocking, but the government does not have a choice to stall FDI (foreign direct investment) reforms at this time," said G. Chokkalingam, executive director and chief investment officer at Centrum Wealth Management.
"India needs foreign inflows for balancing the current account deficit, so bringing in FDI is the only option the government has," he said.
Commerce Minister Anand Sharma, whose department spearheaded retail reform, has written to state governments for support.
Sharma declined to comment when approached by reporters on Monday, saying he had not seen the letter, which was written jointly with other political parties.