Foreign supermarket giants faced being shut out of the Indian capital Tuesday after Delhi's new state government said it would not grant them a licence to operate, reversing the previous administration's policy.
Amit Yadav, Delhi municipality's industry commissioner told AFP he had written to the federal government to say that foreign "multi-brand retailers" would not be allowed to open stores in the city, despite the national Congress-led government supporting their entry.
Foreign retailers, which only sell their own branded products, such as Britain's Marks & Spencer, have long been able to operate in India.
Reforms unveiled by Prime Minister Manmohan Singh in late 2012 were aimed at paving the way for the first foreign supermarkets to operate, provided 30 percent of their produce is sourced locally.
Delhi had been expected to be one of the first places to welcome the likes of Tesco and Walmart under the reforms.
But Singh's Congress party was trounced in state elections in Delhi last month, losing power to a new anti-corruption party with a much cooler attitude towards foreign direct investment (FDI).
"It was a part of their manifesto to drop the FDI in multibrand retail policy and accordingly, a letter has been sent to the government of India asking to withdraw it," said Yadav.
"FDI in multibrand retail is a policy that lies with the consent of individual state establishments. Its implementation is strictly a state subject."
Aam Aadmi, a fledgling anti-corruption party, made opposition to the FDI changes one of its pledges in the Delhi election which had been ruled by Congress for the last 15 years.
Singh's FDI reforms, which allow Western supermarkets to hold a majority stake in local chains for the first time, have been seen as a chance to revive India's ailing economy.
But small family-run stores fear that they could be priced out of business by the major retailers while there has also been widespread opposition from labour activists.
Indian commerce minister Anand Sharma reacted sharply Tuesday calling Aam Aadmi's decision "baffling", saying it was "devoid of any merit or logic" especially when farmers backed the policy.
"India is a responsible and mature democracy. We are not a banana republic. What message are we sending?", Sharma said in an interview to news channel NDTV.
India's main business lobby also criticised the move, saying it would hit investor confidence at a time when the economy is growing at its slowest rate for a decade.
"This direct negation without demonstrating a search for a viable alternative would hamper investment sentiment," said Sidharth Birla, president of the Federation of Indian Chambers of Commerce and Industry.
"It has been proven time and again that both large multi-brand retail stores and small kirana stores coexist peacefully," Birla told the Press Trust of India news agency.
Singh's FDI reforms, which also opened up the airline and insurance industries, had been meant to draw in more foreign investors into Asia's third largest economy.
Last month the foreign investment regulator cleared plans by British retail giant Tesco and Vodafone, the world's largest mobile phone operator, to invest over $1.5 billion in India.
But such deals have been undermined by persistent worries over issues such as corruption, red tape and tax battles.
Walmart and Indian firm Bharti announced last October that they were ending their retail partnership, with the US giant saying India's foreign investment rules were partly to blame for the split.