Wal-Mart’s hopes of entering India’s $180 billion retail market were given a significant boost on Monday as prime minister Manmohan Singh said the country would soon allow foreign direct investment in an industry still dominated by small family-owned businesses.

“There are many fears, particularly among small traders and small shopkeepers, but I believe we can soon move forward,” Singh told the Financial Times after an informal meeting with foreign journalists in New Delhi. Pressed as to when the government might act, the prime minister said: “Hopefully this year.”

Singh’s comments came days after he met John Menzer, president and chief executive of Wal-Mart’s international arm, who was in New Delhi to discuss the US group’s ambitions to enter the biggest emerging economy still closed to foreign direct investment in both food and non-food retailing.

“Wal-Mart will happen,” a senior government official said on Monday, adding that the cabinet might lift the foreign direct investment ban before Singh flies to the US for a meeting with President George W Bush in July. “I wouldn’t be surprised if this happens before he goes,” he told the FT.

Multinational retailers such as Wal-Mart and French rival Carrefour, both already active in China, believe they can expand the Indian market with their investment and retailing expertise.

Small owner-occupied shops dominate India’s retail sector. Large retailers control just 2-3 per cent of the market, although this share is growing by 25 per cent a year.

The cultural impact of opening the market to foreign investment will be significant in cities such as New Delhi, which has a population of 14 million-15 million and a fast-growing middle class, but does not yet boast a single significant supermarket chain.

Most food is sold through corner shops, street markets and door-to-door hawkers on bicycles.

India has been contemplating liberalising its retail sector for a number of years, but the process has been bogged down by political concerns.

Small traders represent an important constituency for the Hindu nationalist Bharatiya Janata party, now in opposition.

Indian retailers have also claimed that FDI will allow global groups to swamp India with imported merchandise. Wal-Mart says its sourcing from India has been rising at least 30 per cent a year since 2003, making it the fastest-growing procurement market for the company.

In recent weeks Kamal Nath, the commerce and industry minister, has been talking up reform, which may include allowing foreign investors to take stakes of between 24 per cent and 49 per cent in Indian retail ventures.

Wal-Mart and other retailers have made clear they want a high percentage of foreign ownership.