* Aimed at attracting foreign investment and unclog supply
* Also seen as way to tackle high inflation
* Move opposed by domestic retailers
* Likely to be welcomed by growing middle class
By Matthias Williams and Manoj Kumar
NEW DELHI, Nov 23 (Reuters) - India could decide this week to throw open its supermarket sector to foreign firms such as Wal-Mart Stores Inc, clearing one of the most hotly anticipated economic reforms of Prime Minister Manmohan Singh's tenure.
Policymakers have for years talked about opening India's so-called multi-brand retail sector to foreign direct investors, a policy aimed at attracting foreign capital, unclogging supply bottlenecks and helping tackle stubbornly high inflation.
But the move has snagged on protests by opposition parties and many domestic retailers, who say an influx of foreign players will drive down prices and cause huge job losses. Some voices within the ruling Congress party have opposed the reform.
India, with its growing $1.6 trillion economy, is seen as one of the last frontiers for a massive and modern supermarket sector aimed at hundreds of millions of middle class consumers who still shop in neighbourhood mom-and-pop stores.
The federal cabinet will discuss opening the sector to a foreign investment cap of 51 percent on Thursday, although it may not take a final decision.
"The policy on FDI in retail is on the cabinet agenda," Neelam Kapur, spokeswoman for the Indian government, told Reuters on Wednesday.
India currently allows 51 percent foreign investment in single-brand retailers and 100 percent for wholesale operations, a policy that the world's top retailer Wal-Mart and Carrefour among others have lobbied to free up further.
A group of senior civil servants approved the proposal to open the multi-brand sector to foreign players in July, although it recommended strict local sourcing requirements and minimum investment levels.
Singh's government, already reeling from corruption scandals and anger over high prices, could face huge resistance if the policy is implemented, possibly denting its prospects in major state elections next year.
Even India's own biggest listed company, Reliance Industries, was forced to backtrack on plans in 2007 to open Western-style supermarkets in Uttar Pradesh, the country's most populous state, after huge protests from small traders and political parties.
The main opposition Bharatiya Janata Party has vowed to oppose opening the sector, and domestic traders have taken to the streets this week amid talk the reform could be imminent. Small shop owners account for more than 90 percent of India's $450 billion retail sector.
Even some lawmakers within the ruling Congress party, which won back-to-back elections touting its pro-poor, centre-left credentials, have resisted the change.
Sonia Gandhi, Congress party head and India's most powerful politician who has run the government from behind the scenes since her 2004 election victory, has publicly voiced concerns about the impact on small traders.
"The Congress party will officially support the government decision on multi-brand retail," a senior Congress leader, who declined to be named, told Reuters. "Though there are some apprehensions on its impact on the traders," the source added.
One big concern would be on the state election next year in Uttar Pradesh being fought by family scion Rahul Gandhi and seen as a key test for Congress where a good performance would provide a platform for the 2014 general election.
Some analysts were sceptical that the government - which has a track record of backtracking on reforms - would make such a bold reform so close to these elections.
"It will be an act of great courage by Manmohan Singh to push it through," said political analyst Amulya Ganguli. "I don't think Congress has the guts to go through with it."
Wholesale inflation in India has remained stubbornly high for more than a year and is now close to 10 percent despite 13 interest rate rises by the Reserve Bank of India (RBI) since March last year.
As much as 40 percent of India's fruit and vegetable production is wasted because of poor networks and a lack of cold storage facilities, with much product still sold on flat-bottomed carts by smallholders even in the centre of cities.