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NEW DELHI—Global retail giants who have been reluctant to dive into the Indian market due to restrictions on how they supply their stores are ready to ramp up their presence in the South Asian nation through outlets that sell only locally-sourced food, said the country's food-processing minister.

Wal-Mart Stores Inc., Tesco PLC and others think food-only retail outlets will have a better chance of being able to fulfill requirements that they fill their shelves with locally made products.

The companies see the huge potential of the world's second most populous country. They have dabbled in selling products wholesale and are ready to enter the retail market through outlets that sell just local fresh produce and processed food, said Food Processing Minister Harsimrat Kaur Badal.

"Retailers want to come to India as our markets and opportunities are too good," she said in an interview.

In 2012, Wal-Mart shelved plans to build consumer-facing retail stores, saying the rules to do so were too tough. It now runs 21 wholesale stores in India that don't directly sell to consumers. Tesco has been working on opening multibrand retail stores which sells food and nonfood products with an Indian partner.

A spokesman for Wal-Mart in India said the retailer was currently "evaluating" the government's food-processing policy. In February, when India first announced it would loosen rules in the food-processing sector to attract more foreign investment, Krish Iyer, president for Wal-Mart in India, called it a "very progressive" step.

Trent Hypermarket Pvt. Ltd., a joint venture between Tesco and India's Trent Ltd., didn't immediately respond to request for comment.

Ms. Kaur recently met with retailer and food processor executives in the U.K., including those from Tesco, J. Sainsbury PLC and Marks and Spencer PLC. Many said they were exploring tie-ups with Indian companies to allow them to navigate complex local regulations to open stores and set up food-processing facilities, she said.

With millions of tiny mom-and-pop shops lobbying for protection from global brands, India has been reluctant to open much of its retail market to foreign firms. Such companies were blocked from owning retail outlets that sell more than one brand but they were allowed wholesale outlets and stores that sell only one brand, like IKEA for example. New Delhi eventually opened the retail market to some foreign ownership of multibrand retail outlets as well but set a tough requirement that foreign-owned multibrand retail outlets get at least 30% of their products from small and medium sized companies in India.

The latest incremental opening of the sector was implemented in June, permitting foreign companies to have 100% stakes in food retailing ventures in India, with the caveat that goods should be either grown or processed domestically. Foreign retailers can't sell imported food products or any other merchandise in such stores.

Ms. Badal is hoping this new opening will convince international firms to invest in India's overburdened and outdated food processing and logistics networks. If the food retailers and processors did more in India they would also start exporting more from India, she said.

Global retailers want the government to review its local-sourcing policy and permit at least some limited sales of nonfood items such as household goods in these new stores, Ms. Badal said.

She said she would be "taking up the matter with the Prime Minister and the Commerce Ministry very soon."

Preetika Rana contributed to this article.

Write to Rajesh Roy at rajesh.roy@wsj.com

(END) Dow Jones Newswires

September 21, 2016 08:35 ET (12:35 GMT)

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