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The decision came after a meeting of ruling coalition and opposition political parties in New Delhi, an attempt by the government to douse political fires over one of Prime Minister Manmohan Singh's boldest reforms in years.
"The decision is suspended till the consensus is developed through consultation among various stakeholders," the finance ministry said in a statement, giving no timeframe for the reform to be back on track.
Aimed at taming high inflation and beefing up supply chains, the attempted reform has created a huge backlash from opposition parties and domestic traders, and has been put on hold while the ruling Congress party tries to forge a consensus.
The decision to press the pause button on the policy just two weeks after the cabinet passed it has fed an impression of policy paralysis within the government, which is accused of ducking difficult decisions at a time of slowing economic growth.
The move will mean the opposition will now stop disrupting parliament after two weeks of protests, allowing the government to pass key reform bills such as one on food subsidies for the poor.
News the policy was being pushed back emerged at the weekend when Mamata Banerjee, the firebrand leader of Congress party's biggest ally and an opponent of the reform, said the government had told her the plans would be put on hold until a consensus was reached.
Business leaders have rounded on the government for flip-flopping.
In an open letter earlier this week to "the saner sections of Corporate India", former Hindustan Unilever chairman Ashok Ganguly and Deepak Parekh, chairman of Housing Development Finance Corp, said opposing the reform was "to the detriment of the vast majority".
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