The government also agreed to sell minority stakes in its oil, copper and aluminum companies as well as its Metals and Minerals Trading Corporation.
The main opposition Bharatiya Janata Party criticized the surprise decisions.
"We consider it as a betrayal of the country, betrayal of the Parliament by this government," said Balbir Punj, of the BJP.
The government's decision on airline investment would allow foreign airlines to own up to 49 percent of an Indian airline. India's airline industry has expanded enormously in recent years, but only one airline has been able to turn a consistent profit. The government-owned Air India and the private Kingfisher have both suffered from labor strife and financial problems.
Aviation Minister Ajit Singh said the decision "sends a very clear message to a sector that has been under stress."
But it was not clear if any foreign airlines would be interested in buying a minority interest in some of India's most struggling airlines.
The government also made a key change to its decision earlier this year to allow foreign retailers selling only a single brand to own 100 percent of their stores, a decision largely seen as aimed at bringing furniture retailer IKEA to India.
The previous decision forced the company to source 30 percent of their products from small cottage industries. Now, it can source that 30 percent from any Indian industry.
Follow Ravi Nessman on Twitter at www.twitter.com/ravinessman
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