Singh’s Biggest Ally to Quit Coalition Over Foreign Retail

Indian Prime Minister Manmohan Singh’s largest ally said it was quitting the ruling coalition over a decision to allow the entry of foreign retailers and raise diesel prices, an exit that would leave the government at the whim of regional parties as it seeks to revive the economy.

Losing the backing of Trinamool Congress would put the government about 24 seats short of a majority in the lower house of Parliament at a time when it is bidding to sustain a burst of policy making and stem a slump in popularity. It’s unlikely to pose an instant risk to the longevity of Singh’s Congress party- led administration, which has in the past won expressions of support from other groups in the legislature.

In what could signal she’s leaving a window for negotiations and face-saving compromise, Trinamool ministers will only be pulled from the federal cabinet on Sept. 21, party leader and West Bengal Chief Minister Mamata Banerjee said late yesterday. Congress spokesman Janardan Dwivedi said the government would discuss issues raised by Banerjee.

“The government has become weaker in numbers, but not in spirit,” said Sanjay Kumar, a New Delhi-based analyst at the Centre for the Study of Developing Societies, who saw “no immediate threat” to the government if it’s pushed to prove its strength in a parliamentary vote. “It won’t backtrack from the path of reforms it initiated though there may be a temporary delay in pursuing further changes,” he said.

‘Disaster’

Divisions within Singh’s ruling bloc have repeatedly hampered government efforts to push through policy changes including the easing of investment rules for pension and insurance companies, a gridlock which has spurred a slowdown in investment and expansion in Asia’s third-largest economy. The retail proposals stalled in December amid opposition from Banerjee’s Trinamool.

Accepting the arrival of overseas supermarket chains in India would prove a “disaster” for India’s farmers and small shopkeepers, Banerjee said at a press conference in Kolkata after a three-hour meeting of her party. “If you allow FDI in retail, where will these poor people go?” she said.

Singh could turn to the Samajwadi Party or the Bahujan Samaj Party, the third- and fourth-largest parties in parliament, both with mercurial leaders.

The Samajwadi Party supported the government when it was close to toppling over a 2008 civil nuclear cooperation deal with the U.S. Mayawati’s BSP, which the Samajwadi Party routed in polls in Uttar Pradesh state this year and is unlikely to be keen to face the electorate again so soon, backed Singh in key budget votes in 2010.

Policy Spurt

The Samajwadi Party said it would take a decision on its relationship with the government after a nationwide strike called by opposition parties for tomorrow, said Ram Gopal Yadav, general secretary of the group.

Banerjee, who controls 19 members in Parliament’s 545-seat lower house, has to weigh the political risks of backing down with her bid to win a bailout for her indebted state.

The government’s minority status makes reforms that require the approval of lawmakers, such as allowing foreign investment in financial services, less likely, David Sloan, Asia director at New York-based Eurasia Group, said in an e-mailed analysis.

A government “aware of the reputational risk inherent in another policy flip-flop will not backtrack on FDI liberalization,” Sloan said. It may consider a partial rollback of the diesel price increase if it helps secure the support of groups like the Samajwadi Party, he said.

‘Downfall’

Singh’s chief rival said Banerjee’s vow would lead to the administration’s ouster. “The beginning of the downfall of the UPA government has started,” Bharatiya Janata Party spokesman Ravi Shankar Prasad told reporters in New Delhi, referring to the coalition by its formal name, the United Progressive Alliance.

In an unexpected move Sept. 14, Singh’s cabinet allowed overseas retailers like Wal-Mart Stores Inc. (WMT) and Carrefour SA (CA) to own as much as 51 percent in supermarket ventures, and foreign airlines to hold minority stakes in local carriers, the biggest changes to overseas ownership rules in eight years. The policies didn’t need parliamentary approval.

A day earlier, the government announced a 14 percent increase in the price of diesel as it attempts to rein in government spending -- a step that ratings companies say is necessary to avoid a credit downgrade to junk.

Olive Branch

Singh’s bid to implement policies sought by business leaders have been hobbled by a divided ruling coalition and graft allegations over coal mining that have paralyzed parliament. The government passed the second-fewest bills since 1952 last year and opposition party protests over the allocation of mining blocks wiped out the last 13 days of the most recent parliamentary session. The economy is now growing at near its slowest pace in three years, while inflation above 7 percent narrows the room for interest rate cuts by the central bank.

Offering an olive branch to regional leaders who have said they’ll oppose the arrival of large overseas retail chains over concerns they will put millions of small shopkeepers out of work, the government said it will be up to state governments to decide if they want to adopt the policy.

Investment Falls

In the latest sign of the frustration felt by voters toward Congress, only 38 percent of Indians said they were satisfied with the country’s direction, according to a Pew Research Center survey. That was down from 51 percent a year earlier, and was the largest drop among the 17 countries in the survey, including China, the U.S. and Brazil.

Amid the political gridlock, India’s economic growth potential may have fallen to 6 percent to 6.5 percent a year, below the Reserve Bank of India’s 7.5 percent estimate, JPMorgan Chase & Co. (JPM) said. Foreign direct investment fell 67 percent to $4.43 billion in the three months ended June from a year earlier, government data show.

The budget shortfall and a deficit in the current account, the broadest measure of trade, led Standard & Poor’s and Fitch Ratings to say earlier this year that they may strip India of its investment-grade credit rating.

Banerjee said yesterday she won’t allow the “country to be sold” in the pursuit of government policy. She accused Singh of attempting to divert attention from the coal scandal.

To contact the reporters on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net; Pradipta Mukherjee in Kolkata at pmukherjee7@bloomberg.net

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Peter Hirschberg at phirschberg@bloomberg.net

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