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Singh Seeks to Heal Coalition Rift on Sri Lanka as Markets Drop

March 20 (Bloomberg) -- Indian Prime Minister Manmohan Singh will today seek to mend a rift with his biggest ally after it vowed to quit the ruling coalition over policy on alleged war crimes in Sri Lanka, undermining the minority administration.

Indian stocks and the rupee fell yesterday on concern the loss of support from the Dravida Munnetra Kazhagam would weaken Singh’s efforts to revive growth in the Asia’s third-biggest economy. While the DMK delayed announcing a formal parting and hinted a compromise was possible if differences were narrowed, two key regional parties promised the prime minister their continued backing.

“In the end, an amicable solution will probably be reached,” said R.K. Gupta, who helps oversee about $645 million of assets as a New Delhi-based managing director at Taurus Asset Management Ltd. “This type of event is very destructive for the economy and how investors see India.”

Singh is battling to refocus the government ahead of an election in 2014, end two years of criticism over alleged corruption and repair a slowing economy. In a signal the DMK was open to a patch-up, its leader Muthuvel Karunanidhi said he wouldn’t immediately sever links with Singh’s Congress. The party has threatened before to quit the alliance, only to backtrack.

The standoff in India comes as the United Nations Human Rights Council prepares to vote this week on a U.S.-sponsored resolution calling on Sri Lanka to fully investigate alleged war crimes by its troops during the final few weeks of the conflict with Tamil guerrillas in 2009. The southern state of Tamil Nadu, where the DMK is based, shares cultural and religious ties with Sri Lankan Tamils.

Shares Fall

The benchmark S&P BSE Sensex dropped 1.5 percent in Mumbai yesterday, the most in three weeks, extending the second-worst performance among emerging Asian countries this year after Malaysia. The rupee weakened 0.4 percent to 54.3750 per dollar and the yield on 8.15 percent notes due June 2022 rose 2 basis points to 7.92 percent. India VIX, the benchmark measure for options prices, rose to the highest level in three weeks.

A weaker government would find it even more difficult to pass proposed legislation, including bills to increase overseas investment in pensions and insurance.

The exit of the DMK, one of nine coalition partners in the governing alliance, would leave Singh 44 seats short of the halfway mark in the lower house of parliament.

Karunanidhi is demanding India’s parliament vote to condemn Sri Lanka and is seeking to toughen the resolution to be presented to the UN agency. Congress leader Sonia Gandhi dispatched her top three ministers, including Finance Minister Palaniappan Chidambaram and Defense Minister A.K. Antony, to talk with Karunanidhi in Chennai on March 18.

Murdered Child

Sri Lanka’s military and Tamil Tiger fighters probably committed serious violations of international law in the final stages of their conflict, resulting in as many as 40,000 civilian deaths, a UN report released in April 2011 said.

A documentary shown at the UN council this month included images of the bullet-riddled body of a child its makers identified as the 12-year-old son of slain Tamil Tiger guerrilla leader Velupillai Prabhakaran. The film shows photographs it says were taken with the same camera of the boy eating a biscuit in the custody of Sri Lankan soldiers and later shot dead.

Sri Lanka denies the alleged atrocities in 2009 and has branded calls for an inquiry as meddling by the international community. While India supported a similar resolution at last year’s UN rights council meeting, it is yet to make its intentions clear ahead of the vote expected this week.

Mayawati Support

The DMK has 18 lawmakers in parliament’s lower house. Without its support, Singh would be further reliant on the backing of groups like the Samajwadi Party and the Mayawati’s Bahujan Samaj Party, which compete for power in the country’s most populous state, Uttar Pradesh.

Mayawati speaking to reporters yesterday reiterated her support for the government.

Karunanidhi has threatened to pull out of the government before as he fought with Singh’s Congress party over how to contest a state election. He also pressured the prime minister ahead of last year’s UN vote.

Relations between the Congress and its southern ally have been strained since former telecommunications minister Andimuthu Raja, a member of the DMK, was arrested in 2011 in a federal probe into the 2008 sale of mobile-phone licenses.

Karunanidhi’s daughter and parliamentary lawmaker Kanimozhi is also among those on trial for colluding to sell spectrum to unqualified companies for personal benefit.

‘All Respect’

“There’s going to be a lot of political uncertainty because of this now,” said Sonal Varma, an economist with Nomura Holdings Inc. in Mumbai. “It highlights how politics is still a big risk in India, particularly given this is a pre-election year.”

Speaking to reporters yesterday after the DMK announcement, Chidambaram said the government had received the latest draft of the U.S. resolution and was studying it to see if it needed changes.

Karunanidhi’s “statement deserves all respect and we have taken note of it,” Chidambaram told reporters in New Delhi. “The stability of the government and the continuance of the government are not an issue.”

Regarding the DMK’s call for a parliamentary resolution condemning Sri Lanka, the government had begun consultations with all parties, Chidambaram said. The finance minister noted that Karunanidhi had said he could reverse his decision.

To contact the reporters on this story: Andrew MacAskill in New Delhi at; Bibhudatta Pradhan in New Delhi at

To contact the editor responsible for this story: Peter Hirschberg at

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