India PM set to reverse diesel price increases

NEW DELHI //India's crisis-torn government looked set to offer a limited rollback of its diesel price increases yesterday after a key ally quit the coalition.

Prime minister Manmohan Singh's government is widely expected to survive the blow to its parliamentary strength, but its new dependence on regional parties against reform will reduce its room for further steps to revive economic growth.

Mamata Banerjee, the firebrand chief minister of West Bengal state, announced on Tuesday that she was pulling her party out of the coalition after Mr Singh stood firm on a slew of economic reforms, including the opening of the retail sector to global supermarket chains.

But a concession to pull her back from the brink before tomorrow's deadline appeared to be on the cards after an emergency meeting at Mr Singh's residence. A source in his Congress party said the government was considering a partial reduction in last week's 12 per cent rise in diesel prices, which economists had long called for to rein in subsidies that have blown out the budget deficit.

A government official said the rise of 5 rupees (34) fils a litre could be pegged down to 3 or 4 rupees, and a new limit on the consumption of subsidised cooking-gas cylinders may also be raised.

However, Congress party leaders said there would be no about-face on allowing investment from foreign retail chains into the retail sector. "The government is not in a mood to relent [but] ... there could be some cosmetic rollback," one party leader said.

If Ms Banerjee does pull her 19 members out of the ruling United Progressive Alliance (UPA), the Congress-led coalition will be left with 254 seats in parliament, 18 short of a simple majority.

"The beginning of the downfall of the UPA government has started," said Ravi Shankar Prasad, a spokesman for the main opposition Bharatiya Janata Party (BJP), amid speculation that the government may fall before its mandate runs out in mid-2014.

While Mr Singh can count on two other regional parties outside the coalition to prop it up with a combined seat tally of 43, both are also opposed to retail liberalisation, which could once again endanger a policy that stalled last year amid street protests.

The move on retail was among a series of "big bang" reforms launched last week. They are seen as crucial to reviving India's flagging economic growth, reining in a bloated fiscal deficit and warding off the spectre of a credit rating downgrade.

Mr Singh's renewed drive for reform had cheered investors as a sign that the government was finally shaking off months of policy inertia. However, the measures sparked a furious backlash from Ms Banerjee and other political leaders, who condemned them as a needless attack on hundreds of millions of poor people.

The BJP said it would try to push for a special sitting of parliament to hold a confidence vote, which could potentially bring the government down. However, parliament is not due to meet for its next session until late November.

Growth in Asia's third-largest economy has languished near its slowest in three years amid an avalanche of criticism for Mr Singh's government, which has grappled with a spate of political scandals since his second term began in 2009.

"The government is in a critical situation but they will somehow survive," said the political analyst Amulya Ganguli. "A minority government cannot, however, last that long. We may look at elections being brought forward."