Govt shackled over reforms, even without left as ally

Chief of the Communist Party of India (Marxist) (CPI-M) Prakash Karat speaks during a news conference in Kolkata October 1, 2007.

NEW DELHI (Reuters) - Having lost the shackles of its communist allies that stymied years of economic reforms, the government finally has political space to push for change.

But Prime Minister Manmohan Singh, with his new pro-business partners the Samajwadi Party (SP), is unlikely to barrel through with major economic changes despite a laundry list of reforms and focus instead on surging inflation ahead of key polls in 2009.

"I don't think any big bang reforms will happen. Right now the key macroeconomic challenge is inflation and they will concentrate all their energy in bringing it down," said D.K. Joshi, principal economist at ratings agency Crisil in Mumbai.

Prime Minister Singh, one of the architects of India's free market reforms, secured the support of the SP to replace his communist allies who say they will withdraw from backing the government if it presses ahead with a civilian nuclear deal with the United States.

The SP's support should help the government avoid early polls this year and allow it to concentrate on fighting inflation which is at a 13-year high, as well as rising interest rates and signs of economic slowdown.

Shubhada Rao, chief economist at Yes Bank in Mumbai said where reforms were concerned there could be some easing of foreign direct investment rules. But little else is expected given the short period ahead of the general elections.

Singh's government stalled on reforms over the last four years due to staunch opposition from its communist allies.

In the SP, led by the wily Mulayam Singh Yadav, Singh has a partner which will be far more pragmatic about its dealings with the government -- and just as willing to push for populist, vote-winning measures as elections approach.

"Mulayam Singh Yadav is a hard-boiled politician who has come up on the strength of his hard work and practical approach," wrote Pankaj Vohra in the Hindustan Times. "He is not a theoretician-politician like some of the Left leaders are."

The Samajwadi Party is known to be pro-business and the party's General Secretary Amar Singh counts several top industrialists as his friends.

When the Congress-led government took power in 2004, many had expected reforms would start as three key leaders in Singh, Finance Minister Palaniappan Chidambaram and Deputy Plan panel chief, Montek Singh Ahluwalia, had a history of engineering sweeping changes.

But opposition from the government's communist allies stalled reforms such as raising foreign investment in insurance sector, changing archaic labour laws and forced Singh to abandon moves to sell stakes in state-run companies.

The government also soft pedalled on opening up the pension sector to foreign participation and has put banking reforms on the backburner thanks to opposition from communists who feared massive job losses and the loss of their support base.

SAVING GRACE

The saving grace for Singh's government has been impressive economic growth which averaged 8.8 percent in the past four years but it now finds itself pushed to the corner with rising prices fuelling widespread discontent and posing huge policy challenges.

That growth has attracted global attention and investors have come knocking at India's door, only to be frustrated by the slow pace of reforms and bureaucratic red tape.

Key state elections are due later this year and federal elections next year and the government is keen to be seen tackling soaring prices rather than lose more popular support with controversial reforms.

"I am not sure whether they will push ahead with major policy reforms. They will concentrate on bringing down inflation and they don't have the numbers to push through big reforms," said N.R. Bhanumurthy, economist at Institute of Economic Growth.

"If they manage to bring down inflation that will be good enough. Otherwise they will concentrate on pro-poor policies. Major reforms will happen only when a new government takes over next year."