NEW DELHI (Reuters) - Ruling Congress party expects a rare dose of good news on Friday when election results may hand the ruling coalition several states, but piggybacking on unpredictable allies may further hobble reforms aimed at reining in the fiscal deficit.
Exit polls published by local media suggest Congress ally and maverick populist Mamata Banerjee and her Trinamool party would overturn 34 years of Communist Party rule in West Bengal, cementing her position as the Congress's top ally in parliament.
Congress coalitions may also win in the smaller southern state of Kerala and Assam. The party is also expected to retain the tiny former French colony of Pondicherry in the south.
But voters in the big neighbouring state of Tamil Nadu are likely to turf out ally Dravida Munnetra Kazhagam, a party linked to the country's largest corruption scandal and which is the second biggest partner in parliament for Congress.
The elections will signal the political temperature in states that jointly make up a fifth of the 545-strong lower house of parliament and will help redraw the political map ahead of federal elections in 2014.
With neither of the main national parties, Congress and Bharatiya Janata Party (BJP), able to secure majorities in general elections, electoral power in India comes down to forging coalitions with regional allies.
The results will restore some political authority to Prime Minister Manmohan Singh's government, which is smarting from a raft of graft scandals and high food prices, giving it a chance to hit back at the BJP.
But the victories will be more due to the strength of Congress' partners that give it a slim majority in parliament, underscoring the party's own weakness in the states and its dependence on fickle regional allies.
That could possibly give the populist allies a louder voice when the government mulls raising fuel prices or cutting down on subsidies, measures that are key to keeping the fiscal deficit at the targeted 4.6 percent of GDP in 2011/12, a year when slowing economic growth may see sluggish tax intake.
As the union railway minister, Banerjee has kept fares untouched for years and expanded freebies. She has several times forced a deferral of decisions on raising fuel prices. Her party is also against more foreign investment in insurance.
"Piggybacking has never worked for Congress, they are only weakening their own foundation," said N. Bhaskara Rao, chairman of New Delhi-based think tank Centre for Media Studies.
"Instead of the coalition having once-a-month problems, you'll now have once-a-week problems."
Singh's government has been considering lifting controls on diesel and fertiliser prices and streamlining a bloated food subsidy programme, but these measures are politically unpalatable given inflation is at nearly 9 percent.
Analysts expect hard resistance from Banerjee's party when Singh's cabinet sits down to take decisions on paring down the subsidy bill, which forms more than a tenth of total spending.
"She'll have to maintain her populist image," said political analyst Mahesh Rangarajan.
But Rangarajan, like other analysts, did not expect her to rock the coalition, given that a Trinamool government in West Bengal would need federal support in terms of funds.
Rising tax revenue from an economy powering away at close to 9 percent has long let India avoid taking hard decisions on slashing expenditure, including subsidies on food, fuel and fertilisers that supporters say are needed to protect India's half-a-billion mostly rural poor from inflation.
But growth this year is expected to slow down to 8.5 percent, weighed down by the nine rate hikes since last March effected to curb inflation.
"The government will find it difficult to push through the kind of reforms they were planning," said D.H. Pai Panandikar, head of New Delhi-based think tank RPG Foundation.
"Fiscal consolidation will be more of technical rather than from reforms ... the fiscal deficit is likely to go up, everything is built on 9 percent (growth)."
Congress is aware of the challenges facing it.
"Various parties within the (coalition) may have different view points. That doesn't mean any political party has a veto on policy, one way or the other," said Congress spokesman Manish Tewari.
Some losses may not be bad in the longer term. An ouster from power in Tamil Nadu will make the DMK more dependent on Congress and less likely to oppose reform policies at the federal level.
DMK lawmaker Andimuthu Raja was the telecoms minister during a 2007-08 grant of mobile phone licences which police say was rigged to favour some firms and which lost India as much as $39 billion in potential revenue.
The outrage over this and other scandals that have emerged in Singh's second term sparked off a hunger strike by a social activist who demanded stronger anti-corruption laws. The government later relented.
(Editing by Alistair Scrutton and Sanjeev Miglani)
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