Q+A - What next for India's embattled government?

NEW DELHI Thu Jun 23, 2011 5:55pm IST

Indian Prime Minister Manmohan Singh (L) and Chief of India's ruling Congress party Sonia Gandhi hold up a recently released book titled ''Report To The People 2010-11'' by the government of United Progressive Alliance (UPA) in New Delhi May 22, 2011. REUTERS/B Mathur/Files

Indian Prime Minister Manmohan Singh (L) and Chief of India's ruling Congress party Sonia Gandhi hold up a recently released book titled ''Report To The People 2010-11'' by the government of United Progressive Alliance (UPA) in New Delhi May 22, 2011.

Credit: Reuters/B Mathur/Files

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NEW DELHI (Reuters) - India's coalition government faces one of the biggest challenges of its six-year rule, with protests against graft paralysing policymaking at a time when the economy is slowing down.

Experts have warned that Asia's third-largest economy risks a slump if the government does not fast-track plans to free up fuel prices or open up the retail sector.

Here are some questions and answers on what could emerge:

WHAT'S NEXT FOR THE GOVERNMENT POLITICALLY?

The most likely scenario is that the coalition led by the Congress party will stick together, maintaining the government's slim majority in parliament. But the party's populist allies will resist painful economic steps such as cutting subsidies.

Congress' top ally Trinamool Congress needs federal funds for West Bengal state where it came to power last month, while second largest ally DMK is out of power in its stronghold of Tamil Nadu and is embroiled in a massive corruption case.

While this means that Prime Minister Manmohan Singh will remain in power, it also slims down the chances his government can push through reforms during parliament's August session.

It is highly unlikely there will be a mid-term election. Congress is unprepared for a national election while the main opposition Bharatiya Janata Party (BJP) does not have the numbers to topple the government in parliament.

Key to the long-term trends of governance would be 2012 elections in Uttar Pradesh, India's largest state. A good showing for Congress may give it confidence to stand up take back control, while a setback will extend the policy limbo.

WHAT'S NEXT FOR THE ECONOMY?

With the political stalemate continuing, the economy may be starved of the close attention it needs from the government.

Most private economists are skeptical of the government's forecasts for the economy to grow 8.5 percent in the year to March 2012, the fiscal deficit to be at 4.6 percent and for inflation to ease to 6.5 percent by then.

As the government dithers on freeing diesel prices and lifts fuel prices lesser than that warranted by rising crude oil, the subsidy bill could balloon.

Also at risk are several foreign investments that were to have reversed a trend of declining overseas interest in India.

Protests have stopped land acquisition for South Korean POSCO's $12 billion steel plant.

Approval for Vedanta Resources' $9.6 billion plan to buy Cairn Energy's India assets has been delayed and could face revaluation over a dispute about royalty payments. An inquiry into some of Reliance Industries' exploration costs could overshadow a $7.2 billion deal with BP Plc.

ARE ANY REFORMS LIKELY?

Unlikely in the near term. The centre-left Congress has historically evaded major reforms till pushed to the wall by economic circumstances and leaders including party president Sonia Gandhi have shown little appetite for such measures.

The government has promised a law that makes it easier for industry to acquire land, but Trinamool party opposes any attempt by the government to step in to acquire land.

A nationwide goods and services tax, fundamental to simplifying business and increase tax intake, will probably miss its April 1, 2012 target on opposition from states and the BJP.

India has pledged since 2004 to open up multi-brand retail to global firms like Wal-Mart, but with opposition from small traders and the BJP, little progress is seen.

Freeing diesel prices will be inflationary, further angering citizens already reeling under high food prices and add to discontent against the government.

HOW WILL THE GOVERNMENT DEAL WITH PUBLIC DISCONTENT?

India faces the prospect of a fresh wave of discontent as a popular social activist goes on a hunger strike in August against corruption. The government has taken a tough stance on protests, sending police to break one up earlier this month.

But faced with public anger, the government may jettison all attempts at reforms and look at shoring up its rural vote base through expensive dole-outs, including cheap food, fuel, fertilisers and bank loans.

(Editing by Paul de Bendern and Sanjeev Miglani)

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