Rebellion brews in coalition over petrol price hike

Demonstrators carry a motor bike with the help of bamboo sticks to protest a price hike in petrol in New Delhi November 4, 2011.

NEW DELHI (Reuters) - Trinamool Congress, a top ally of the ruling coalition, threatened to quit on Friday unless Prime Minister Manmohan Singh reversed a rise in petrol prices, testing the government's commitment to a move sorely needed to cut the fiscal deficit.

Trinamool Congress said it would wait for Singh to return from the G-20 summit in France and reconsider the increase in petrol prices, the fourth time this year.

If the party were to quit the coalition it would reduce Singh's government to a minority at a time when it is already buffeted by corruption scandals and stubbornly high inflation.

"When the prime minister is out of the country, I don't want to take a decision that can lead to the fall of a government," said Trinamool chief Mamata Banerjee, whose 19 lawmakers provide Singh with a parliamentary majority.

"Let the PM return then our party will go to him and tell him our view ... that if this goes on like this we don't want to stay in the government. We have tolerated enough but we are not willing to accept this burden on the poor any more."

In a first indication that the government could cave to its ally's demand, a source in Singh's Congress party said on Friday that a partial rollback of the petrol price rise was possible.

Banerjee's threat could force the government to delay a rise in diesel, cooking gas and kerosene prices even though it desperately wants to cut subsidies to stay in sight of the 2011/12 fiscal deficit target of 4.6 percent of GDP.

But with headline inflation topping 9 percent for nearly a year despite 13 rate hikes by the RBI since March 2010, government allies such as the Trinamool have become uneasy with their ties to the increasingly unpopular federal coalition.

Singh's Congress party is itself nervous about angering its core constituency, the rural poor, ahead of a string of state elections beginning early next year. In the past it has given in to street protests over reform moves such as freeing up farm prices.

In India, the government sets retail prices of diesel, cooking gas and kerosene to help control inflation and protect consumers, particularly the poor, from sharp fluctuations in energy prices.

It granted autonomy to state-run firms last year to fix retail prices for petrol and has said it is considering giving up control of other fuel prices to help rid itself of a crippling subsidy burden.

Raising diesel prices is a political hot potato as the fuel, which accounts for over a third of refined oil products' demand in the country, is widely used by the farm sector and industrial users and has a cascading effect on the economy.

(Editing by John Chalmers)