PM defends reforms as Trinamool quits government

Prime Minister Manmohan Singh drinks after his speech at the University of Dhaka September 7, 2011.

NEW DELHI (Reuters) - Prime Minister Manmohan Singh launched a spirited defence of measures meant to breathe life into India's stuttering economy after his biggest coalition ally quit in protest on Friday, reducing his government to a minority.

In only his third televised address in eight years in office, Singh pressed the case for raising heavily subsidised diesel prices and liberalising retail trade, reforms passed last week that sparked street protests and a one-day national strike.

"At times, we need to say `No` to the easy option and say `Yes` to the more difficult one," said the 79-year-old economist, in a speech dotted with references to a balance-of-payments crisis in 1991 that triggered a first wave of reforms. Singh was finance minister at the time.

"We are not in that situation today, but we must act before people lose confidence in our economy. I know what happened in 1991 and I would be failing in my duty as prime minister of this great country if I did not take strong preventive action."

Singh spoke after the biggest partner in his coalition withdrew over the reforms long-sought by investors. The Trinamool Congress pulled its 19 members of parliament, bringing more instability to an already volatile political landscape.

"The message given was that 'we don't need (Trinamool Congress) for survival of the government and we'll go ahead with the reforms because that is what's good for the country," D.H. Pai Panandiker, head of the RPG Foundation, a New Delhi-based think-tank, said of Singh's speech.

While there appears to be no immediate risk of the government falling, Singh will struggle to push forward with his economic reform agenda and get legislation through parliament. Questions have been raised about whether the government can survive until elections due in 2014.

An Oxford-educated economist, Singh is often feted as one of the fathers of economic reforms that freed industry from stifling state controls and started two decades of rapid growth.

But he has faced criticism over a perceived lack of boldness to press ahead with a so-called "second generation" of policies seen by many as crucial for Asia's third-largest economy to realise its potential as an economic powerhouse alongside China.

Growth has languished near its slowest pace in three years.

The most high profile reform was to allow foreign supermarkets such as Wal-Mart Stores to set up shop in India for the first time - a move aimed at taming inflation but seen threatening the livelihoods of domestic retailers.

In his 12-minute speech, Singh appealed to "my dear brothers and sisters" to understand that the reforms were necessary to curb a ballooning fiscal deficit and revive the economy. His direct appeal was unusual for a leader who is often characterised as an aloof technocrat.

"We are at a point where we can reverse this slowdown in our growth," said Singh. "We need a revival in investor confidence, domestically and globally."

STOCK MARKETS CHEER

Singh's coalition must now rely on the outside support of two powerful regional parties that have in the past opposed efforts to liberalise the economy and are likely to try to extract concessions to further their own agendas.

"Barring a political perfect storm, we now believe that the current government is likely to limp along through the scheduled end of its five-year term in mid-2014," said David Sloan, an analyst at political risk research consultant Eurasia.

Despite the backlash, the government pressed ahead with more reforms on Friday, slashing a tax on overseas borrowing by Indian firms, implementing a scheme to encourage individuals to invest in the stock market, and relaxing minimum requirements for the country's airlines to fly overseas.

The cabinet may also approve measures next week to allow greater foreign investment in the insurance sector.

The BSE Sensex and Nifty rose more than 2 percent on Friday to their highest since July 2011 on hopes of further reforms.

"It's all very positive. Actually, the way the market has endorsed it, that itself is a good testimony of whatever the government has done after a long period of market-perceived inactivity," said Sunil Agarwal, head of the institutional client group at Deutsche Bank India.

(Additional reporting by Satarupa Bhattacharjya, Annie Banerji and Manoj Kumar; Editing by Ross Colvin and Robin Pomeroy)