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KOLKATA (Reuters) - The beleaguered Congress-led coalition has managed to avoid a major voter backlash over a series of embarrassing corruption scandals, winning three of five regional polls and overturning two communist state governments, results showed on Friday.
The coalition fared worse than expected in Tamil Nadu, where voters punished key ally DMK over the $39 billion telecoms scam that paralysed parliament for months and hit foreign investment in Asia's third-largest economy. But the loss came as no surprise. It also lost Pondicherry.
But it took two states from the communists -- West Bengal, where the world's longest serving democratically elected government was finally unseated, and Kerala. It also won Assam.
Overall, the results were the first good news in months for the suddenly accident-prone government of Prime Minister Manmohan Singh. The main national opposition, the Hindu nationalist Bharatiya Janata Party, scarcely improved on its scant presence in West Bengal and Tamil Nadu, a sign Congress is still the party to beat ahead of 2014 general elections.
"The election results will lead to some stability at the centre," said R. K. Gupta, managing director of Taurus Mutual Fund. "It gives Congress more muscle to push through its reforms."
The victory of populist Congress ally Mamata Banerjee's Trinamool Congress in West Bengal may stabilise the coalition. But the unpredictable maverick, who holds the balance of power in parliament, will prove a thorn in the side of government economic reform plans.
"Regional forces are again asserting their importance, and the Congress will have to make all kinds of bargains and compromises to fit them in," said Ramachandra Guha, fellow of the Indian Institute of Management in Kolkata.
The complicated post-election scenarios highlight how Singh faces hard times in his second term amid signs the 78-year-old is increasingly out of touch with both reform-hungry investors and voters angry at inaction over corruption and inflation.
Banerjee, a 56-year-old who wears a traditional sari with bathroom slippers and lives alone with her mother, is the latest in a string of women in this traditional society, like Congress chief Sonia Gandhi, who have risen to political power.
Millions of Bengalis rebelled against three decades of communist rule that left a moribund state economy and a leftist government stuck in a Cold War time warp.
It highlighted how many Indians were keen to embrace more free market policies that have helped transform much of India since 1991.
"The people of West Bengal have won their freedom today," Banerjee said. "The victory is of hapless people who have faced exploitation, violence, and discrimination."
Jubilant supporters thronged outside Banerjee's house in Kolkata, punching the air, dancing and shouting her name and waving their tricolour party flags. They pasted green paint on their foreheads to mark the victory.
The final results, due in a few hours, may also define how aggressively the left-of-centre government moves ahead with long-awaited reforms such as raising fuel prices and a land acquisition bill for farmers and industry.
The 30-share benchmark BSE index rose 2 percent, in part due to the election results.
The loss in Tamil Nadu of a family-run dynasty may also be a silver lining for Congress, allowing Singh more leverage over a weakened ally.
There is talk of a cabinet reshuffle in New Delhi after the election and a push by the government to pass bills in the July parliamentary session, including one to help industry acquire land from farmers.
With neither of the main national parties -- Congress and BJP -- able to secure majorities in general elections, electoral power in India comes down to forging coalitions with regional allies, who often have chequered records.
The results were a gauge of 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.
India's 28 states, with strong linguistic and cultural identities, have a high degree of autonomy and their leaders are some of the most important powerbrokers in India, often blocking policies by the central government.
West Bengal sends 42 MPs to parliament and its long domination by the communists is one of the biggest reasons India's founding socialist ideas retain political currency even after two decades of market reforms.
Banerjee's Trinamool Congress in West Bengal is the biggest coalition ally of Congress and holds the balance of power in parliament. Her victory may force the government to be more dependent on a mercurial partner opposed to several key economic reforms. Analysts say Banerjee's victory will give her a louder voice when the government mulls raising fuel prices or cutting down subsidies -- measures that are key to keeping the fiscal deficit at the targeted 4.6 percent of GDP in 2011/12, when slowing economic growth may see a sluggish tax intake.
As the railway minister, Banerjee has kept fares untouched 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.
In Tamil Nadu, the DMK facing a series of arrests over a telecoms scam is the second biggest coalition ally and Singh may be forced to switch allegiance to the likely winner, the AIADMK, nearer to the 2014 election.
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.
Rising tax revenue from an economy powering away at close to 9 percent growth 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 aimed at curbing inflation.
Additional reporting by C.J. Kuncheria and Matthias Williams in NEW DELHI and Ami Shah in Mumbai; Writing by Alistair Scrutton; Editing by Paul de Bendern and Andrew Marshall