With Key Ally Poised to Exit, Can India’s Government Survive?

Last week's economic reforms, which included plans to allow big retail chains like Walmart into India, may now collapse the government and force early elections

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Bikas Das — AP

Chief Minister of West Bengal state Mamata Banerjee speaks as she addresses a large rally in Kolkata, India, Sept. 15, 2012. Angry Indian opposition parties protested on Saturday against the government's decision to open the country's huge retail market to foreign retailers, a hike in the price of diesel fuel and reduction in cooking gas subsidies.

India’s embattled government descended into deeper uncertainty on Wednesday after a key ally announced plans to pull out of the coalition, potentially leaving the ruling United Progressive Alliance—of which Indian Prime Minister Manmohan Singh‘s Congress party is the prime mover—in a parliamentary minority. Trinamool Congress (TMC) leader Mamata Banerjee announced the news on television on Tuesday night, citing fierce objections to last week’s spate of economic reforms, including a hike in diesel prices, a cap on how much subsidized cooking gas is made available to the public, and easing the way for multi-brand foreign retailers like Walmart and the U.K.’s  Tesco to set up in India.

It was a masterful piece of prime-time theater that sent the UPA leadership into a huddle today. It also thrust Banerjee, a fiery populist who has been getting some unflattering press for her strong reactions to criticism in recent months, back into the center of the action. Last year, the mercurial chief minister of West Bengal dominated the political landscape when she first threatened to leave the coalition in response to the proposed economic reforms, which would have loosened controls on foreign direct investment (FDI). In that instance, Congress leaders backed down, much to the dismay of observers abroad. But months later, faced with increasingly gloomy economic projections and mounting pressure to shake free of what its critics call a state of policy paralysis, they evidently made a calculated risk that they would survive TMC’s withdrawal, and pressed ahead.

(MORE: Mamata Banerjee, the TIME 100 Class of 2012.)

Congress did take one small conciliatory step on Wednesday, stating that Congress-led states would bump the cooking gas quota from last week’s announced six cylinders of subsidized cooking gas per year per household to nine. It’s a far cry from the 12 cylinder quota that TMC has demanded, and Banerjee has also said that a hold on the FDI reforms and a near rollback in the diesel hike would be needed to keep her party in the fold. Congress has made no signs it will budge on either point, but there are still 48 hours of negotiations to go before Banerjee and her 19 lawmakers are gone. “Officially the government is not saying, ‘We are rolling back,’” says Paranjoy Guha Thakurta, a political analyst in New Delhi. “But this is a clear indication that whatever Banerjee has done has had an impact.”

How far the UPA needs to bend to survive is the question. If TMC does pull out on Friday as expected, UPA will no longer hold a majority of seats in Parliament. Other parties have offered to lend their support to the government so it can survive a vote of confidence ahead of the next general elections, which are scheduled for 2014. At this point, early polls are a “distinct possibility,” says Guha Thakurta. But, he says, “predicting politics in India is like trying to guess the price of oil.”

Meanwhile, Banerjee, the main opposition party and right-leaning Bharatiya Janata Party (BJP) and other left-leaning parties have joined their voices in saying the UPA did not have the mandate to approve last week’s host of reforms. “[Congress party leaders] have taken all the decisions despite the fact that the Congress is not the majority government,” Mamata Banerjee told reporters on Wednesday, according to Firstpost.com. “They have taken the decisions unilaterally.”

(MORE: How the entry of big retail will change India.)

That kind of discord will make it hard — if not impossible — for the government to push through future reforms backed by its main economic strategists, including Singh, a former finance minister in the early 1990s. At this point, the three measures Banerjee wants to axe are still in play. But the sense of optimism they created in business circles after their announcement on Friday is already fading. Easing the way for more FDI in India was “a mood changer,” said R.V. Kanoria, president of the Federation of Indian Chambers of Commerce and Industry (FICCI) at a press briefing today. But that mood will change again — and fast — if it is followed only by more instability. “We’re naturally concerned that gridlock will prevent [further reforms],” Kanoria said.

Some industry-friendly measures the group has been advocating require parliamentary approval, including changes to India’s pension fund that could free up cash flow for investment in infrastructure. That has already been stalled, and it seems even more unlikely to move forward now. The so-called “monsoon session” of Parliament that recently adjourned was among the most contentious and unproductive since the UPA was re-elected in 2009. Only a handful of bills were passed, and the MPs’ days of deliberation convulsed into shouting matches. The coalition wasn’t enjoying particularly good health before this week’s upset. It may very well survive the upheaval, but governing on life support is not going to win a lot of votes when elections do come around.

(MORE: Indian government approves entry of Walmart and other multi-brand chains.)