Govt shackled over reforms, even without left

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Having lost the shackles of its communist allies that stymied years of economic reforms, the government finally has political space to push for change.

But Prime Minister Manmohan Singh, with his new pro-business partners the Samajwadi Party (SP), is unlikely to barrel through with major economic changes despite a laundry list of reforms and focus instead on surging inflation ahead of key polls in 2009.

"I don't think any big bang reforms will happen. Right now the key macroeconomic challenge is inflation and they will concentrate all their energy in bringing it down," said D.K. Joshi, principal economist at ratings agency Crisil in Mumbai.

Prime Minister Singh, one of the architects of India's free market reforms, secured the support of the SP to replace his communist allies who say they will withdraw from backing the government if it presses ahead with a civilian nuclear deal with the United States.

The SP's support should help the government avoid early polls this year and allow it to concentrate on fighting inflation which is at a 13-year high, as well as rising interest rates and signs of economic slowdown.

Shubhada Rao, chief economist at Yes Bank in Mumbai said where reforms were concerned there could be some easing of foreign direct investment rules. But little else is expected given the short period ahead of the general elections.

Singh's government stalled on reforms over the last four years due to staunch opposition from its communist allies.

In the SP, led by the wily Mulayam Singh Yadav, Singh has a partner which will be far more pragmatic about its dealings with the government -- and just as willing to push for populist, vote-winning measures as elections approach.

The Samajwadi Party is known to be pro-business and the party's General Secretary Amar Singh counts several top industrialists as his friends.

When the Congress-led government took power in 2004, many had expected reforms would start as three key leaders in Singh, Finance Minister Palaniappan Chidambaram and Deputy Plan panel chief, Montek Singh Ahluwalia, had a history of engineering sweeping changes.

But opposition from the government's communist allies stalled reforms such as raising foreign investment in insurance sector, changing archaic labour laws and forced Singh to abandon moves to sell stakes in state-run companies.