By Matthias Williams
NEW DELHI (Reuters) - The biggest partner in Indian Prime Minister Manmohan Singh's shaky coalition formally withdrew on Friday over big-ticket economic reforms that have cheered investors but sparked nationwide protests.
The Trinamool Congress pulled out its six ministers and 19 MPs, reducing Singh's coalition to a minority government and bringing even more instability to an already volatile political landscape.
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.
His coalition will now have to rely on the outside support of two powerful regional parties that have in the past opposed efforts to liberalize the economy and will likely 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.
The prime minister is due to make an unusual televised address to the nation at 8 p.m. (1430 GMT) to try to tame the popular outrage at measures to raise heavily subsidized diesel prices and allow foreign supermarkets to set up shop in India, a move seen threatening the livelihoods of domestic retailers.
Many parts of India were brought to a halt on Thursday by a nationwide strike called to protest against the reforms.
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 Indian airlines to fly overseas.
The cabinet may also approve measures next week to allow greater foreign investment in the insurance sector.
STOCK MARKETS CHEER
Indian stock indexes 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.
Singh has faced withering criticism from business leaders, economists and foreign investors for inaction as economic growth slumped to 5.5 percent. Now that he has taken action, he finds himself under fire from coalition allies and political opponents keen to find political advantage ahead of state polls later this year and national elections in 2014.
Trinamool Congress leader Mamata Banerjee, the firebrand leader of West Bengal state, had threatened on Wednesday to pull her ministers out of the coalition if the reforms were not rolled back by Friday. The government rebuffed the threat and formally approved the retail reform on Thursday.
"I don't care. I am not scared of anyone. As long as I live, I will live like a tigress," Banerjee in a speech in West Bengal on Friday, while her ministers resigned in the national capital, New Delhi.
Banerjee's withdrawal from the coalition leaves it vulnerable to a possible confidence vote in parliament in the winter session of parliament later this year, although there are signs that the main opposition Bharatiya Janata Party's (BJP) appetite for such a vote is waning.
The ruling Congress party believes it could survive such a vote with the support of the Samajwadi Party and the Bahujan Samaj Party, both based in the state of Uttar Pradesh, whose combined 43 seats are enough to prop up the coalition.
Markets cheered an announcement by the Samajwadi Party chief on Friday pledging support for Singh's government.
"It does not make sense to ask the government to take a floor test unless one of them quits," a BJP official said, referring to the two regional parties.
In the meantime, the government is trying to keep up the momentum generated by the big-bang reforms unveiled last week. The cabinet could approve a proposal to ease restrictions on foreign investment in the insurance sector, raising the cap to 49 percent from 26 percent, a Finance Ministry official said on condition of anonymity.
The measure still needs to clear parliament, however, and that is not seen likely in the foreseeable future.
(Additional reporting by Satarupa Bhattacharjya, Annie Banerji and Manoj Kumar; Editing by Ross Colvin and Robert Birsel)