By Manoj Kumar and Matthias Williams
NEW DELHI (Reuters) - A key regional ally pulled out of India's ruling coalition on Tuesday, jeopardizing Prime Minister Manmohan Singh's economic reforms but posing no immediate threat to the minority government, which can survive with the support of other parties.
The withdrawal of the Dravida Munnetra Kazhagam (DMK) could hamper the government's efforts to rein in the budget deficit, spur growth in Asia's third-largest economy and stave off the threat of a downgrade by global credit ratings agencies.
DMK leader M. Karunanidhi told a press conference the party would not offer outside support to the government and would withdraw its five federal ministers on Tuesday or Wednesday.
In a possible sign of policy paralysis to come, a powerful regional party that supports the government in parliament, the Samajwadi Party (SP), said it would not back bills aimed at liberalizing pensions and insurance. The government had hoped to pass the reforms in this session of parliament.
"With the federal elections next year, political stability is key for all economic reforms. This will surely delay the economic reforms to some extent," said Rupa Rege Nitsure, chief economist, Bank Of Baroda, Mumbai.
In other reform bills, the government wants to change land acquisition laws to make it easier for companies to buy land for industrial and infrastructure projects. Also planned are a food security bill to provide subsidized more grain for the poor, the setting up of an anti-graft ombudsman and the approval of an ordinance providing for harsher punishment for perpetrators of sex crimes.
The DMK, which draws its support from Tamils in the southern state of Tamil Nadu, announced its withdrawal from the coalition in protest against the government's perceived dithering on a U.N. resolution on war crimes in neighboring Sri Lanka between that country's Sinhalese-majority government and its own minority Tamils.
It was not immediately clear what impact the withdrawal of the DMK would have on the bills as the party has previously expressed support for the land acquisition and food security measures.
But the withdrawal heightens the chance that the government will call a snap national election if it is unable to pass major legislation, although neither the ruling Congress party nor the main opposition have shown much appetite for early polls. Elections need to be held by May 2014.
"The government has lost majority. All the reforms including insurance and pension will now be put on the back burner," said Rajiv Pratap Rudy, a spokesman for the main opposition Bharatiya Janata Party (BJP).
BJP leaders said they had no immediate plans to call for a confidence vote in parliament.
Finance Minister P. Chidambaram said the government was stable, adding there was a chance the DMK could change its mind. The DMK has climbed down in the past after threatening to withdraw from the coalition.
"There is no crisis," Chidambaram told reporters.
AT THE MERCY
But the coalition, already a minority in parliament, will be more than ever at the mercy of powerful but fickle regional parties for support, especially the SP and the Bahujan Samaj Party (BSP), both based in Uttar Pradesh state.
Indian bonds, stocks and the rupee fell on the news of the DMK's withdrawal.
The DMK has often pressured the Indian government to do more to protect Sri Lanka's minority Tamil population.
It wants the Indian government to introduce stronger language into the U.N. resolution, including the use of the word "genocide" to describe the deaths of Tamils during Sri Lanka's civil war. The government has yet to give a response on what its position on the resolution would be.
The DMK has 18 seats in the lower of house of parliament, which made it the biggest ally in Singh's coalition. Its pullout is the latest blow, following the withdrawal of another ally, the Trinamool Congress, last year in protest against the government's reforms.
The government needs 271 seats out of 543 to survive any possible confidence vote. After the pullout of the DMK, the Congress alliance has about 235 seats, but they could narrowly survive any vote with the outside support of the BSP and SP.
(Reporting by Annie Banerji, Devidutta Tripathy, Satarupa Bhattacharjya and Nita Bhalla, Anupama Chandrasekaran, Nigam Prusty, Sharat Pradhan, Mumbai markets and treasury teams; editing by Ross Colvin and Raju Gopalakrishnan)