Government tried on Monday to defuse a political crisis over sweetheart coal deals that has deepened a perception of dysfunction in the world's biggest democracy and derailed Prime Minister Manmohan Singh's efforts to win back investors.
In a shock forecast, Morgan Stanley warned there was a "very high risk" that growth in Asia's third-largest economy could slow to just 4.3 per cent in the 2013 fiscal year unless the government took urgent steps to cut the fiscal deficit and encourage private investment.
Dr Singh's government has struggled to defend itself against allegations that it awarded coalfields potentially worth billions of dollars to private and state power, cement and steel companies in a process that was corrupt at worst and lacked transparency or any element of competition at best.
Under pressure from the prime minister's office, a government committee met on Monday to speed up the review of 58 coalfields whose owners have already been issued notices for missing deadlines to get them operational. The coal ministry has until September 15 to decide whether to cancel the licences.
Among those that face possible cancellation of coal mining licences are billionaire Lakshmi Mittal's ArcelorMittal, GVK Power and Infrastructure, India's top aluminium producer Hindalco Industries Ltd - part of the Aditya Birla Group - and Tata Power.
The furore, dubbed "coal-gate" by media, has drowned out Dr Singh's efforts to show that his coalition government is serious about implementing reforms. For months it has been under fire for dithering while the economy suffers from the impact of the eurozone debt crisis and sluggish U.S. growth.
Morgan Stanley cut its growth forecast for India to 5.1 per cent on Monday for the 2012/13 fiscal year. It had previously projected the economy would grow at 5.8 per cent in the year ending next March. But in its "bear case" scenario, growth could tumble to 4.3 per cent if policy inaction persisted, it said.
The main opposition Bharatiya Janata Party (BJP), which will challenge Dr Singh's ruling Congress party in elections due by 2014, has seized on a state auditor's report that questioned licenses granted for 142 coalfields between 2004 and 2009.
The concessions were awarded by a government committee without competitive bidding. The auditor said it was not clear from the minutes of the committee's meetings how it arrived at decisions on coalfields that could be worth billions of dollars.
The BJP has all but paralysed Parliament for two weeks, using the report to blacken the government, which has been buffeted by corruption scandals, most notably a $39 billion telecoms licences scam that saw a former minister arrested.BJP wants to keep corruption centre-stage
Crowding around the speaker's seat in Parliament, BJP members chanted "prime minister submit your resignation". Amid the din, the Congress party and its allies managed to pass three bills.
The BJP, which has struggled to capitalise on infighting within the Congress-led coalition, wants to keep alive an issue it believes resonates strongly with voters, political commentator Vinod Mehta said.
"They feel it is striking a chord. They are trying to keep the corruption issue at the centre of political discourse."
Dr Singh has denied any wrongdoing and pointed out that it was his government that proposed competitive bidding, but the softly spoken prime minister's rebuttal has been overshadowed by daily images of Parliamentary chaos on cable television news channels.
It has been left to Congress leader Sonia Gandhi, who normally keeps a low profile, to take the fight to the opposition. She has surprised observers with her unusually aggressive response to the BJP's corruption charges.
With the monsoon session of Parliament due to end on Friday, there was no sign of an end to the deadlock.
The BJP has signalled that it might be willing to drop its demand for Dr Singh to quit if the government cancels coal licenses and agrees to an independent inquiry. But the government has dismissed the demand, saying a Central Bureau of Investigation probe was already under way.