As battle turns political, will economics prevail?

When Trinamool Congress chief Mamata Banerjee announced her party would no longer be a part of UPA II, the most wounded party was not the Congress, but economics.

Last week, the government announced a series of reforms. It retorted to months of incessant criticism of its policy paralysis over a frenzied 48-hour period by hiking diesel prices and announcing foreign direct investment in multi-brand retail and aviation.

Although the markets and India Inc. exulted, the UPA’s allies and the Opposition wasted no time in condemning the measures.

Foreign rating agencies such as Moody’s and S&P adopted a cautious approach, saying India has a history of being unable to implement reforms, to which Finance Minister P. Chidambaram said thatreforms are meant for people and not rating agencies, adding that the government will not roll back either the diesel price hike or the new FDI norms.

After Ms Banerjee announced her decision to quit the UPA, Prime Minister Manmohan Singh allegedly reiterated his commitment to economic reforms, telling his senior ministers that the government "must stay the course" and that it has "an unfinished agenda" for the economy for which it will allow "like-minded people" to help.

The government plans to go ahead with more economic reforms, especially in areas where these could be done through its own executive powers, Law Minister Salman Khurshid told reporters late last night.

"The Prime Minister is leading from the front with the intention that the next two years are going to be very significant years for economic reforms. These are economic reforms, fortunately that have yet required any legislation, and these can be done without legislation," Mr Khurshid added.

At 5.5 per cent, India’s GDP growth in the three months to June languished near three-year lows, and was just above the 5.3 per cent in the preceding quarter. This was followed by a cut in India’s 2012-13 growth forecast by Morgan Stanley, which said that “in the event of continued inaction from the government, we see very high risk of a potential deeper macro stress scenario”. Later, rating agency Fitch said India’s “macroeconomic situation remains weak as growth is slow and inflation pressures are strong”.

The recent political developments will now only reinforce—albeit adversely—what the rating agencies have been saying: India's reforms are usually crippled by rollbacks.

Already, there is talk that Congress president Sonia Gandhi may try to  negotiate a compromise - while there will be no reversal of the retail reforms, the government may agree to a partial rollback in diesel prices, along with increasing the cap on subsidized LPG cylinders from six to nine per year.

Ms Banerjee has 19 Lok Sabha MPs. Mulayam Singh Yadav and his Samajwadi Party, who provide external support to the UPA, have 22. Ms Mayawati and her Bahujan Samaj Party (BSP) have another 21.

So though the UPA is in a minority without the Trinamool Congress, it can be propped up by Mr Yadav and Ms Mayawati. With the support of Mr Yadav and Mayawati, the UPA still has more than 300 MPs on its side.

It needs 272 to stay in power. But the government will now be more vulnerable to demands from those partners, who are both opposed to FDI in retail.

Mrs Gandhi is meeting her party's top leaders to discuss the crisis. Dr Singh and Mr Chidambaram are there, among others. So is economics. Unfortunately, for now, it may not have a say.