By Matthias Williams
NEW DELHI (Reuters) - The biggest partner in 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 their own political agendas and are equally hostile to reforms such as allowing foreign supermarkets to set up shop in the country.
"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. Many parts of India were brought to a halt on Thursday by a nationwide strike called to protest the reforms.
PRESSING ON WITH REFORM
Despite the backlash, the government pressed ahead with more reforms on Friday, slashing a tax on overseas borrowing by Indian firms and implementing a scheme to encourage individuals to invest in the stock market.
The cabinet may also approve measures next week to allow greater foreign investment in the insurance sector.
BSE Sensex and Nifty 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, 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.
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. It still needs to clear parliament, however, and that is not seen likely in the foreseeable future.
(Additional reporting by Satarupa Bhattacharjya and Manoj Kumar, editing by Ross Colvin)