By Matthias Williams
NEW DELHI (Reuters) - The government's stuttering economic reform programme faces a key parliamentary test today on whether to let foreign supermarket chains such as Wal-Mart Stores set up shop, in a vote that could pave the way for further measures to revive the economy.
Prime Minister Manmohan Singh's minority UPA government bowed to opposition pressure last week in agreeing to a vote, ending days of deadlock in parliament and cheering investors who saw it as a sign of a renewed policy momentum to come.
News that the government agreed to a non-binding vote helped Indian shares climb to their highest in nearly 19 months and bolstered the rupee. But defeat for the ruling Congress party could see the currency tumble to 56 to the dollar from about 54, said Abhishek Goenka, chief executive at India Forex Advisors.
The government opened its doors to foreign retailers in September as part of a package of measures to stave off a looming credit rating downgrade, cut a swelling fiscal deficit and revive the country's investment climate.
While it doesn't need parliament's approval, defeat would be embarrassing and the government would come under pressure to roll back a policy that critics say would squeeze existing retailers and cost jobs.
GRAPHIC: India retail http://r.reuters.com/cuh79s
Whether or not the policy survives the vote will be a measure of the minority government's agility in pushing its legislative agenda in the time it has left before a general election due in just over a year.
If Singh loses, it could also put at risk other reforms pending in parliament, including measures to inject foreign cash into the struggling pension and insurance industries. If he wins, it could hasten their passage and embolden the government to move ahead with plans including simplifying the tax system.
These are seen as key for reviving investment and slashing the fiscal deficit, one of the widest among major emerging economies. At 5.9 percent of GDP last year, India's deficit earned it a warning from global ratings agencies that it could lose an investment grade rating for its sovereign debt.
"Reforms stalled in the legislative circuit are vital for the country to avoid a ratings downgrade," said an editorial in the Hindustan Times newspaper. "Stuck in the pipe are laws allowing more foreign investment in insurance and pension funds. The hope now is that some of the opposition sting will ebb once the vote on foreign direct investment in retail chains is out of the way."
DEEPER REFORMS WANTED
Singh's government has battled to free up an economy that was largely run through state-controlled permits and quotas until the 1990s. But reforms have progressed in fits and starts in the teeth of fierce political opposition.
The symbolic vote is to be held on Wednesday. The Congress party is expected to muster enough support to win in the Lok Sabha, but could face defeat in the Rajya Sabha.
The government could also face a separate vote on amending India's foreign exchange rules, which it needs to win in order to be able to implement policies including retail reform.
Asia's third-largest economy looks set for its worst performance in a decade, with low growth and uncomfortably high inflation. Investors are urging the government to accelerate deeper reforms including simplifying a convoluted tax system and speeding up clearances for big-ticket infrastructure projects.
"Sadly, India's reform needs are greater than its political system's capacity to deliver at the moment, and policy implementation uncertainty remains a key risk," said Jyoti Narasimhan, senior principal economist at IHS Global Insight.
(Additional reporting by Nigam Prusty in NEW DELHI and Subhadip Sircar and Abhishek Vishnoi in MUMBAI; Editing by Ian Geoghegan)