UPDATE 1-Indian government wins vote on supermarket reform

Wed Dec 5, 2012 8:35am EST

By Nigam Prusty

NEW DELHI Dec 5 (Reuters) - India's fragile ruling coalition won a vote on allowing foreign supermarkets to operate in Asia's third-largest economy in a test of support for Prime Minister Manmohan Singh's minority government and his flagship economic reform.

The victory gives Singh a much-needed boost at a time when he is trying to drive a second wave of economic reforms through a fractious parliament. The debate over retail reform has proved a costly distraction for the government and has already eaten up two weeks of the month-long parliamentary session.

The vote now clears the way for voting on bills aimed at attracting foreign investment to the ailing pension and insurance industries, two measures seen by financial markets as important steps towards further liberalising an economy in the midst of a slowdown.

Expectations the government would win drove India's stock market to a 19-month high on Wednesday.

The vote in parliament's lower house - which the government won thanks to abstentions by two powerful regional parties - was non-binding. However, a loss would have made it harder for Singh to defend the policy to bring global chains such as Wal-Mart Stores Inc. to India's $450 billion retail sector.

Under threat of losing India's investment grade credit rating, and facing the prospect of fighting a general election during the worst growth slump in a decade, Singh launched the policy amid a flurry of long-delayed reforms in September.

Money has flowed into India's capital markets since, and Goldman Sachs last week upgraded India's outlook, but formidable hurdles remain to get the economy back on track.