UPDATE 1-U.S. inflation path since 2012 is worrisome, policymaker says
* Bullard warns on inflation, cautious on aggressive rate hikes
* Will "never" lower opposition to foreign supermarkets
* Says subsidies protect poor, government should find revenue elsewhere
* Debt crisis, erratic moves give government leverage over querulous ally
By Matthias Williams and Frank Jack Daniel
KOLKATA, India, May 13 Kolkata's red-brick secretariat was built more than 200 years ago for Britain's East India Company, which used trade in opium, cloth and tea to colonise the subcontinent. Distrust of foreign merchants lingers still.
For the past year, the sprawling building has been occupied by Mamata Banerjee, the diminutive chief minister of West Bengal state who is perhaps the largest obstacle to economic reforms that would allow 21st-century traders free access to India's consumer markets.
To supporters who affectionately call her "Didi", or "Big Sister", Banerjee is a hero who ended more than three decades of communist rule in West Bengal. They say she shelters farmers and shopkeepers from the harsh winds of globalisation, while guiding West Bengal towards its rightful place as an economic and cultural powerhouse and India's gateway to Southeast Asia.
But after a series of erratic moves, including the arrest of an academic who forwarded a joke email about her to his friends, critics see her as an autocrat in the making. Weekly magazine India Today branded her the "Queen of Democrazy".
Banerjee's widely ridiculed antics and disappointment with her administration in West Bengal could hasten the end of her honeymoon with the voters.
She is also dependent on the central government to bail West Bengal out of a debt crisis. Together, those factors offer Prime Minister Manmohan Singh a chance to out-manoeuvre someone who, despite being a coalition ally, has stood doggedly in the way of much-needed economic reform.
In the past year, India's stellar economic growth has slowed and its current account and budget deficits have ballooned. But the central government's attempts to introduce policies it says would remedy the crisis have been blocked by the very coalition allies it relies on for survival, chief among them Banerjee's Trinamool Congress party.
"She's very much on the back foot because of her behaviour," said Bengali political analyst Amulya Ganguli, adding a change may now be "in the offing".
"There are signs of mellowing. Perhaps she realizes she has to act responsibly and not say no to everything."
A weakened Banerjee could make it easier for Singh's government, whose popularity has sagged amid corruption scandals and high inflation, to push through reform.
SLUMS AND iPADS
Despite modest beginnings as a poor teacher's daughter, Banerjee was named in April one of Time Magazine's 100 most influential people in the world. Last week she was visited by Hillary Clinton, who praised her political achievements after discussing potential U.S. investment in Indian ports.
Talking to Reuters in the same sparse room where she received Clinton, Banerjee however gave cold comfort to U.S. merchants who may have thought a visit from the secretary of state would soften her opposition to foreign supermarkets such as Wal-Mart Stores Inc. operating in India.
"Never," Banerjee said emphatically. She said she welcomed private investment to create jobs in areas such as tourism and industrial projects, even for hospitals, but would always oppose policies that destroy jobs for farmers and small retailers.
"There are some areas I cannot go," she said, clad in a white saree. "I cannot tell the people you just go from your work, you must be jobless because of this."
She said she would remain opposed to raising the price of heavily subsidised fuel and rail fares. That is bad news for prime minister Singh, whose failure to rein in the deficits and reverse the slowdown has tarnished his reputation as the architect of reforms that transformed India's slow-coach economy 20 years ago.
"They talk about price rises only for the common people, you have to nurture other options also, you need to look at other ways out, how you can develop business, how you can find more funds," said Banerjee, whose 19 lawmakers give Singh's Congress party a majority in parliament.
Unmarried and still living in her tin-roofed family house in a Kolkata slum, Banerjee is facing her own financial crisis in West Bengal's state government, which could give Singh more leverage on his stalled reform agenda.
Saddled with India's highest state debt of nearly $40 billion - mostly inherited from her communist predecessors who had ruled from 1977 until elections last year - Banerjee is struggling to pay teachers' salaries and is seeking a three-year moratorium from the central government.
Although she proudly brandishes her iPad, Banerjee is drawn to the frugal tradition of Indian independence hero Mahatma Gandhi. She says she takes no government salary, or perks such as a car and residence.
Such personal austerity has not stopped her hiring some 90,000 new teachers and police, despite the state's debts. The cost has raised eyebrows but her finance minister, Amit Mitra, said it was nominal because of low wages.
Mitra, a harried-looking former head of India's premier industry chamber, FICCI, said the state's tax take was up 20 percent last year thanks mainly to enforcement.
Kolkata, formerly known as Calcutta, was Britain's beachhead in India and flourished as an intellectual and industrial capital long after the colonialists were expelled. One of the world's richest cities in the 19th century, Kolkata today is more reminiscent of Cuba's Havana with its faded tropical grandeur and 1950s-style taxis.
"We want to restore the past glory of this state," said Banerjee, who has promised to make the city as modern as London and has invited companies to help, including to build a 'Kolkata Eye' to rival the British capital's giant ferris wheel.
Projects to paint city bridges and buildings blue and install thousands of ornamental street lights Banerjee designed herself to boost civic pride have been pilloried in the media but officials say they are cost effective.
New flyovers to ease congested streets, an airport terminal and the mushrooming of middle-class apartments and office buildings are signs that change is on the way.
Overtures to private investment began before Banerjee took office, and many have been disappointed that she has not done more to improve the investment climate in West Bengal.
BLACK AND BLUE
Devoted to Bengali polymath Rabindranath Tagore, a Nobel literature prize winner, Banerjee has her own creative leanings as a painter and poet.
But critics point to a darker side of someone who does not appear to tolerate dissent. In a sign of her clout, she recently forced the prime minister to fire his railway minister, one of her own party members, after he announced in parliament that rail fares would go up.
"When I announced the increase in fares, everyone thumped the desk," the former minister, Dinesh Trivedi, said from his New Delhi residence. "And suddenly, I was asked to go."
The fare rise was supported by unions and economists as necessary to help pay for the modernisation of a railway network whose overcrowded trains and creaking infrastructure are a major drag on economic growth.
Then in April, 52-year-old chemistry professor Ambikesh Mahapatra forwarded an email doing the rounds that ridiculed Banerjee's treatment of Trivedi. Police detained him for what Banerjee called 'cyber crimes', but not before a group of about two dozen people confronted him and beat him up.
"I didn't realise that I was committing some kind of crime," Mahapatra told Reuters. "There is a sense of fear in my mind. Especially because the government seems so unapologetic."
Mahapatra's treatment sparked an outcry. Banerjee, once hospitalised for months after Communist thugs punched her to the ground, defeated the leftists partly by railing against the culture of political violence in West Bengal.
Her critics now wonder whether life is any different.
"White and blue for the bridges, black and blue for the protesters," said Dwaipayan Bhattacharyya of the Centre for Studies in Social Sciences, Calcutta.
"That appears to be her policy at this moment ... She doesn't have any tolerance for even an iota of dissent." Such behavior has alienated the educated middle classes who cheered her defeat of the left, Bhattacharyya said.
Banerjee was visibly annoyed by the charge she was autocratic, saying the campaign against her was orchestrated by the communists she ousted and maintaining that violence has dropped sharply since she took office.
Until now, Anand Sharma, the minister who drove the plan to open up India's retail sector, has seen his ambition thwarted. But change might be coming.
"With this scientist arrest, she is losing sheen as a dragon slayer," one very senior government adviser said on condition of anonymity. "Perhaps that gives Anand a little more room, we'll see."
* Bullard warns on inflation, cautious on aggressive rate hikes
BEIJING, May 26 China's structural reforms will not be enough to arrest its rising debt, and another credit rating downgrade for the country is possible unless it gets its ballooning credit in check, two officials at Moody's ratings agency said on Friday.
* Sterling tumbles on PM May's shrinking election lead, UK GDP