* Congress seeks stable coalition
* Focus on domestic investment and demand
* Free to pursue foreign policy objectives
By Krittivas Mukherjee
NEW DELHI, May 17 India's Congress party held talks on Sunday to identify allies for a stable new coalition government after a sweeping election victory at a time of sagging economic growth and regional instability.
Prime Minister Manmohan Singh's coalition defied predictions of a tight election and was only about 11 seats short of an outright majority from the 543 seats at stake, according to election commission data. (For more stories click [ID:nSP437509])
In a country where unwieldy coalitions were becoming the order of the day and hobbling policy, the electoral verdict this time means Congress will call the shots in coalition building rather than being dependent on the goodwill of regional parties.
The Congress' top leaders, including Singh, party chief Sonia Gandhi and Foreign Minister Pranab Mukherjee, met on Sunday and discussed potential allies.
They were expected to talk later on Sunday with the regional Samajwadi Party, which is based in the northern state of Uttar Pradesh, for a possible alliance, local TV channels said. The party had backed the Congress-led government over the last year.
"I can only tell you that there are a lot many smaller groups, many political parties or independents who are more than willing to support this government in national interest," Congress spokesman Rajiv Shukla said.
Pollsters had predicted controversial regional chieftains like Mayawati, a lower caste leader in northern India, could have held the balance of power after the election, stymieing economic policy and demanding ministerial portfolios.
A strong Congress-led coalition, free of pressures from its former communist partners, has boosted the prospect of reforms to encourage growth in Asia's third largest economy.
The new government will also have a strong mandate to deal with security issues in a region overshadowed by instability in Pakistan and Afghanistan.
Singh's coalition will be free to pursue closer ties with the United States, which the communists had opposed. They eventually walked out of the alliance over a civilian nuclear energy deal.
Indian markets were set to surge on Monday on expectations the clear election victory would lead to a strong and stable government that would accelerate the pace of economic reform.
The rupee INR=IN was expected to strengthen past 49 per dollar and bond yields were set to fall as the outcome should encourage foreign investors, analysts said.
"The markets could go up anywhere between 1,100-1,300 points over the next two to three days because you cannot have asked for a better combination," Arun Kejriwal, strategist at KRIS, said of the share market
The Congress must form a government by June 2.
While a strong mandate gives the reformist Singh the freedom to pursue market-friendly reforms, Congress party leaders struck a cautious note saying they would rather focus on reviving domestic demand.
"Some of the icons of the financial world who were advocating financial reforms have closed shop. We have to be cautious this time," Trade Minister Kamal Nath said in a telephone interview.
During the election, the Congress had campaigned on a record of spending on the rural poor, including a public jobs programme in the countryside and a costly loan waiver programme for indebted farmers, and was unlikely to give up such a platform.
"Inclusive growth was the mantra of success," wrote political analyst Mahesh Rangarajan in The Mail Today.
The Congress leadership was also expected to discuss a cabinet role for Rahul Gandhi, heir apparent of the Gandhi-Nehru dynasty. He is seen as the architect of the Congress party's resurgence, particularly in the northern states.
Though Singh, 76, will retain his office for now, Gandhi is projected as a potential future prime minister.
"Verdict 2009 has also been a decisive judgement on the 39-year-old Rahul Gandhi as a campaigner, political tactician and as the ordained one who would be king," wrote the Times of India. "And the judgement is overwhelmingly in his favour." (Writing by Sanjeev Miglani; Editing by Alistair Scrutton)