NEW DELHI, March 15 (Reuters) - India's railway minister looked set to quit on Thursday after a storm broke out over his move to raise passenger fares, underscoring the government's inability to take unpopular policy steps amid growing speculation the ruling coalition could break up.
Breaking with years of populist policies, Railway Minister Dinesh Trivedi announced the first increase in fares in eight years on Wednesday, a move aimed shoring up the finances of a network whose dysfunction has become a major drag on the economy.
The move cheered investors but prompted a furious response from Trivedi's own party, a powerful regional ally of the ruling Congress party that has stood in the way of economic reform in the past.
Trivedi's Trinamool Congress Party governs the eastern state of West Bengal under firebrand Chief Minister Mamata Banerjee. Shortly after the railway budget speech ended, the party attacked its own minister, demanding he resign and that the fare increase be rolled back.
Trivedi denied media reports that he had already quit and Finance Minister Pranab Mukherjee told parliament that a formal resignation had not been submitted to the prime minister.
If Prime Minister Manmohan Singh agreed to a rollback of the fare hike, it would feed the impression that his government - already reeling from graft scandals - is unable to implement policies needed to lift economic growth, which has slowed to its lowest in nearly three years.
The row may cast a shadow over the federal budget for 2012/13 (April-March) due to be presented in parliament on Friday, which is expected to push for a fiscal deficit reduction.
"None of this augurs well for the upcoming general budget," the Times of India said in an editorial on Thursday.
"There'll be misgivings about Mamata playing to the gallery by bashing any reform the finance minister proposes in the budget. So, he might think it better to play safe than sorry. The upshot for the is clear: Mamata as an ally has become a liability."
If Banerjee's Trinamool Congress does not support the budget in parliament and withdraws from the ruling coalition, the government would face a no-confidence motion and would have to look to other regional parties to maintain the majority in parliament required to rule.
If Congress failed to prove it had a majority, a snap general election would have to be called, two years before the government's term is due to end in 2014.
However, Trinamool Congress' parliament leader, Sudip Bandyopadhyay, sought to cool speculation that the party was about to quit the coalition, saying the government was "totally settled and will complete its term".
The row over railway fares follows a series of policy flip-flops. Last year, Prime Minister Singh attempted to allow foreign retailers such as Wal-Mart Stores Inc to invest in the country's supermarket sector, but his move was blocked by the Trinamool Congress.
Earlier this month, a flip-flop over whether India would ban cotton exports plunged global markets for the commodity into uncertainty.
"Mamata Banerjee does not want the ... government to fall but there are issues on which the Trinamool Congress differs with the ruling Congress Party," Ambica Mukherjee, Trinamool Congress MP, told Reuters.
"There are parts of the reforms agenda of the government that we are not convinced about. So how can we be expected to follow everything the Congress says?"
Many Indians still see the railways as a service for the "aam aadmi", or "common man", or those left on the periphery of two decades of surging growth that has seen millions buy cars or travel by air for the first time. (Editing by Raju Gopalakrishnan)