NEW DELHI (Reuters) - Indian Prime Minister Manmohan Singh’s government is struggling to weather its worst crisis as communist allies threaten to end support, and even if the coalition scrapes through its stability is likely to be badly dented.
Either way, analysts say the crisis will shake some investor confidence in one of the world’s fastest growing economies and raise political risk at a time Indian markets are already reeling under the impact of global credit worries.
The crisis — triggered by the opposition of the left parties to a historic civilian nuclear cooperation deal between India and the United States — was initially considered to be mere anti-American posturing by the communists.
But with Singh refusing to give in and daring the communists to withdraw the support of their 60 MPs in parliament, the confrontation has deteriorated into a battle of political egos, analysts said.
“I don’t think we have reached a point of no return,” said B.G. Verghese, a political analyst at New Delhi’s Centre for Policy Research. “But we are on the edge.”
The communists, who now have the most lawmakers in parliament in their history, could never hope to better that performance and would therefore not want to push for an election, he said.
“But you never know. They also have their extremists and adventurists who may want to go for the brink,” Verghese added.
The communists — made of four parties in parliament — have been critical of the government’s growing friendship with Washington and opposed the nuclear deal, saying it hurts India’s sovereignty and draws it into the U.S.’s strategic embrace.
The deal aims to end three decades of American sanctions on nuclear trade with India and give it access to nuclear fuel and equipment to help meet its soaring energy needs, even though it has tested nuclear weapons and rejected non-proliferation pacts.
Besides being seen as the cornerstone of a new warmth between the once-estranged democracies, the deal is also considered one of India’s biggest foreign policy triumphs in decades and the most significant achievement of Singh’s three years in power.
The crisis had been expected to explode on Saturday at the end of a politburo meeting of the largest communist party but the left leaders apparently bought time and kept the door open for a way out.
However, in an indication that the political stakes were higher, they threatened the government with “serious consequences” if it did not stop negotiations to gain global approvals for the deal without addressing their concerns.
On Sunday, Foreign Minister Pranab Mukherjee said the government was looking for ways out of the logjam.
“We are examining it from various sides and let us see how we can proceed further and what could be done to overcome the impasse,” he told reporters.
A debate in parliament next week over the deal and some mollycoddling of the communists by giving them fresh assurances that their concerns would be addressed could help take some of the steam out, political analysts said.
New Delhi cannot afford to delay the deal and needs to sew it up and seek the approval of U.S. Congress before the end of this year, with a U.S. presidential election looming in 2008.
The deal, which has also faced opposition from the non-proliferation lobby in Washington, would find it tough to get the backing of a Democrat-dominated U.S. Congress in an election year, diplomats say.
Relations between Singh’s government and the communists have been marked by constant bickering, with the left opposing everything from raising gasoline prices to the privatization of state firms, labor reform, pension reform and greater foreign investment in key sectors.
“If we don’t go ahead with the deal now what is India’s status going to be in the world?” asked Verghese. “What is going to happen to the economy, who is going to sign any contract, economic, political or social?”
Asked if the crisis had raised India’s political risk, V. Anantha Nageswaran, investment research head at Bank Julius Baer in Singapore said: “I think the answer is yes. Regardless of anything it means materially to India’s policy making, that is how the market would perceive it.”
Giving in to the left now would mean “even the very, very remote or slim chance of any economic reform or liberalization goes to pretty much zero in the next two years and that would be considered negative”, he said.