Indian prime minster-elect Sonia Gandhi faced her first crisis yesterday, before even taking power, when pivotal leftists refused to formally join her government and markets crashed on fears over economic policy.
Shares on the Bombay exchange plunged almost 16 percent -- the worst fall in its 129 years -- before trading was suspended a second time. They later recovered to about 9 percent down, on top of heavy losses last week. The rupee also fell 0.8 percent yesterday despite central bank support.
PHOTO: AFP
The crash, including a big drop on Friday, has wiped billions of dollars off the value of India's listed companies. Hundreds of bro-kers and small investors protested outside the bourse on the day Gandhi was due to visit the president to claim power.
PHOTO:AFP
Leftist parties, which hold more than 60 of the new parliament's 545 seats, decided not to formally join Gandhi's Congress party and its allies in the coalition expected to be sworn in tomorrow. They have pledged to support her from outside on vital votes, such as confidence motions, but the decision has stoked concerns about the government's stability and fears the communists will wield their power without responsibility.
"The whole tug-of-war is economic policy. Either the left should be in the government and take responsibility for implementing those policies or they should give unconditional support if they are supporting from outside," said a trader with a leading brokerage in Mumbai.
"It makes no sense to remain outside and then dictate terms. Outside support will make the government that much more unstable," the broker said.
But Congress spokesman Jaipal Reddy said: "There are no doubts about stability of this government. There will be no difficulty."
Investors fear the leftists, led by the Communist Party of India (Marxist), the third largest party in the parliament with 43 seats, will block or slow key reforms in Asia's third largest economy, especially privatization of bloated state firms.
Senior Congress leader Manmohan Singh, the father of India's economic reforms more than a decade ago, stepped in quickly to reassure investors.
"We are not pursuing privatization as an ideology, but we are not against privatization where it is called for in the national interest," he told reporters. "Our fiscal and other policies will seek to create a favorable climate for enterprise."
But at exactly the same time, just a few kilometers from where Singh was speaking, communist leaders were calling for increased subsidies for farmers, the return of some import restrictions and the axing of the privatization ministry.
However, Communist Party of India leader A.B. Bardhan also said the parties would support some stake sales in government firms and welcomed foreign investment.
Analyst Prem Shankar Jha said the power of the communists after Congress' surprise ouster of the ruling Hindu nationalist-led coalition could take India back to the instability of the mid-1990s when leftists were also pivotal.
"By staying out, the communists will be free to criticize anything the Congress does. This will constantly erode the confidence in the government," he said.
The Italian-born Gandhi was expected to visit President Abdul Kalam to claim power yesterday, armed with letters of support totalling more than 320 seats. That includes the leftist bloc.
If Kalam agrees, her new government is due to be sworn in tomorrow, making her India's first foreign-born prime minister and the dynasty's fourth.
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