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PM Defensive As Economy Stares At Stagflation

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The ruling Congress party was in turmoil on Thursday after two key allies signalled loss of confidence in Prime Minister Manmohan Singh, whose fragile coalition government has struggled to cope with mounting economic problems leading to stagflation.

The Mamata-Mulayam show forced Congress to spring to the prime minister's defence, insisting he would remain in his post until general elections due by 2014, after the allies suggested he should be considered for the largely ceremonial position of president.  Congress, which has ruled India for most of the 65 years it has been independent, has yet to officially name its presidential candidate, but Finance Minister Pranab Mukherjee is viewed as party leader Sonia Gandhi's top choice.

In fact, with one stroke the UPA allies seem to have tendered the position of both Pranab and Manmohan Singh uncertain. While it will now be foolhardy for Congress to run with Pranab as Presidential candidate, it also showed the world, how little respect the allies have for Manmohan Singh as the Prime Minister.

Yesterday, Congress was blindsided by the comments from West Bengal Chief Minister Mamata Banerjee, who has repeatedly thwarted proposed economic reforms despite being a member of the government, and Samajwadi Party chief Mulayam Singh. (Read: Mamata, Mulayam Name Presidential Candidate)

Key UPA constituent Trinamool Congress on Thursday toughened its stand saying if Congress names Finance Minister Pranab Mukherjee or Vice President Hamid Ansari as its Presidential candidate, it will "contest" the election with A P J Abdul Kalam as its nominee.

TNC said its leader Mamata Banerjee had not breached any trust by disclosing the names of Mukherjee and Ansari discussed with her by Sonia Gandhi on Wednesday, saying that it was done with the "consent" and "permission" of the Congress chief.

Trinamool Congress, which has teamed up with Samajwadi Party, floated the names of Kalam, along with Prime Minister Manmohan Singh and former Lok Sabha Speaker Somnath Chatterjee yesterday as a counter to UPA's nominee.

On the Congress criticism of Trinamool chief for disclosing the names of Mukherjee and Ansari, Ghosh said, "Yesterday Mamata had gone to meet Sonia Gandhi to discuss Presidential candidate and after the discussion Mamata asked Sonia whether she could disclose (names) to media standing outside.... And Sonia gave her the consent. That is what exactly she did."

Congress's ability to get its nominee elected president is widely seen as an important test of its power after it suffered stinging defeats in provincial elections this year. India will elect a new president on July 19 and Singh has already made clear he has no interest in taking the post.

Singh, hailed as the architect of landmark economic reforms he introduced in 1991 when he was finance minister, has been widely criticised by business leaders and investors for weak leadership at a time when India is beset by slowing growth, dwindling foreign investment, and high inflation.

Economic Troubles Go A Notch Up
There was fresh evidence of the economic troubles on Thursday. Inflation accelerated in May, adding to an avalanche of harsh data for the beleaguered leaders and making it harder for the RBI to revitalise the flagging economy with a widely expected RBI interest rate cut next week. Government data also showed that exports from Asia's third-largest economy fell 4.16 per cent in May over the previous year. (Read: Inflation Picks Up) in the same month to 7.55 per cent. (Read: May Exports Down)

Global financial services firm Moody's said on Thursday Indian economy is facing stagflation, where growth is slow and inflation high, and cautioned that the Reserve Bank cannot be too aggressive in cutting interest rates.

"With the inflation numbers now being driven by supply-side factors, and with the currency being pushed downwards...and India's weaker growth prospects, we think that the RBI could cut rates without it putting too much upward pressure on inflation," said Moody's Analytics. (Read: India Facing Stagflation)

The country's crucial monsoon rains were 50 per cent below average in the week to June 13, the weather office said on Thursday, a second week of scant rain and confirmation the four-month season has got off to a slow start. The monsoon rains were 36 percent below average in the first week, reflecting a delay in the arrival of the seasonal rains over south from the usual June 1 start date.

Surprise Snub
Until Wednesday, the party thought it had the votes it needed to get him elected and much of the focus had been on who would replace him and whether the change in leadership would be a boon to the economy.

But the snub by Congress's allies - Mukherjee was not on their list of potential candidates - threw what had been a relatively smooth presidential race into disarray and fuelled speculation about a new government lineup that would not include Singh, who has been prime minister since 2004.

"We cannot afford to remove Manmohan Singh from the prime minister's post. It is our commitment to the nation. He will stay in the chair until 2014," said Janardan Dwivedi, the Congress party's chief spokesman.

Television news channels showed Congress leaders shuttling back and forth from Sonia Gandhi's New Delhi home as she tried to plot a way forward. Three Congress officials told Reuters that Mukherjee remained her preferred candidate but that the situation was fluid.

News reports said the party was scrambling to muster the votes it needed from a coalition of smaller parties. It was not clear whether it would get the magic number it needs to get its candidate through the electoral college.

"The Congress would lose face badly if it does not now run with Mukherjee," the Economic Times warned.

With the next general election widely expected to produce a fragmented parliament with no clear winner, Congress wants to make sure it controls the presidency. The new president will play a key role in deciding which party takes the lead in forming a government.

The political drama is a major distraction at a time when the flagging economy and global economic uncertainty require the government's full attention, a government official said.

"It is not correct to say that the work has stopped. Work is going on. But it does act as a distraction," the official said on condition of anonymity. When the situation is bad, you would want complete focus on the economy."

Indian media offered differing interpretations for Wednesday's embarrassing snub by the regional allies, but analysts agreed it was typical of the machinations that complicate Indian politics and confound good governance.

"Everybody has a chess game in mind," said analyst Surjit Bhalla, chairman of Oxus Investments, expressing hope that the latest developments could provide the impetus to shake up the political landscape and break the policy inertia.

(With Agencies)