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India Reassures on Reforms After Key Ally Quits

Poras Chaudhary | The Image Bank | Getty Images

The Indian government said on Wednesday it was still able to pass reform legislation in parliament, a day after its biggest ally abruptly quit the ruling coalition, but ministers did not answer questions on whether it would call a snap election.

The withdrawal of the Dravida Munnetra Kazhagam (DMK) has rattled markets, who are worried that it has left Prime Minister Manmohan Singh unable to pass reforms needed to turn around the country's worst economic slowdown in a decade.

The government is looking to pass a slew of bills in the current session of parliament to restore investor confidence and stave off a ratings downgrade, including opening India's insurance and pension sectors to foreign investors, and making land acquisition easier for industry.

(Read More: India's Industrial Output Recovers in January, Rate Cut Still Seen)

The DMK pullout has fired speculation that the government, which is in a minority in parliament and relies on the support of powerful regional parties to stay in power, could call early elections, possibly as early as November.

News of the DMK's withdrawal, which was sparked by a row over censuring Sri Lanka for alleged war crimes committed during the island nation's civil war, sent shares down to their lowest levels in more than two weeks.

"I want to reiterate that the government is neither lame nor a duck. We are absolutely stable," Parliamentary Affairs Minister Kamal Nath told a news conference in New Delhi. "No political party has come out and challenged the majority of this government."

(Read More: Indian Inflation Picks Up, but Rate Cut Bets Unchanged)

Finance Minister P. Chidambaram, also speaking at the news conference, said the government would have enough support in parliament to pass legislation.

"I am sure on the merits of reform bills, political parties will support the government," he said, adding that the pullout would not affect the government's ability to cut the fiscal deficit.

Neither Nath nor Chidambaram answered a question on whether an early election was likely.

In the federal budget announced at the end of February, Chidambaram had said India's fiscal deficit would fall to 5.2 percent of GDP in the current 2012-13 fiscal year that ends on March 31, and 4.8 percent in the next year, targets intended to help stave off a sovereign credit rating downgrade to "junk" status.

(Read More: India Cuts Rates, Experts Say So What?)

The DMK submitted a formal letter of withdrawal to the Indian president on Tuesday night, and its five ministers are expected to submit their resignations on Wednesday. Congress leaders said they still hoped to persuade the DMK to change its mind.

The source of the row is a draft United Nations resolution on allegations that Sri Lankan troops committed war crimes in the closing stages of the 25-year-long civil war in the island nation against its minority Tamil population.

Tens of thousands of civilians were killed in 2009, in the final months of a war that began in 1983, a United Nations panel has said, as government troops advanced on the last stronghold of the rebels fighting for an independent homeland.

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