Indian government ally sulks

A key ally in India's ruling coalition refused to join the cabinet yesterday because of a row over portfolios, but investors cheered the new reformist finance minister after weeks of chaos in financial markets.

The row, which came up on the first day Prime Minister Manmohan Singh's communist-backed coalition government opened for business, was not seen as a major threat, but underlined the difficulties in making the alliance work.

But Bombay's benchmark stock market index was not deterred. Hit by some of the biggest plunges and recoveries in its history in the chaos that followed India's election, it closed up 3.26 per cent yesterday.

Also, India's new foreign minister promised he would draw on his own stint as an ambassador to Islamabad to deepen the budding friendship with old enemy Pakistan.

Mr Singh, the father of India's reforms, named Harvard-educated lawyer Palaniappan Chidambaram to the critical post of finance minister on Sunday in a bid to calm battered markets.

Mr Chidambaram was commerce minister when Mr Singh, then finance minister, began dismantling India's socialist controls in the early 1990s.

In his first news conference since taking over, Mr Chidambaram said the reforms critical for growth in Asia's third-largest economy would be continued, and they would be enhanced by the experience he had gained in the past 13 years.

"It will be my endeavour to promote investment which I believe is the key to growth, jobs and to income," Mr Chidambaram said. "I have come back with very valuable experience."

Economists said the signs were promising. "(Mr) Chidambaram has proved himself and the markets have accepted him in the past. But how much will he be able to deliver under a coalition government is to be seen," said Paras Adenwala, head of equity funds at Birla Sun Life Mutual Fund. "Overall, I am happy that things are moving. We have a government in place."

Another new minister said the government would consider liberalising rules that restrict foreign investment in India's economy. Plans to privatise the country's airports in New Delhi and Bombay would not be affected, the aviation minister said.

The comments were aimed at allaying fears among investors that the left-leaning government may slow reforms in Asia's third-largest economy.

But key questions still remaining on the government's first working day included the coalition's formal economic agenda and the pulls and pressures from allies.