Prime Minister Manmohan Singh's biggest ally has pulled out of the Congress-led ruling coalition, tipping the government into a minority as a political firestorm over big-ticket reform measures escalates in the world's most populous democracy.
Mamata Banerjee, chief minister of West Bengal, had demanded the government reverse its decision to raise diesel prices and open India's supermarket sector to investment from foreign chains such as Wal-Mart Stores.
The pullout of her Trinamool Congress party (TMC) on Tuesday evening is unlikely to topple the government as Singh can count on two other powerful regional parties outside the coalition to prop it up. But both these parties are also opposed to retail liberalisation, which could once again endanger a closely watched policy that stalled last year after street protests.
Retail reform was among a series of "big bang" economic reforms launched last week. They are seen as crucial to reviving India's flagging economic growth, reining in a bloated fiscal deficit and warding off the spectre of a credit rating downgrade.
But the measures sparked a furious backlash from Banerjee and other political parties, who condemned them as a needless attack on India's hundreds of millions of poor people.
A senior leader in the Bharatiya Janata Party (BJP) told Reuters it would try to push for a confidence vote in a special session of parliament it plans to convene.
Singh's renewed drive for reforms had cheered investors as a sign that the government was finally shaking off months of policy inertia. The Congress party appears confident of surviving opposition to the reforms and has so far held firm against calls for them to be rolled back.
"The government have lost their credentials. If they cannot keep their friendship with us, they cannot keep it with anyone," Banerjee told reporters on Tuesday after a meeting of her party in Kolkata, seat of her government.
"DIDI" A THORN IN CONGRESS' SIDE
The withdrawal of the 19 TMC MPs in the lower house of parliament puts the government in a minority.
But it is unlikely to destabilise the coalition in the short term. Congress has the formal support of the Bahujan Samaj Party (BSP) and the Samajwadi Party (SP), who have a combined total of 43 seats in parliament, to keep it afloat. It needs a minimum of 272 seats out of 543 in the lower house.
"The government will survive. We have the numbers," said Tom Vadakkan, media secretary for the Congress party. "We've done our calculations. We have 272."
Growth in Asia's third-largest economy has languished near its slowest in three years amid an avalanche of criticism for Singh's government, which has grappled with a spate of political scandals since his second term began in 2009.
"The government is in a critical situation but they will somehow survive for now," said political analyst Amulya Ganguli.
"A minority government cannot, however, last that long. We may look at elections being brought forward," he said. National elections are due by 2014, when Singh is expected to stand down.
Several party and government officials had earlier told Reuters that Congress leader Sonia Gandhi had assessed the risks of losing coalition allies over the measures and concluded the government was safe.
"While the Samajwadi Party condemns the actions taken by the UPA (United Progressive Alliance) government, we are not going to withdraw our support to it," Samajwadi spokesman Ram Gopal Yadav said, speaking after Banerjee's withdrawal.
A spokesman for the BSP said the party would decide at a meeting in October whether to keep supporting the government.
The BJP will push for a confidence vote but it cannot officially do so until parliament reopens in the next session due in December. The party may pressure the Indian president to hold a special session for the vote earlier than that.
Banerjee came to power in West Bengal in 2011, ending more than three decades of Communist rule in the state. Colloquially known as "Didi", or "elder sister", Banerjee's supporters hail her as a champion of India's poor and dispossessed.
But her politics have been a thorn in the side of the government. Her protests were instrumental in blocking a slew of economic measures, from retail reform to allowing foreign direct investment into India's aviation and insurance sectors.
"We waited enough time," Banerjee said. "They have to withdraw FDI in retail if they want us to stay, they have reverse their decisions on LPG subsidy and diesel hike."