Leaving aside the politics, against the unfavorable economic backdrop, room for tough reforms is likely to be limited, say Alastair Newton, senior political analyst and Sonal Varma, India economist at Lehman Brothers

India's ruling Congress-led United Progressive Alliance (UPA) government's majority win ensures the immediate survival of the government and potentially removes the risk of an early general election.

Reduced political uncertainty is a positive for the markets in the short term. Pushing through the Indo-US nuclear deal is more likely now that the government has both domestic and international support although there are still hurdles to be overcome in the form of IAEA and Nuclear Suppliers' Group (NSG) approval as well as ratification by the US Congress, which may not be straightforward at this stage in the US electoral cycle.

There are also expectations for economic reforms in areas that were earlier opposed by the Left party and which may find some support from the government's new allies, including:

• A hike in foreign direct investment (FDI) limit in the insurance sector to 49 perc ent from 26 per cent;
  
• Allowing foreign investors voting rights in proportion to their equity holding in banks from the current cap of 10 per cent;
  
• Passing the Pension Fund Regulatory and Development Authority (PFRDA) bill that allows private sector more participation in the pension sector; and
  
• Further disinvestment in public-sector companies, which would help ease the worsening fiscal position.

However, at this stage in India's electoral cycle - a general election must be held no later than May 2009 - we are more cautious about expecting more substantial reforms, such as addressing the infrastructure, labour market and bureaucracy problems, during the lifespan of the current government.

Rather, with elections no more than 10 months away, there is an inevitable propensity in any administration to lean towards populist policy decisions rather than tough, and potentially unpopular, measures.

Also, the confidence vote is no guarantee that the election will indeed be pushed out until May 2009, as the government's position remains fragile and the main opposition BJP in particular may continue to try to force an early election.

Even without reforms the government will have its work cut out in arresting not only a weakening economy, but deteriorating fundamentals. The top priority is taming the high inflation rate, which we expect will continue to remain in double-digits until Q1 2009. We also expect the twin deficit challenge of rising fiscal and current account deficits (we forecast at 9.1 per cent and 3.0 per cent of GDP respectively in FY09) to remain.

With an expansionary fiscal policy and rising risks of second-round effects of inflation, we expect further monetary policy tightening to tame inflation, but only at the cost of slowing GDP growth.

Even leaving aside the politics, against this unfavorable economic backdrop, the room for tough reforms is likely to be limited. In our view, it has reached the point where earlier elections look to be the better option.

First, despite the outcome of yesterday's vote, the current government's overall position remains weak; this morning's air of greater political certainty is therefore likely to prove short-lived, in our view, with greater uncertainty likely to return until the elections are done and dusted. Second once a new government takes office, there should be at least a new window of opportunity for economic reform, particularly if inflation eases next year, as we expect.