The introduction of VAT, is widely seen as crucial to improving the efficiency of India's economy and raising cash for the Union government to fight poverty. If the tax is put on ice -- this time because of objections by states ruled by the main opposition BJP -- it would be for the sixth time in a decade.

Yet the view from New Delhi is that while another delay would speak volumes about the complex political relations between the central government and the states, Asia's fourth-largest economy remains on the road to reform.

"India has changed dramatically in the past 10 years because of lots of small, incremental changes put together," said Vijay Kelkar, a former senior civil servant.

Kelkar, author of a blueprint to overhaul India's tax system, said this measured pace of change toward a more market-orientated economy was a positive for India, not a drawback.

"People like familiarity. Small changes make the process sustainable, so there's been no going back on reforms. The probability of reversal is very small," said Kelkar, who chairs the India Development Foundation, a privately funded think tank.

The compulsion of coalition politics means that India's federal governments could not ram through radical changes even if they wanted to. The BJP, which tried to implement VAT when it was in power, used to lead a coalition of more than 20 parties.

It was replaced last May by the Congress party, which rules in coalition with more than a dozen parties.

Four left-wing parties also support the government from outside the coalition, putting a further brake on reform.

"Some economic policies are going through, though they've been delayed thanks to our pressure," said Ardhendu Bhushan Bardhan, general secretary of the Communist Party of India.

NO OBJECTIONS

In an interview with Reuters, Bardhan said he was unhappy that the coalition had not done more to help rural India and was quietly keeping the door open to privatisation. The party also opposed the coalition's recent decision to raise the foreign ownership cap on telecommunications firms to 74 per cent from 49 per cent and is hostile to plans for banking sector consolidation.

But Bardhan said his party would not seek to bring down the reform-minded coalition as long as it kept its promise to pump more cash into rural development and poverty alleviation.

"If the government does, there's no objection. It will continue," said Bardhan, adding that his party's political imperative was to prevent the BJP from getting back to power.

He said his party had no objection in principle to foreign direct investment in India, which has been attracting about as much FDI in a year as China gets in a month.

"All encouragement should be given to the private sector to expand," he said. "And per se we don't object to foreign capital. Anything that does not compromise your security or allow your resources to be grabbed by others, we are willing."

Bardhan also said he was resigned to the gradual weakening of India's rigid labour laws. The government would never dare to repeal the laws, which make it hard for firms to sack workers. But it was increasingly bending them, for example by letting textile firms hire contract staff and making women work nights.

"They're bypassing the laws and ignoring some. It's very difficult to fight that," he said.

DETERRENTS

Pronob Sen, a senior Planning Commission official, said fewer companies thinking about investing in India were raising the question of India's hiring-and-firing laws.

"They are deterrents in the early stages. Then people start to find a way round them. China isn't exactly the world's most investor-friendly place either. But once you've figured out how to get round it, you can start moving," he said.

Nonetheless, other countries are well ahead of India in removing the obstacles to doing business.

International Monetary Fund chief Rodrigo Rato reminded an audience in Mumbai last week that average trade tariffs in India were still nearly three times higher than Southeast Asia's; it took 89 days to start a business here against 41 in China; and enforcing a contract took 425 days, nearly double that in China.

The textile industry, for example, had the potential to make large gains in the wake of the expiry on Jan. 1 of global quotas that curbed exports to western markets, but only if India relaxed its labour laws, lowered trade barriers and cut red tape.

"Without key changes in these areas, India may be left without the flexibility to compete in an increasingly competitive industry," Rato said.

Overall, though, reforms had made steady progress despite changes in political leadership. "Looking ahead, it appears that the broad path of reform -- if not the pace or details -- is firmly established," the Fund managing director said.