Congress says its workers and leaders are being threatened or coerced every day by the Trinamool.
Congress even faced opposition from parties that it relies on to govern, including from Ms. Banerjee's Trinamool Congress.
Some worry that her relations with Congress have become so dire that her own Trinamool party may leave the coalition.
West Bengal Chief Minister Mamata Banerjee, of Trinamool, asked why Congress had not objected while Mr Basu was in residence.
But he said it had "respect" for Trinamool and would discuss the overhauls further with the party in the days ahead.
WSJ: India Government Roiled as Ally Withdraws Over Retail Plan
That was a victory for Congress's main coalition ally, the Trinamool Congress.
The decision was also welcomed by the Trinamool Congress, a West Bengal-based party that contributes 19 votes to the ruling coalition in New Delhi.
Prime Minister Manmohan Singh's governing United Progressive Alliance, which relies on Trinamool's 19 seats to form its Parliamentary majority, isn't likely to fall immediately.
WSJ: India Government Roiled as Ally Withdraws Over Retail Plan
In September, the Mamata Banerjee-led Trinamool Congress had pulled out of the coalition government protesting a decision to allow foreign retailers set up shop in India.
As The Economist went to press, Mamata Banerjee, chief minister of West Bengal and leader of the Trinamool Congress, was threatening to withdraw her ministers from the coalition.
The Trinamool Congress has decided to leave the government over plans unveiled last week, said Mamata Banerjee, the party's head and the chief minister of India's West Bengal state.
WSJ: India Government Roiled as Ally Withdraws Over Retail Plan
Many potential BJP allies (such as the Trinamool Congress in West Bengal and Telugu Desam Party in Andhra Pradesh) will be wary of alienating Muslim voters by cohabiting with him.
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Trinamool, which means grassroots, won after she led a campaign against plans by Tata, India's biggest firm, to build a car factory on land she claimed was taken unfairly from farmers.
Trinamool Congress leaders have been pushing her left-wing credentials.
"We are totally in favor of a strong bill but the federal government should also take the views of states as they are the ones who would implement it, " Trinamool Congress Party member Sudip Bandopadhya said.
The party has 18 members in the lower house of Parliament and the absence of their support will further weaken a government which is in minority since the Trinamool Congress pulled out of the coalition in September.
The government is dependent on the Trinamool Congress and the DMK for its Parliamentary majority but it does not face any immediate threat of losing power as both have assured the Congress party they would not leave the coalition.
West Bengal Chief Minister Mamata Banerjee, who is leader of the Trinamool Congress party, another major Congress ally, is also against the decision to open up India's retail sector but whether her party would help defeat the government remains unclear.
Still, Trinamool's defection adds to political turmoil in India and could imperil the economic measures taken by the government last week, which also include allowing greater overseas participation in India's airline and broadcasting sectors, as well as boosting diesel-fuel prices to lower subsidies.
WSJ: India Government Roiled as Ally Withdraws Over Retail Plan
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