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Congress victory bodes well for investors

May 19, 2009 10:27 IST

Economists and stock market pundits in India's financial capital could hardly believe Saturday's election result, which seemed tailor-made for investors.

In contrast to their fears that the election would deliver an unstable coalition dependent on India's reform-allergic leftist parties, investors are now looking at what promises to be a stable government based on one of the large national parties.

They expect investors to also vote for the new government by driving the Bombay Stock Exchange's benchmark Sensex Index up by between 10 per cent and 25 per cent from its present level of 12,173.42 points.

"There's a lot of investors who had moved their money to the sidelines before the election," said Rashesh Shah, chairman of Mumbai-based financial services house, Edelweiss Group

"There's buying power there so we should see now the market moving from its present range of 10,000 to 12,000 points to the 12,000 to 15,000 points range."

Investors will be betting that a host of reforms that were delayed during the previous five-year term of the Congress party-led ruling coalition will be possible to implement now.

Ideological opposition from the left was blamed for putting India's potentially large privatization programme on hold. Now the government might be able to sell further stakes in state-controlled National Aluminium Company, mobile phone company BSNL and some of its banks.

Foreign investors will be watching the government to see whether it loosens up ownership restrictions on foreign direct investment in sectors such as insurance, telecoms and retail. The new government could take the initiative early by quickly passing a number of important bills stuck in parliament, such as one reforming the pension system.

"I'm hoping that some of what had been put on the backburner will be revived," said Amit Tandon, managing director of Fitch Ratings in Mumbai.

Economists, meanwhile, will want the government to unveil a medium-term fiscal strategy that shows the ballooning consolidated government budget deficit, estimated at over 12 per cent of gross domestic product in the year ending March 2009, gradually being brought back under control.

Critical to this will be tackling politically difficult but cripplingly expensive oil and fertilizer subsidies.

Dharmakirti Joshi, director and principal economist with Crisil, the Indian unit of Standard & Poor's, said the new government will face challenges reviving growth to the levels of previous years. India's industrial production fell the most in 16 years in March and exports plunged 33 per cent during the same period - the biggest drop on record.

"The hit on industry has been very hard and the fiscal stimulus doesn't have the power to put economy back on an 8 per cent growth footing, it only has the strength to stop it sliding further," Mr Joshi said. He expects economic growth to be about 5.7 per cent this fiscal year ending March 2010.

In spite of the optimism in stock market circles, Mr Joshi also cautioned against expectations of rapid economic reform by the new government.

"I'm not expecting miracles," Mr Joshi said. "But it [the election result] is a positive surprise and I expect things to go faster than in the past five years."

Much will depend on the choice of finance minister, a job presently occupied by the Prime Minister, Manmohan Singh.

Analysts speculate that Congress may choose the present home minister, Palaniappan Chidambaram, for the job, which he occupied before Mr Singh. It might also appoint the present external affairs minister, Pranab Mukherjee, or introduce a new face, such as the deputy chairman of India's Planning Commission, Montek Singh Ahluwalia.

Others say that with this overwhelming mandate, Congress can no longer blame the left for dallying on reform. While the party and its allies pushed through numerous handouts to farmers over the past five years, its record on reform was seen in business circles as disappointing.

"The government has no excuse for non-performance now," said Fitch's Mr Tandon.

Joe Leahy in Mumbai
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