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Markets back India's call for change
The Australian - May 19, 2009
Amanda Hodge, South Asia correspondent – The surprise weekend electoral triumph of India's Congress party sent shares soaring yesterday on expectations that the new government will push through long-awaited economic reforms.
As party leaders, including Prime Minister Manmohan Singh, met again yesterday to determine the composition of a new coalition government, the benchmark 30-share index on the Mumbai stock exchange jumped more than 17 per cent to 14,272.63, up 2099.21 points.
The rise triggered circuit breakers that automatically halted trading for the rest of the day to allow the market to cool down.
Indian voters handed the Congress-led alliance an unexpected mandate for change on Saturday with a 261-seat haul, confounding predictions of a far closer result and the possibility of an unwieldy coalition riven by regional interests. The tally leaves the United Progressive Alliance just 11 seats short of the required 272-seat parliamentary majority, which it is expected to make up with support from independents.
Mr Singh, a former economics professor, left all prospective coalition partners in no doubt about the strengthened hand of Congress to push through its economic reform agenda at the weekend, describing the party's victory as a "massive mandate".
He is reportedly determined to capitalise on that mandate, directing officials to draw up a plan for quick action in the first 100 days of the new government that targets job creation and infrastructure investment.
"This was the big-bang event that investors were looking for," said Hitesh Agrawal, head of research with Angel Broking. "Political uncertainty has been completely eased with the Congress party emerging as the single largest party." Congress alone grabbed 205 seats in its best showing since 1991.
Economists have long advised that opening India's previously closed economy to more foreign investment is the best way to boost growth.
Estimates suggest India's economy must grow by at least 8 per cent a year if it is to improve the lives of the more than 40 per cent of its population subsisting on less than $US1.25 ($1.67) a day. But India has not been immune to the global recession, which dragged growth for the fiscal year to March down to 6.5 per cent, from 9 per cent the previous year. It is tipped to slow further, to 6 per cent this year.
The outgoing government's reform attempts were most severely hampered by the communist parties, which blocked insurance, banking and labour market changes before finally withdrawing support for the UPA over the nuclear supply deal with the US.
Voter support for the communists collapsed, leaving the Left Front with just 24 seats. "The most positive news from the elections is that the roadblock to reforms – the communist parties – were trounced," said Apurva Shah, head of research with brokerage Prabhudas Lilladher.
Economists are now hoping the new government will push through a long-stalled goods and services tax, as well as reforms of the insurance industry and labour market regulations.
Markets will also be looking for the government to address India's largest fiscal deficit in 18 years. "We think pension, insurance, banking reforms and disinvestment may be back on the agenda," analysts at Goldman Sachs said yesterday.
Fund managers expect the markets to surge by another 20per cent in coming weeks, against a backdrop of better-than-expected fourth-quarter corporate earnings.
President Pratibha Patil was scheduled to meet with Mr Singh last night to ask him to form the next government following further talks with Congress leaders, including party president Sonia Gandhi, over coalition partners and cabinet positions.
[Additional reporting: Agencies.]
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