MONTREAL - The hopes of the India's United Progressive Alliance as it heads
towards next week's general elections are being encouraged by a stock-market
revival that has seen shares recover 20% since the Satyam Computer Services
fraud scandal broke on January 23.
The US$1.5 billion scandal involving falsification of profit and revenue at the
top of one of the country's foremost computer software companies came as
plunges in the broader market cast a shroud over the hopes of many believers in
capitalism in the world's biggest democracy. India's Central Bureau of
Investigation has charged Satyam founder Ramalinga Raju and eight other
people for their role in the fraud case, it was announced this week.
In the past four weeks, both the BSE Sensex 30 and the broader-based Nifty are
up about 25%, boosted by some optimism on the outlook for the economy and
company earnings, while shares are also participating in the global market
rally.
Voting in the elections for the Lok Sabha (Lower House) is staggered across the
country, so complete results will not be announced until late in May. Polls at
present point to the United Progressive Alliance (UPA, the electoral alliance
around the Congress Party) to receive more seats than its main competitor, the
National Democratic Alliance (NDA, the electoral alliance around the Bharatiya
Janata Party), but not enough to form a majority government by itself.
An alliance of leftist and some regional parties is contesting the elections
under the general umbrella of the "Left Front", while the Bahujan Samajwadi
Party (BSP, or Dalit Society Party) is making a nationwide appeal to dalits,
formerly known as "untouchables". Caste and communal affiliation, or religious
and social identity, will drive much of the electoral mobilization.
Even so, economics plays an inescapable factor. In the short term, observers
have noted that the domestic credit market has become more liquid and more
stable. Accordingly, banks such as ICICI and HDFC have participated strongly in
the current share rebound. Inflation is also declining, at least as measured by
the wholesale price index, again helping to strengthen consumer demand.
The rupee has rebounded to around 50.00 from around 52.01 to the US dollar at
the beginning of March as foreign institutional investors have re-entered the
market in the course of the recent upsurge and encouraged by the central bank
relaxing rules restricting the influx of capital into the country.
The fall in world prices for energy and commodities has not hurt either, while
the previous sharp decline in valuations of Indian equities, from around 17,600
last May to as low as 8,160 last month, has contributed to a sense that stocks
should have rebounded.
Even so, some analysts anticipate corporate earnings to decline further during
the current year, with downside risks due to continuation of an unfavorable
credit outlook and a possible further deceleration of demand. That expectation
would be validated by a further pullback in equity prices following the present
run-up on what were judged as low valuations towards the beginning of the year.
This should present a buying opportunity in six to 12 months.
Fears of reversals of these short-term trends, on the basis of more enduring
fundamentals, are among the reasons why longer-term perspectives are less
openly optimistic. The principal fundamentals-based doubts over the Indian
economy and stock market center on questions on whether foreign capital will
continue to return, or flee should the market turn down once more, and on
related concern over the availability of investment capital in the absence of
foreign funds. Initial public offerings have become much less frequent than in
the recent past.
The prospect of lower dividends in the wake of slowing economic growth is also
a deterrent. Growth in the Indian economy may slow to around 4% to 6% according
to a range of forecasts, down from a median estimate of 7% for 2008.
Right now, the present short-term upturn could redound to the benefit of the
UPA, the core of the governing coalition, although it is so short-term that its
effects have barely percolated much beyond the financial and banking sectors to
the consumers who form the bulk of the electorate.
The fall in wholesale prices is not being seen at the retail level, with
various consumer price index indicators still at high single-digit levels. The
result will likely be a coalition government with smaller parties and
independent candidates, often regionally based, having a say on the basis of
political horse trading after the poll results are published.
Robert M Cutler(http://www.robertcutler.org) is senior research
fellow in the Institute of European, Russian and Eurasian Studies, Carleton
University, Canada.
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