The current government, led by prime minister Manmohan Singh, could now be in a position to see out its current term, which ends in May 2009. The move is a fillip for the ruling party as it will enable it to push through reforms which the left-wing parties had been opposing.
The vote of confidence was triggered by the government entering a nuclear pact with the US, which now seems set to go through with no further ado. India is entering the agreement in an attempt to double the share of nuclear power it generates as its nuclear capabilities are currently stymied by a lack of fuel. The agreement enables Indian companies to tie up with global nuclear firms in exchange for permitting international monitoring of IndiaÆs facilities.
But analysts are also hopeful that other stalled reforms, especially those in the financial sector, will finally be pushed through, such as: the privatisation of state-owned enterprises with proceeds being deployed to contain the fiscal deficit; allowing private managers to oversee pension assets and to invest in equity markets; increasing the foreign direct investment limit in insurance from the current 26% to 49%; and enabling voting rights in proportion to shareholdings in the banking sector.
The Bombay Stock Exchange index, the Sensex, gained 5.9% to 14,942 yesterday, disappointing the optimists who had been predicting it would breach the 15,000 mark. Nonetheless, this was the largest intra-day gain for the Sensex since March this year and made the Indian stockmarket an out-performer even amid strong gains in a number of Asian markets yesterday.
Banking and financial stocks were key gainers as investors anticipated a relaxation in regulations to benefit the sector. ICICI Bank was up 11.6% to Rs739 ($17.50), Housing Development Finance Corp up 11% to Rs2,376, State Bank of India up 10% to Rs1,534 and HDFC Bank up 9.4% to Rs1,205. Other sectors to gain were real estate, capital goods, power, and oil and gas.
But economists are still cautious about how much the current government can achieve in the less than 12 months it has left before the country's next scheduled election date. In a research update issued late on Tuesday, after the results of the vote were released, Goldman Sachs outlines what it sees as the five factors that could hinder the Indian governmentÆs ability to enact such reforms: ôFirst, the small amount of time available before the government's term expires. Second, the need to placate and meet the demands of allies who voted for it in the confidence motion. Third, the pressing priority to win the next general elections and the populism that may entail. Fourth, the acrimonious discussions that took place between the government and the opposition, especially the Bharatiya Janata Party, during the vote, which could lead to difficulties in the passage of important bills. Lastly, the lack of self-confidence that the government has shown so far in pressing ahead with reforms.ö
Goldman Sachs is in synch with other specialists in terms of viewing the outcome to the vote as largely positive for markets. In the run-up to the vote, it was generally expected the UPA government would win the vote but by a very slender margin. The eventual 19 vote margin was enough to cause celebrations across IndiaÆs financial markets.
The Indian rupee climbed 1.3% yesterday to a seven-week high of Rs42.18 to the dollar. The rupee has fallen from levels below Rs40 and touched a fifteen-month low of Rs43.50 as rising oil prices dampened sentiment on the currency. But it reversed the trend last week as crude oil prices finally started to drop from the all-time high they touched earlier in July. Some foreign exchange experts are predicting the rupee will stabilise against the dollar at a level around Rs41.50.
Even amidst all the euphoria, the government is still facing significant challenges. In tandem with the situation across Asia, inflation is rising. It is currently in low double digits and expectations are that July data could see inflation hit 12%. The infrastructure deficit in the country is large and requires significant investment. The gap between the rich and poor is widening. And many political commentators believe the current government could decide to hold elections on its own terms before May 2009. Amid all this it remains to be seen if the government has the bandwidth to turn its attention to resolving some of these pressing issues.
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