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Political uncertainty clouds market growth in India

Political uncertainty clouds market growth in India
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First Published: Sun, Aug 26 2007. 11 55 PM IST
Updated: Sun, Aug 26 2007. 11 55 PM IST
Mumbai: The Indian stock market has been unnerved by the uncertainty surrounding the future of the government at the Centre. That is the primary reason why Indian markets have fallen more than their emerging market peers in Asia.
The MSCI index for India is down 9.7% in August, compared with a fall of 6.7% for the MSCI Emerging Market Asia index. Last Friday, however, markets picked up courage in the belief that the Left was unlikely to pull the rug from under the feet of the government. The MSCI India index accordingly went up 1.47% that day, compared?with?a?flat closing for the EM Asia index for the day.
However, the uncertainty has by no means dissipated.
“In a democratic set-up like ours, the ruling party cannot dictate terms or policies. Especially when it comes to the foreign policy of the nation,” says a senior Indian parliamentarian and a prominent leader of a major left wing party who wished to remain anonymous even as his party is publicly saying?the?same about the Congress government’s approach to the Indo-US nuclear deal.
As to mid-term polls, “Everything depends on the decision of the Congress party,” he says. “It has to discuss and debate the issue in the Parliament before we proceed with this agreement. After a debate, if the house (Parliament) feels that the agreement will not affect the sovereignty of our nation, we shall go ahead with this agreement with US. We are not asking the government to completely scrap the nuclear agreement with the US. Our urge is to study some parts of the agreement, such as the Hyde Act, carefully.”
Veteran Revolutionary Socialist Party leader Abani Roy says, “We’ll be having a meeting with the leaders of the government in a day or two. Things will become clearer after that, when a decision will be taken on when the issue can be debated in Parliament.”
Unrelated political uncertainty has taken its toll on markets elsewhere in Asia, too.
The MSCI Taiwan index, for example, has gone up 23% in the last one year, severely underperforming the region, with the MSCI Emerging Market Asia index up 42% in the period. Similarly, in Thailand, where the army seized power, the?MSCI?index is up a comparatively low 24% year-on-year.
However, analysts believe that the threat in India may have been overplayed.
“The Left front in India, in our understanding, is disputing purely from an ideological stand-point on the nuclear agreement with the US,” says Steve Wilford, country manager of the UK-based Control Risks in India, an independent risk-consultancy that specializes in political and business intelligence analysis for clients. “Our analysts believe that none of the major Indian political parties stands to gain from a fresh election and not any of them are prepared for an election scenario.”
Unlike the past, there is a pragmatic understanding in India that reforms are good for the wholesome development of the country, says Wilford. “Over the years, a pro-development consensus has emerged among all political parties in India, including those in the Left wing,” he adds. “Disputes such as the current one, is an inevitable part of a coalition government formed by political parties with differing ideologies.”
However, the equity market will be on tenterhooks due to increasing political uncertainty about the current coalition government at the Centre, says Sandesh Kirkire, chief executive of Kotak Mahindra Asset Management Co. Ltd. “Any uncertainty brings chaos in equity markets. Therefore, investors will be very cautious and somewhat hesitant while making their calls in the market, in many trading sessions to come. However, no political change can really affect the basic economic fundamentals of this country. So, the recession in the equity market will be very short-lived, even if one gets to see a change in the Central government.”
Nevertheless, the stock markets have fallen during earlier periods of political turmoil.
During the 2004 elections, for example, equities dropped precipitously in May after the National Democratic Alliance lost the elections and the current Left-supported government came to power.
In the three months to 1 June 2004, or over the entire election period, the MSCI India index lost more than 16%, while the MSCI Emerging Markets Asia index fell around 10% in the period. At that time, just as is happening now, the political uncertainty in India went hand-in-hand with the turmoil in emerging markets. During the elections in 1996, 1998 and 1999, too, markets were edgy and lost ground during the run-up to the formation of a new government.
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First Published: Sun, Aug 26 2007. 11 55 PM IST