Indian Prime Minister Manmohan Singh is wooing new friends to save his government from collapse. Perhaps as early as next week, ignoring the warnings of his Marxist backers, Singh will take steps to implement the India-US agreement on civilian nuclear energy cooperation.
Forced into an ideological corner, the Communists will have to carry out their threat and stop supporting the administration.
What happens next is crucial for investors who would love nothing better than a short rally in Indian stocks so they could cut their losses and get out of a market that’s fallen 39% this year in dollar terms. There may be many such investors. As David Kathman, a mutual fund analyst at Morningstar Inc., noted in a report last week, US funds that had bet big on China last year no longer own significant amounts of Chinese shares.
By contrast, many of the funds that had large Indian holdings in 2007 continue to carry them while suffering sizeable losses. “Many of these funds, for better or for worse, seem to be betting that the current market downturn is temporary and that these stocks will rebound,” notes Kathman.
That confidence may now seem misplaced. India’s inflation rate is at a 13-year high of 11.4%. Banks are charging their best customers 16% annual interest. The monthly trade deficit widened to a record $11 billion(Rs47,630 crore) in May. Property prices are falling, and the rupee is looking vulnerable even after an 8.75% slide against the dollar this year. With so much going wrong, investors must look for the nearest exit, at least until crude oil prices subside.
The political scenario that’s most favourable to investors is precisely the one that’s likely to unfold over the next week. The Communist Party of India (Marxist) says that the nuclear deal, which Singh has negotiated with the Bush administration since July 2005, has become his “obsession.”
So wary are the Communists about Singh presenting them with a fait accompli, they don’t even want him to attend the Group of Eight nations’ summit that begins on 7 July in Hokkaido Toyako, Japan. With that deadline in mind, the government is going all out to court the Samajwadi Party, and its leader Mulayam Singh Yadav. With the allegiance of Yadav’s 39 lawmakers, the government might just survive.
After the accord with the US is operational, India would be able to import uranium to ease its long-term energy crunch without having to dismantle its nuclear weapon programme. By creating an ally in India, George W. Bush would score a last minute foreign policy win.
From blocking sales of state assets to delaying foreign investment in the retail industry and obstructing the modernization of pension management, the Marxists have torpedoed most economic initiatives in India during the past four years. To be sure, the pork-barrel policies of the last four years—a wasteful rural job guarantee, a hazardous farm-debt waiver and a dangerous expansion of caste-based quotas in higher education—were of the government’s own doing. Nevertheless, both Singh and investors would be happy to see the Marxists go.
And why will Yadav oblige? He doesn’t exactly have a terrific relationship with the ruling Congress party, or its leader Sonia Gandhi. But he wouldn’t want the government to fall now, as that might strengthen the hand of Mayawati, Yadav’s arch rival in his home state of Uttar Pradesh.
Mayawati has mobilized those at the bottom of India’s caste ladder as a formidable political force. She won big in the state’s assembly elections last year. If Singh’s government caves in and national elections are advanced to, say, November from May 2009, Mayawati may be able to carry the momentum of her victory to the national level.
Yadav wouldn’t like it much. Nor will early elections help the ruling Congress in its fight against the Bharatiya Janata Party (BJP). The BJP, which the Congress had unexpectedly ousted in the 2004 national elections, has a decent shot at staging a comeback.
“The BJP has displaced the Congress in four Indian states in the past four years, and secured a second consecutive term in one state,” says Seema Desai, an analyst at Eurasia Group, a London-based political risk advisory firm.
Besides, the boundaries of most of India’s 543 parliamentary constituencies have been recently redrawn, giving greater representation to urban areas. Analysts say the BJP, whose following is predominantly in cities and towns, may gain about 15% more seats because of this change.
Italian-born Gandhi may want Singh—whom she had anointed prime minister in 2004—to call the next election only after the government has succeeded in getting a grip on inflation, the No. 1 concern of voters at present.
The worst-case scenario for investors would be if both the Congress and the BJP fared badly in the polls. A ragtag alliance of smaller groupings, each representing the narrow interests of a caste or a region, with no national party at the helm, will be a disastrous outcome. Rather than having to face the added risk of an entirely unpredictable election in what is already a very difficult time for asset markets, investors are likely to welcome it if Singh’s government survives the Marxist threat.
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