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.
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First published in Asia Times Online, 9 April 2009.