Indian Stock Surge Shows Investors Anticipate More Open Economy

May 19 (Bloomberg) -- India’s record stock-market surge after the election triumph of Prime Minister Manmohan Singh’s Congress Party is a sign of just how much investors want the next government to open Asia’s third-biggest economy.

Expectations are soaring as Singh, 76, starts his second term without the need for support from the communist allies who choked his market-opening efforts from 2004. Investors are betting the Oxford-trained economist will remove the last barriers to foreign investments in financial services and re- start asset sales to help trim a widening budget deficit.

“There’s a real sense of urgency in taking this event and translating it into tangible results,” said Nick Chamie, global head of emerging-markets research at RBC Capital Markets in Toronto. “If we don’t see some positive signs on an improving fiscal deficit in relatively short order, we could end up again with a weaker equity market, a weaker rupee and reduced confidence in the government’s ability.”

The benchmark Sensitive Index, or Sensex, jumped 17 percent yesterday, breaching the daily limit and forcing share trading to be halted for the day for the first time. The rupee climbed 3.1 percent against the dollar to 47.92 in Mumbai and the benchmark bond yield fell 12 basis points.

Among the names being speculated by the Indian media to take over the reigns of the finance ministry is Palaniappan Chidambaram, who had the job for more than four years until last November, when he was moved to the home ministry to tackle terrorism after the Mumbai attacks. Chidambaram, 63, presided over a record average growth rate of almost 9 percent since 2004.

Mukherjee, Nath

Other potential candidates for the position include acting finance minister Pranab Mukherjee, Commerce Minister Kamal Nath, 62, Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, 65, and former central bank governor Chakravarthy Rangarajan, the Economic Times reported yesterday.

Congress and its allies won 261 of the 543 elected lower- house seats, with the party getting 206 lawmakers of its own, the most since 1991, when Singh as finance minister abandoned Soviet-style state planning and introduced free-market policies that have helped India’s economy quadruple in size.

The immediate interest among investors is the fiscal stimulus the government can provide to revive an economy growing at its weakest pace since 2003. The finance minister may unveil this year’s budget by July. Singh’s government said before the elections that the economy needs stimulus of at least another 1 percent of gross domestic product.

Six-Month ‘Honeymoon’

“They’ll have a honeymoon of six to eight months,” said John Praveen, chief investment strategist at Pramerica International Investments Advisers, a unit of Prudential Financial Inc. in Newark, New Jersey. “As long as they’re delivering on some of the expectations, the markets will hold the gains. They have to make the right start.”

The Reserve Bank of India estimates the fiscal and monetary steps announced so far are worth more than $85 billion, or almost 7 percent of GDP.

The tax cuts and increased spending since December widened the federal budget deficit to 6 percent of GDP in the year ended March 31, from a target of 2.5 percent.

The prospect of an increased budget shortfall prompted Standard & Poor’s to say in February that India’s spending plans were “not sustainable” and the nation’s credit rating may be cut to junk if finances worsen. S&P has a BBB- long term credit rating on India, the lowest investment-grade level.

Window of Opportunity

S&P and Moody’s Investors Service, which places India two steps below investment grade, yesterday indicated the South Asian nation has a chance to improve its fiscal situation after the resounding election victory.

The poll result gives the government more “political space” to sell stakes in state-run companies and improve revenue, Moody’s senior analyst Aninda Mitra told Bloomberg News.

S&P’s director of sovereign ratings Takahira Ogawa said “there is a possibility for the government to implement various measures to reform for further expansion of the economy and for the fiscal consolidation.”

Singh had to depend on the communist parties to gain a majority in parliament in his first term. The communists were opposed to his plans to raise funds by selling stakes in National Hydroelectric Power Corp., Oil India Ltd., Bharat Heavy Electricals Ltd. and National Aluminium Co.

“Among the key reforms will be disinvestment now - the new government will focus on fiscal responsibility,” said Rajeev Malik, an economist at Macquarie Group Ltd. in Singapore. “The key issue will be for the government to balance the need for additional fiscal stimulus with a credible plan for fiscal consolidation.”

Communist Impact

Communists also stalled a bill to raise the foreign- investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and resisted legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. They also blocked entry of global retailers such as Wal-Mart Stores Inc. into India.

“Now the Congress party can rule with a minimum number of coalition partners and with a mandate for reform,” said Rory Medcalf, an India specialist at the Lowy Institute for International Policy in Sydney. “This is exceptionally good news for India.”