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Congress will follow an 'inclusive' reforms agenda

By Prasanna D Zore
May 19, 2009 14:21 IST
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The markets as well as Indian politics never cease to surprise. Just as the Congress and its allies staged a spectacular comeback in the 2009 Lok Sabha elections Dalal Street too jumped in joy.

In an historic move the 30-stock BSE Sensex hit the upper end of the circuit on Monday twice forcing the stock exchanges to suspend trading for the day.

However, this euphoria may not last long if the next UPA government fails to deliver on reforms. Also, the next incumbent in the South Block will have to tread very carefully on the fiscal deficit front while pushing for inclusive reforms.

In an e-mail interview with Manoj Vohra, director of research and senior editor at Economist Intelligence Unit said that the rate of inflation is likely to moderate to 4.3 per cent by 2010 and interest rates are expected to drop by another 0.5 per cent.

However, he cautions investors that the current rally may lose steam if real economy fails to recover.

After a 2,100 point jump on Monday where do you think are the Indian stock market headed?

The market is buoyant as an anticipated political uncertainty has been negotiated well. The real economy, however, is yet to show any convincing signs of recovery to support this buoyancy. Global factors will continue to influence market behaviour and if the real economy doesn't improve in accordance with market expectations we will see readjustment and market correction.

Will this rally last till the next budget comes up?

We are likely to see some celebration, but the long-term direction of the market depends upon the recovery in the real economy, which will only come towards the end of this year. Global factors will continue to influence market behaviour and if the real economy doesn't improve in accordance with market expectations we will see readjustment of expectations and market correction.

What is your perspective on the new government formation? What are the reforms that the government should look into?

The UPA should have no difficulty in forming a ruling coalition. Congress's resounding electoral mandate is likely to allow it to pick and choose its coalition partners, none of which will have much scope to extract concessions from the government in exchange for their support.

For similar reasons, Congress will be free to implement liberalising economic reforms, if it so chooses.

The government is expected to take more fiscal measures to revive the domestic demand and interest rates may come down further by at least 50 basis points.

With the Left Front marginalised, the government should push ahead with reforms.

In terms of sectors, the government needs to focus on infrastructure, education and energy.

Pursuing financial inclusion should also be on the government's agenda if the country is to channelise its strong domestic savings effectively. The government also needs to cut on wasteful spending and undertake administrative reforms.        

How do FIIs perceive this UPA victory?

Foreign investors will be closely monitoring how the new government stimulates the domestic economy without further jeopardising the country's fiscal health. If the new government fails to bolster investor confidence and promote market-friendly policies, financing the fiscal deficit could become increasingly difficult, leading to sovereign-rating downgrades, higher long-term bond yields and the crowding out of private investment.

The UPA hasn't received a simple majority. The total seats required are 271. What is your take on it?

While the new government hasn't received a complete majority, it is likely to be cohesive instead of fractious, long-lasting not precarious, and free to implement liberalising reforms rather than hamstrung by the demands of reactionary coalition partners.

Do you think the Manmohan Singh government will push reforms & which sector should get priority?

The Congress is likely to follow an "inclusive" reforms agenda.

In terms of sectors, the government needs to focus on infrastructure, education and energy. The government is also likely to undertake FDI reforms, but gradually.

What is your take on Inflation?

The global recession and the puncturing of the commodity price bubble are delivering a sharp deflationary impulse to the Indian economy. We expect wholesale prices to decline by 0.2 per cent in 2009, but they will then rise by 3.9 per cent in 2010 as international commodity prices begin to pick up.

Consumer price inflation has not fallen significantly so far. This largely reflects the bigger weighting of food prices (which remain elevated) in the consumer price basket compared with the wholesale price basket.

However, retail food prices will begin to moderate during the rest of 2009, allowing consumer price inflation to average 5 per cent in 2009 and 4.3 per cent in 2010.

Would the instability in India's neighbouring countries be a cause of concern for FIIs?

Regional instability is a concern, but unlikely to undermine India's proposition as an investment destination. 

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Prasanna D Zore

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