India still shines despite politics

India still shines despite politics

Courtesy - Umesh Desai and Muralikumar Anantharaman (Reuters)

India's long-term growth prospects under a reformist prime minister outweigh any short-term setback from the incoming government's retreat on privatisation, big foreign investors believe.

Fund managers with investments in India said they expect domestic bourses to remain volatile until the Congress Party-led coalition secures its alliance and articulates its economic plan.

But they see promise in the long run.

"The market fall misses the point that the corporate and economic story is still strong," said Devan Kaloo, Singapore-based fund manger at Aberdeen Asset Mangement, which has $400 million in Indian assets.

"We have little doubt that over the next 12-24 months the Indian market will outperform the rest of the region," he said, adding that aside from privatisation and rural focus the new government's reform agenda would not change.

Even as the fund managers met, India's prime minister designate, Manmohan Singh, held crisis talks with powerful coalition partners after a dispute over cabinet posts erupted a day before his inauguration.

India's bellwether BSE SENSEX reacted to the developments by gyrating within a 174-point range before settling up about half a percent from where it started the day.

Traders and investors have mainly been focused on whether the new government will follow through on the previous government's plan to privatise many state-owned companies.

When the rural backlash against the Hindu nationalists swept the Congress Party-led, communist-backed coalition into power, traders initially panicked. On Monday, the Bombay index sank as much as 17 percent from the previous close, its biggest intra-day drop ever, before turning back up.

Prime minister-designate Singh's has since said that only loss-making state firms will be privatised and that state-run banks would remain in the public sector.

"That is a setback...but it takes away only a little bit of the sheen, not all," said U.S.-based Brad Durham, managing director for fund research at Emerging Portfolio Fund Research.

"A rising middle class and a growth rate that competes with China are just some of the reasons why India is a long term story," he said, adding that Singh's role in dismantling the pre-1990 state controls on the economy was also key.

India's economy grew by 8.1 percent in the fiscal year ended March 2004, and analysts say that sustained demand for cars, houses and durable goods from its billion-plus people will create growth of another seven percent in 2004/05.

"India has always had an attractive bottom-up investment case," said Vijay Tohani, U.K.-based portfolio manager at First State Investments, explaining why foreign investors were enticed by the country.

"However, recently it has benefited from an improving macro-story with a pick-up in the pace of reforms, record low interest rates and an improving credit cycle."

In 2003, foreign funds pumped $7.7 billion into Indian debt and equities, the highest since they were first allowed to invest there, making the Bombay Stock Exchange Asia's second-best performer in that year. But just in a matter of days, some $53 billion has now been lopped off the market capitalisation of Asia's oldest bourse.

Several analysts said that when the rhetoric of the newly elected government dies down, reforms will continue on the same path because the decade-old programme had given India a 7-8 percent annual growth rate, among the highest in the world.