Over the next two months, neither fundamentals nor expectations will decide which way the Indian stock markets move. From now on, the one factor that will be relevant is politics. The reason: the fundamentals of the Indian economy aren’t likely to change much in the near future, and expectations have already had their impact on the Sensex, when it zoomed by over 2,000 points on 18 May. Investors, both retail and institutional, will now be interested in the politics of policy-making, or how intra-Congress dynamics and coalition pressures influence economic decisions.
Consider Manmohan Singh’s selection of the new finance minister. His original choice, say sources, was Montek Singh Ahluwalia, deputy chairman of the Planning Commission. His selection would have sent the ‘right’ signal to investors as Ahluwalia is known for his free market ideology and is in favour of pushing through critical second-generation reforms. But thanks to the politics within the Congress and Sonia Gandhi’s vision of ‘inclusive growth’, Manmohan had to choose Pranab Mukherjee as finance minister. Mukherjee is likely to pursue a mix of development and growth-oriented policies in Budget 2009. This might not please the investors too much.
Similarly, look at the manner in which the Congress battled the DMK over portfolios. Initially, Manmohan was against the nomination of two DMK leaders because of the corruption charges against them. Then, suddenly, he said he had nothing against them. Obviously, the PM had caved in to political pressure. The same may happen when the ministers belonging to allies decide on policies. Will Mamata Banerjee pursue privatisation in the railways like Lalu Yadav did, or will she opt for ‘centrist’ policies?
In this scenario, Budget 2009 will turn out to be a critical document. The UPA has the opportunity to woo investment, kick-start growth and improve sentiment in the stock markets. However, it remains to be seen if politics will be a stumbling block and whether Manmohan can push through decisions against the odds. Don’t forget the role of the monsoons. At the moment, it seems we are in for another year of average to good rains. But if the rain gods are angry, forget even 5% GDP growth this year. Now, that would be bad news.
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