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India in Focus
Parliamentary Election results signal path to economic reform
Election Update
May 17, 2009 marked the conclusion of the month-long general election process in India. The ruling Congress-led United Progressive Alliance (UPA) won a resounding victory, surprising many observers who expected a fractured outcome. The incumbent Prime Minister, Dr. Manmohan Singh, will return for a second term. The margin of victory was large enough to ensure that the government will have a stable, workable majority in Parliament without needing the support of the market-unfriendly Left Front and other regional parties.
All the other key political formations, including the primary opposition Bhartiya Janata Party (BJP), the left leaning Communist parties, and caste based regional parties performed worse than expected. However the biggest casualty of the elections was the Communist party led Left Front, which was a coalition partner of the previous Government and had worked to limit foreign investment and privatization of state owned assets. While it would be premature to write the epitaph of sectarian, regional and socialist politics in India, the strong performance of leaders with development oriented and inclusive agendas is a hopeful sign of the increasing maturity of the Indian electorate.
Impact on the Economy
It is widely expected that the new Government, unencumbered by messy coalition politics, will implement an agenda of pro growth and market oriented economic policies. The Indian equity markets, with a 17% rise after the announcement of election results, have already signaled such expectations. However, those who expect rapid implementation of pro-market economic reforms will be disappointed.
Due to internal opposition within the Congress party, minimal progress is expected on many critical items on the economic agenda. These areas include labor market reforms, liberalizing foreign investment in retail, and elimination of subsidies for oil products and fertilizers.
However, there are a few items on the government’s agenda on which political consensus already exists, and significant progress is likely. Specific policy actions from the government in these areas are expected to boost India’s economic growth and create opportunities for private investors. We are highlighting three such areas, where we believe policy actions will create significant opportunities for both foreign and domestic investors.
1) Infrastructure: Development of India’s infrastructure will be the number one priority for the new government. Expenditures in this area are expected to exceed $500 billion over the next five years, with at least 40% of this investment sourced from private investors. The government is expected to improve the regulatory framework to facilitate investments from the private sector as well as take steps to quicken the pace of approval for projects.
Investor participation is expected to increase in infrastructure projects such as development of new power plants, toll roads, ports, railway stations and airports. Investors may also benefit from investment opportunities in infrastructure related industries such as construction equipment, material handling, port based logistics, and power equipment.
2) For Profit Education: Demand for high quality education significantly exceeds supply in India. The shortage of education opportunities in India is particularly acute – just over 10% of all college age population is enrolled in an institute of higher learning. While the private sector was expected to play a significant role to help bridge the gap, private participation in the education sector has been limited due to regulatory barriers. The new government is expected to make significant improvements to the regulatory environment in order to attract private investment. It is also expected that India will open its doors to foreign universities, which are currently barred from operating in India.
3) Financial Services:
Insurance: India is a significantly under-insured society compared to the rest of the world – insurance premiums are 4.5% of GDP, compared to 7.5% for the rest of the world. In addition, Indian insurance companies are significantly undercapitalized and are not allowed to sell more than 26% of their equity capital to foreign investors. This limit is expected to be increased in the future, and consequently stimulate significant investment from foreign investors.
Pensions: The new government is also expected to deregulate and open the management of employee pensions to private players.. Last year, the government allowed private players to participate in the management of pension funds on a limited basis. Further liberalization of this sector will help develop a more stable and sustainable investor base for India’s volatile capital markets and generate attractive opportunities for domestic and foreign asset management companies.
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