FIIs cheered by prospect of stable government

A commanding Congress victory was welcomed on Saturday by foreign investors, who feared a hung Parliament and political horse-trading would be destabilising for India at a time of slowing growth.

Bank of America-Merrill Lynch estimates that almost $4 billion has been pumped into emerging markets in the week to May 13.

But more money is waiting on the sidelines and the Congress party’s decisive victory is likely to push bigger inflows into Asia and India equity funds.

Christian Goldsmith, international investment specialist at Fortis Investments, said foreign investors were likely to make “significant moves” back into Indian equities now that the uncertainty had been removed.

“India will see big foreign investor inflows as it is a positive for economic policy. The stock market will react positively to the shape of the new Indian parliament. The country is back to a strong ruling party and opposition — codeword for stable government,” New York-based Amit Bhatiani, partner at CX Capital Management, told DNA.

“Prime Minister Singh had wanted to do a lot more in reforming the financial services sector, which he might be able to do now since he won’t be hamstrung by the communists. The FIIs are happy as they already have established relations with the Singh government,” he added.

Foreign investors are more than a little kicked that India’s free-market architect, who many were ready to send into retirement less than 24 hours ago, is back in the saddle with a better mandate.

They feel that India will almost certainly continue now on its path of erratic, gradual economic reform that has paid dividends in the shape of foreign investment.

“Some protectionism is inevitable in the current recession. Anti-dumping provisions will be used liberally. But India will not reverse its broadly open policies,” said the Forbes magazine while dwelling on a Congress win.

“Small businesses may thwart the entry of foreign investment in retail. Yet, post-recession, economic liberalisation should spread to finance and retail.”

“Our expectation is that long-term economic growth in India will be strong,” said Kerry Series, head Asia-Pacific equities at AMP Capital.

US defence suppliers and nuclear companies are also pleased that Singh, 76, is bidding to retain power without needing the support of the communist parties, his main ally in 2004, which almost brought down the government last year over the nuclear energy deal with the US.

The communists had said they would review the nuclear deal if they rode into power.
US firms now expect the new government to begin the process of enacting a nuclear liability law that facilitates compensation in the event of an accident. US companies simply can’t do business in India till New Delhi signs the Convention on Supplementary Compensation (CSC) treaty.

“We believe that signing the CSC would be a way for India to maintain the spirit of the US-India nuclear pact,” said Seth Grae, president and CEO of Thorium Power, a pioneer in developing non-proliferative nuclear fuel based on thorium.

“Prime minister Singh has played a key role in the passage of the deal and we recognise his efforts to implement the 123 Agreement. India now represents one of the most important new nuclear markets in the world,” said Grae.

With the PM and other free-market liberals at the helm, 99% of high-tech trade between India and the US is now unhindered by export licences.

The US is India’s second largest trading partner. Bilateral trade in 2007 was $41.6 billion and there is a mutual desire to hike it to $60 billion.

The US also wants to increase the $9 billion it funnelled into India last year as foreign direct investment.

“India has been growing at 20-30% a year for all of us. So, we actually like doing business in India and all the other CEOs I talk to feel exactly the same way,” said Indra K Nooyi, chairman and CEO of PepsiCo, when she took charge of the 280-member US-India Business Council.