A Positive Development in India's Economy

Robert Hsu, May 26, 2009

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India's elections and subsequent win for Prime Minister Manmohan Singh's Congress party spurred U.S. and Asian stocks and bonds last Monday with India's benchmark stock exchange, Sensex, gaining 17.3%. The dramatic jump higher triggered a historic mid-day close with the indiex at a 2,110 high.

What truly triggered the rally was Indians and investors expectations to see the same free market reforms and positive economic growth with the Congress party filling 261 of 543 parliament seats. In 1991, the Congress Party instituted free market practices upon its first large-seat win in 1991, and India's economy quadrupled in size under those actions. So many Indians were hoping to see the same results this time around.

I'm not as convinced. Here's why:

While the results of the Indian' election is great news for the country, I don't think that we can overlook the Sensex's historic plunge in 2004 when the Congress Party won a record number of seats in an election. It is very likely that we could see that happen again, so I expect high volatility to plague the markets in the days and weeks to come, just as it did in 2004.

In addition, these positive changes in government will not fix the economic plunged India faced during the global economic crisis -- I still think the country's growth will slow as much as 6% this year. That's because there are still many negative factors weighing on the Indian economy, including plunges in exports in March and the fact that the country has not resolved the conflict facing its stimulus plan from private lenders or the governments inability to increase spending. India is one of the countries hit hardest by the global economy crisis, and I think the above mentioned factors have the potential to be a drag on the economy going forward.

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A Positive Development in India's Economy

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