Last Friday, a day before the election results were announced, Bloomberg reported that the hedge fund managed by HSBC Holdings Plc. asset manager Sanjiv Duggal had reduced its net India exposure to zero because of “uncertainty over election results”. Now that the elections have not only removed that uncertainty, but have also replaced it with a hugely positive surprise, investors who had withdrawn from India are likely to scramble to get back in. That’s why everybody expects the markets to open with a big upward gap on Monday. This initial tidal wave will lift all boats. But the question is: Will it lead to a re-rating of the Indian market? There’s every reason why it should. That’s because investment into the Indian market has been hobbled by the government’s lack of headroom on the fiscal front.
Equity strategists and economists have for long compared India unfavourably with China in this respect. As HSBC economist Robert Prior-Wandesforde writes in his recent research note with the telling title of “New Government, Old Problems”, “An expansionary budget in June would prove counter productive by preventing the RBI (Reserve Bank of India) from cutting and risking a sovereign credit downgrade. The challenge for the government will be to cut the structural deficit, without reducing the capital/infrastructure spending share in GDP (gross domestic product).” But with the absence of the Left, that constraint may ease a bit, since disinvestment of public sector units and incentives for investment can now be back on the agenda, while the auction of 3G (third generation) spectrum will also bring in money. The stability of the government will allow it to concentrate on structural reforms. In short, the risk-reward outcome for the Indian market has improved considerably.