India "shines" again as new coalition settles down

NEW DELHI (Reuters) - When a communist-backed government took power in India in May, the question on everybody's lips was: has India's shine dulled?

Markets tumbled after the Congress-led coalition took power and anxiety gripped investors as its communist allies called for the scrapping of a successful privatisation drive.

The government inherited a large budget deficit, but still plans to increase some spending.

Further, a poor monsoon saw growth forecasts cut.

Despite those worries, economic indicators are robust. Stock prices are rallying and foreigners remain keen investors.

"The investment-led recovery that began 18-24 months ago is continuing to gain momentum, services are buoyant and the manufacturing sector will grow strongly for at least three to four years," said Prasenjit Basu, managing director, Robust Economic Analysis.

"The corporate sector has restructured and is profitable. So there is much to be happy about."

"India shining" was the re-election slogan of the Hindu nationalist-led government. It was derided after that government's unexpected defeat in May, and in view of the serious problems facing many people in the agriculture-dependent country.

But the economy seems to have found a solid footing under Prime Minister Manmohan Singh, architect of India's reform drive 14 years ago, reflected in the main Bombay stock exchange index which hit a new high last week.

A government review said on Monday prospects for the year to March remain "reasonably bright", even after the poor monsoon.

Economists see GDP growth of about 6 percent in the year ended March 2005, which is lower than pre-monsoon forecasts of 7.0-8.0 percent and below last year's 8.2 percent.

While the monsoon hurt growth, other indicators are strong. Industrial output rose 10.1 percent in October, its best since 1997, and exports are up 24 percent so far this fiscal year.

"Sentiment continues to improve toward Prime Minister Manmohan Singh's government, after an intensely volatile period," Rajeev Malik, economist with JP Morgan, said in a report.

"Barring an unexpected political shock, India's favourable economic trends in 2005 will probably continue to attract investors' attention, despite the coalition dynamics," he said.

REFORMS DRIVE

Initial concerns about communist influence on policy in the coalition seems to have been overdone.

The coalition has raised the foreign investment limit in private airlines.

Despite strong communist opposition, it also raised freight rates, which had been flat for three years, and petroleum product prices. The government aims to raise investment caps for insurance and telecoms next year.

But Singh faces challenges, particularly a huge fiscal deficit which will widen if the government goes ahead with plans to tap foreign exchange reserves to pay for infrastructure improvements and guarantee jobs for every poor rural family.

"Even this year keeping the deficit at the budgeted level is a challenge, and the challenge will mount next year given the two plans," said Sanjeet Singh, economist with ICICI Securities.

Policy makers have signalled the government plans state pension reforms, cuts to unwieldy subsidies, tax and duty restructuring, and infrastructure improvements in its 2005/2006 budget, which will be released in February.

As for investors, they remain keen on India. Foreign funds have invested almost $8 billion in Indian shares this year, a record since India was opened to foreign investment a decade ago.

Foreign direct investment was $2.38 billion between April and October, up 68 percent from a year earlier, though still less than half of what China gets in a month.

"In the last three to four years, China has been the topic of discussion in global boardrooms," said Kenneth C. Borda, chief executive officer, Asia-Pacific, at Deutsche Bank.

"Discussions now very much focus on India as well."