The Congress victory, with the party alone winning 40 per cent of the Lok Sabha seats in the 2009 election, sent the market into a tizzy on the very first working day on Monday after the poll results, which came out on May 16. The Bombay Stock Exchange's (BSE) 30-share sensitive index (Sensex) greeted Ms Sonia Gandhi and Dr. Manmohan Singh with a euphoric 2,100-point rally in just 70 seconds of trading, an all-time record. The foreign institutional investors (FIIs) managed to pump in US$ 296 million to buy shares as soon as the markets, BSE and the National Stock Exchange (NSE), opened on Monday, May 18.

The excitement is real. The speculators' exuberance is not irrational. With the Left parties off the government's back, foreign investors, though mostly unknown and faceless, are expecting a speedy public sector and financial sector reform. Their wish list includes a large-scale government disinvestment in high profile public sector enterprises such as BHEL, NTPC, SAIL, ONGC, IOC, HP, BP, NMDC, Coal India, SCI, SBI, some top-ranking nationalised banks, BSNL and MTNL. They are also expecting private and foreign control of India's insurance sector. A more liberal FDI regime in the media industry and other restricted sectors is also on the cards. All these would have never been possible under a weak leadership of the government in which coalition partners call the shots. The miserable performance of the Left group and a sizeable reduction in the strength of Bharatiya Janata Party (BJP), the main opposition, in the new Lok Sabha called for a big celebration.

Courtesy foreign investors, the Indian stock markets did exactly that. Paradoxically, foreign investors in other much larger global markets are still taking a cautious approach. The depression has already taken a heavy toll on all major global economies. Financial analysts do not expect to see the light at the end of the tunnel before mid-2010. On May 18, when BSE and NSE were on the troposphere, Nikkei, the sensitive index of the world's second largest economy, Japan, actually closed 2.5 per cent lower. Even Hong Kong's Hang Seng, the health barometer of the world's third largest economy, China, was up by only 1.5 per cent. Singapore's Straits Times index rose by barely one per cent. The contrasting behaviour of the Indian stock market vis-a-vis other much stronger Asian markets is more on account of a highly probable liberal economic agenda of the newly elected government than India's existing economic strength itself.

In fact, FIIs are upbeat on India for a number of reasons. On the face of it, they are mostly negative in nature and are responsible, as most foreign investors think, for underperformance of the economy. As a result, they feel, the new government has no choice but to go in for large-scale PSU and financial sector reforms to ensure continued foreign fund flow to prop up the economy. PSU disinvestment will substantially check the high fiscal deficit, which is hovering around 10 per cent of the gross domestic product (GDP). The fiscal deficit is a major obstacle to economic growth. PSU disinvestments can help the government to raise a few lakh crores of rupees from the market. The declining exports, for six months in a row, is a major cause of concern. The gap between the Reserve Bank's foreign exchange reserves and liabilities has dangerously narrowed. A high dose of FDI inflow alone can improve the situation. The consumer price index continues to be at around 10 per cent. The mindless cut in interest rates by RBI may ultimately affect the deposit growth in the banking system curtailing credit expansion or bank investment in due course.

What choice does the new Congress-led government, headed by Manmohan Singh, have, other than holding foreign hands, to fulfil his pre-poll promise of rejuvenating the economy within 100 days of his reassuming the power and for a double digit growth thereafter? Obviously, it is time for a fresh round of economic reform. It is about time for a fresh round of policies to attract FDIs. A big spurt in stock prices is bound to have a positive impact on the primary market and the direct investment, both domestic as well as foreign. Advisors and economy managers of Dr. Singh in the previous United Progressive Alliance government have laid such a trap that the new economic policy will be forced to stay focussed on further economic reform and larger role of foreign direct or indirect investors. Dr. Singh and his team's dream to achieve a nine to 10 per cent economic growth can be fulfilled if only the country's annual savings or investment growth rate is sustained at 40 to 45 per cent in the coming years. India will need at least US$ 38 to 40 billion per annum in FDI alone in the initial years.

Many think that a substantial portion of the overseas hot money flow into the Indian stock market, this time, is actually a part of the huge unaccounted Indian black money held abroad and may stay 'cold' here in stocks for fear of future exposure of their real sources by dubious foreign fund managers in tax havens under international and local pressure. India's unofficially estimated trillion-dollar black money held abroad was made a poll issue by both the Left group and BJP, though without much impact on electorates. The menace of black money has now become a big issue before both the World Bank and International Monetary fund, trying to discipline the global monetary system, especially after the collapse of top US investment banks, many of which are known to handle those so-called unaccounted funds from undisclosed sources.

The previous UPA government had a soft corner towards the entry of such funds into India's both secondary and primary markets, which led to a massive stock boom and large FDI inflows, especially into the infrastructure and realty sectors. Under pressure, the new government may further liberalise the flow of such funds, even at the cost of national security and long-term financial stability. Forget about the official statistics and claims. The truth is: the Indian economy is badly fund-starved now. It is too weak to apply discretion, at least for the time being, on the sources of funds. Speculators and fund managers cannot let go such an opportunity. The market will go up if the government is prepared to take the risk. (IPA Service)