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S. Vaidya Nathan

HOW equity prices pan out in the second half of May and the immediately succeeding few months in the homestretch to the Budget appears to now hinge on the contours of the new government.

There is a degree of uncertainty on this aspect with exit polls pointing to a hung Lok Sabha. Perception that the present ruling dispensation would get a comfortable majority has received a jolt.

Exit polls have gone awry in the past; a repeat cannot be ruled out. Markets have, however, preferred to factor in changes in the government or the composition of the NDA, should the outcome mirror the exit polls.

If the exit polls turn out to be wrong, markets may retrace losses quickly when results are announced.

The process of economic reform is likely to be taken forward by whichever combination comes to power. The pace of economic reforms will, however, be a key factor, which would depend on the composition of the new government.

A firm hand on the controls would be needed to push for: Reforms in infrastructure, power, labour laws; disinvestment of PSUs through the strategic sale route; enhanced limits for FDI/FII in key sectors such as telecom, retail and banking; freeing up controls in agriculture; a free hand for oil sector companies, which would mean addressing the subsidy on LPG and kerosene; and consolidation in the finance sector.

This is a reason why a clear mandate for the NDA could be a positive for the market, as it would ensure continuity in economic policy.

If the BJP's numbers do not decline sharply, but it is forced to seek new allies, it may take time for the NDA to press ahead on tough economic issues.

From the market's point of view, this outcome, which appears likely, may still be preferred to alternatives. Policy changes may be avoided, even though pace of reforms in sensitive areas may slow down, at least initially.

A Congress-led government may be forced by the Left to go slow in areas such as disinvestment, finance sector consolidation, subsidies and higher foreign investment limits. Such a formation may lead to a decline in equity prices of between 10 per cent and 15 per cent.

Privatisation of HPCL and BPCL will suffer a setback. Such a government may, however, not retrace policy in key areas as the Congress' policy bias is for economic reforms.

In these three cases, expect the push in telecom, infrastructure and power to continue. A repeat of the bull market of 2003 is unlikely. Equity markets may also be headed for a period of modest returns, irrespective of the quantum of FII flows.

FIIs may not be deterred by a Congress-led combination, with the Left parties as lynchpin, as they have not hesitated to invest big-time in countries where parties with Leftist leanings have been in the saddle. India is perceived as a long-term growth story and this theme may continue to drive FII flows.

The prospect of a Third Front coming to power with the support of the Congress could, however, pose downside risk to equities of a larger magnitude. There would be a question mark over its longevity. Its early demise and the possibility of either a Congress or BJB-led coalition forming the government, or fresh elections, may not be an unwelcome prospect.

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