The Hindu Business Line : Politics of the market

Political uncertainty has often been a red rag to the stock markets. The market meltdown of mid-2004 took shape when the Left parties stated that they would support the UPA Government from outside, but not be a part of it. Fast forward to August 22, 2007, when the market ended flat ahead of a key meeting with its coalition partner when the Indian Government decided not to put the nuclear deal on hold. On October 9, 2007, the Sensex was down again on account of the face-off between the UPA Government and the Left on the nuclear deal.

The risk finally played out, with the Left withdrawing support to the UPA Government on July 8.

What happened

The Left withdrew support as the Government approached the Board of Governors of the International Atomic Energy Agency (IAEA) regarding the Safeguards Agreement. This has left the government short of a simple majority in the House and it is enlisting the support of the Samajwadi Party and other parties to make up for the numbers. Minutes after the announcement of the withdrawal of support, the stock market witnessed a brief rally, as concerns over a political stalemate dissipated. But the prospect of a vote of confidence motion continues to give the markets the jitters.

What’s ahead

So what could lie ahead for the markets? Uncertainty in the political environment usually tends to be a destabilising influence on the stock market. Seen in this context, a win for the present government in the motion may bring in some stability (even if temporary) at least for the stock markets. Previous instances in the late 1990s show that the markets fell in the one month preceding a no-confidence motion and rose after there was certainty in the one month consequent to the passing of such a motion.

The stock markets may also find reason to mark up certain sections of stocks if the UPA gets its numbers and goes ahead with the nuclear deal. The focus then, may turn to possible beneficiaries from this deal in the listed space. Already, companies engaged in the construction of nuclear power plants such as Hindustan Construction and others involved in the manufacture of power equipment would derive an advantage from the deal. Stocks in this category include Areva T &D, L&T, BHEL and NTPC.

Better times to come

Nuclear deal apart, the one question that always arises when one political formation gives way to another is what stance the new government may take on key policy measures, government spending and the unfinished agenda on reforms. Should there be a change in the Centre, hopes may revive on enhancement of limits of FDI in various sectors, the partial divestment of profit-making PSUs and pension reforms, some policy moves which haven’t made much headway under this regime. The Pension Fund Regulatory and Development Authority (PFRDA) Bill, which enables private managers to oversee pension money, may also be watched for. Other pending economic reforms such as the Insurance Bill (to increase the FDI limit from 26 per cent to 49 per cent) and Banking Regulation Bill (to give investors the voting rights commensurate with the extent of shareholding, applicable to private sector banks), are likely to be on the radar again if the government passes the trust vote scheduled on July 22.

Should the Left front be part of any new formation, issues such as universalisation of PDS, price rise of petroleum products, forward trading in essential commodities, farmers’ suicides and yawning gap between the rich and the poor, which were bones of contention between the government and its coalition partner, the Left, may be taken up.

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