Hopes of further reforms have started to diminish among stock market participants after the Trinamool Congress (TMC) said it was pulling out from the Congress-led United Progressive Alliance (UPA) government.
The brokerages are not expecting the government, technically reduced to a minority, to fall. Experts say it would be difficult for the government to push ahead with reform measures, such as allowing foreign direct investment (FDI) in sectors like insurance. However, administrative measures such as implementation of the Shome panel report and the debt recast of state electricity boards (SEBs) are possible.
“The decision of a member of the ruling coalition to pull out of the government in protest against recent reforms may scuttle the market’s hopes for more reforms,” said Kotak Institutional Equities in its India strategy report. “The reality of Indian politics will demand a more subtle approach to reforms and perhaps even populism.”
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What does TMC's withdrawal from UPA mean?
Experts believe there is no immediate threat to the government. “The ruling coalition will have 254 seats in the Lok Sabha (out of 545) post the TMC’s exit and will probably be in a position to stay in power with the support of regional parties such as the SP and BSP,” said the Kotak report.
However, the changed scenario could mean that difficult reforms take a back seat. “This ordeal brings to light some challenges of a coalition government in terms of satisfying different constituencies while pushing through difficult reforms. However, pending reforms relating to SEBs and approvals for projects etc are administrative in nature, so less likely to create as much resistance,”added a report by Citigroup. “Continuation of political uncertainty would again bring threats of slow growth and possible ratings action.”
The Bombay Stock Exchange index, Sensex, on Thursday ended at 18,349.25, down 0.8 per cent or 146.76 points, its biggest single-day fall in a month. Reacting to TMC's withdrawal, the Sensex opened more than 200 points lower and remained volatile through the day. Weakness in the Asian and European markets also dented sentiment.
Mumbai-based Ambit believes Parliament would continue to remain dysfunctional in the coming year but reforms outside it would continue. The domestic broking firm expects the government to be able to proceed with measures like the final Shome committee report and removal of capital gains tax. It also expects the Kelkar committee report on fiscal consolidation to be published in mid-October and see a package of measures being announced by the Securities and Exchange Board of India. Ambit on Thursday reiterated its Sensex target of 19,000 by December. Domestic brokerage Edelweiss believes the government will be able to take its reform process forward after the TMC’s exit.
“The fact that the government has been reduced to a minority is seemingly negative but in our view, the TMC’s exit from the UPA has actually created space for continuation of reforms. We do not anticipate a reversal of recent reforms, beyond a symbolic partial roll back of the fuel price hike,” it said in a note to its clients, advising them to buy whenever the market corrected. The broking firm feels the coming months would offer several opportunities to buy, given the political uncertainty.