The $1.8 trillion economy needs "radical reforms" neither Prime Minister Manmohan Singh's administration nor the next government can undertake, said Lutz Roehmeyer, a fund manager at Landesbank Berlin Investment. Fisch Asset Management Ltd treats the nation's bonds as junk because of the "mess" created by politics. Legg Mason Inc. is concerned the nation's leaders will be hamstrung by compromises needed to stay in power.
"They need to provide confidence to international investors, particularly with an election coming up," Amanda Stitt, investment director at Legg Mason Global Asset Management, which oversees about $436 billion of debt, said in a telephone interview from London. "The government understands the problems. It's just whether they have the political ability to deal with them."
The rupee has slumped 15 per cent this year against the dollar, the most in Asia, and the benchmark bond yield touched a 12-year high this week as the economy expands at the slowest pace in a decade amid twin current-account and budget deficits. Opinion surveys show the single largest party to emerge from the polls will control the fewest seats on record in parliament, meaning it will need the support of several smaller ones to form a governing coalition.
No majority
No party has won an outright majority in India since 1989, requiring coalitions of parties representing different regions and castes striking deals with each other to stay in power. The fewer the seats a leading party wins, the more the trade-offs with potential allies. There are 39 parties in the 545-seat lower house of Parliament, and nine in Singh's ruling alliance. India needs to hold the next election by May.
In the past two decades, the nation's currency has weakened before four of the five elections on concern instability will hamper policies. In the 12 months before the 2009 ballot, the rupee slid 14 per cent against the dollar.
Among the challenges a new government is set to face are politically sensitive measures such as reducing fuel subsidies in a country where the World Bank says two thirds of the 1.2 billion people live on less than $2 a day.
Thwarted attempts
Singh's attempt to pass bills such as allowing foreign companies to sell insurance and pensions and changes to a law on how land is purchased for industry have been thwarted by coalition partners.
"Most of the mess is created because of politics," said Philipp Good, who manages $800 million of global bonds, including Indian securities, at Fisch Asset in Zurich. "Political risks are significant. With elections next year, most probably, it will be a coalition, and it's not positive for reforms." Fisch Asset has internally treated India with a junk rating of BB+ for almost a year, Good said. S&P, which has the lowest investment grade ranking of BBB-, last year cut the nation's sovereign credit outlook to negative.