Foreign investors look to boom in postelection India

Foreign investors look to boom in postelection India

NEW DELHI (Reuters): Foreign institutional investors say they expect India's fledgling economic recovery to turn into a full- blown boom in the coming months with elections starting on Sunday widely expected to bring a majority government to power.

"All indications are that India will have a stable government and the agenda of economic reform will pick up," said P.K. Basu, Singapore-based chief economist for Southeast Asia at Credit Suisse First Boston.

Opinion polls tip a coalition led by the ruling Bharatiya Janata Party (BJP) to win parliamentary majority.

"We've seen a cyclical rebound in the Indian economy. Any stable government with a coherent set of policies will set the stage for a fair amount of growth over the next few years," said Arjun Divecha, who manages US$1.3 billion in emerging market funds at Grantham Mayo Van Otterloo in Berkeley, California.

The BJP government's projection of seven percent growth in Gross Domestic Product in fiscal 1999/2000 is within target, with several macro-economic factors converging to provide the necessary push for a sharp economic upswing, analysts said.

An unusually good harvest year this year has put money in the pockets of farmers who have pushed up demand for consumer and durable goods, helping lift the country from a three-year economic slowdown. Bumper crops are holding down prices of agricultural goods, comprising about a third of the economy.

That in turn has helped keep a lid on inflation. Both consumer and whole-sale price inflation, at 3.2 percent and 1.5 percent respectively, are at nearly two-decade lows. Foreign exchange reserves are at $33 billion.

That will give the next regime a little room to lower relatively high short-term interest rates and spur infrastructure and fixed business investments, analysts said. The prime lending rate of public sector banks ranges between 12 and 13.5 percent.

"Agricultural production has provided a sort of trigger, but going forward, the key driver is going to be infrastructure," said Ridham Desai, strategist at JM Morgan Stanley in Bombay.

An improving economy will boost corporate earnings and ease the way for the key Bombay stock market Sensitive Index (Sensex) to cross the 5,000 barrier this fiscal year, many foreign institutional investors project.

JM Morgan Stanley has a target for the Sensex to touch 5,800 by the middle of next year, building on a 70 percent gain in the Sensex since October last year. CSFB's Basu said his bank has an end-year target of 5,400.

"There is still room in this market. We could touch 6,000 by the middle of next year," said Sanjiv Sanghvi, head of securities at HSBC Securities in Bombay.

Brokers say India's market is fairly valued in terms of current corporate earnings but relatively cheap on the basis of forward earnings.

The market is trading at 16.5 times projected corporate earnings in 1999/2000 and 14 times 2000/2001 earnings, said Deepak Lalwani, broker at Astaire & Partners in London.

But India's problem is that it is not the only cheap market in Asia right now. "At this stage, do I want to chase Indian cyclical stocks? The answer is probably no. The smaller market capitalizations of Indonesia, Thailand and the Philippines will probably do better," said Tim Love, emerging markets strategist at Societe Generale in London.