Singh's Deft Maneuvering Is Bringing Back Investors

Investors have decided they like Indian Prime Minister Manmohan Singh. That's a major switch: Four months ago the upset victory of Singh's Congress Party drove India's bourses down 20% in a matter of days. The fear was that reform would stall as Singh proved himself both easily manipulated by Sonia Gandhi, the Congress Party president, and cowed by that party's left-wing allies.

Yet now stockpickers both foreign and domestic are back, driving the market up 26% since mid-May. "People are surprised by how much more market-friendly than expected the coalition is," says Rajeev Malik, senior Asia economist for J.P. Morgan (JPM ) in Singapore.

Singh certainly has his problems, and this being India, some of them are sizable. The communist members of the Congress coalition are obstreperously opposed to too many market-friendly measures. "With allies like the Left, who needs an opposition?" asks Surjit S. Bhalla, a respected economist and fund manager at Oxus Investments in New Delhi. Then there's the matter of local and state finances: Congress is rushing to make good on its campaign pledges by diverting funds to the countryside, but it's not doing enough to help the fragile fiscal positions of cities such as Bombay. Singh says that will change. Despite the assurances, in mid-October's local elections, some urban voters might deliver a sharp rebuke to Congress, and thus weaken its overall position in New Delhi. Budget politics could also get rough if a late monsoon damages farm incomes.

Hairy problems indeed. Yet investors see a technocrat who has finessed his way out of a number of situations. Rajen Mariwala, who runs Hindustan Polyamides, a chemicals business in Bombay, especially appreciates Singh's deft handling of the Left: "Dr. Singh gives us great hope that the right kind of people are sitting at the top." With his team of Finance Minister P. Chidambaram and economic adviser Montek Singh Ahluwalia, Singh has placated the stock market by abolishing the tax on long-term capital gains and reducing the levy on short-term gains. By next April, India's 29 states will rationalize their complex, corruption-laden tax structure by switching to the value-added tax. The move is expected to boost the tax base and hike revenues by 50%, according to New Delhi's Center for Policy Alternatives.

Singh has also softened the impact of high global commodity prices by cutting import tariffs on oil, petrochemicals, and steel, forgoing $1 billion in government revenues but preventing a public outcry. And the Prime Minister has moved to curb the profligate ways of India's states by tying federal funding to fiscal responsibility. Abroad, Singh has secured a crucial gas-pipeline deal with Pakistan -- evidence that the peace process between the two countries is gathering momentum.

The question is, how will Singh do in his second act -- especially vis-à-vis the communists? So far he has managed to "keep talking left but walking right," says Manish Chokhani, director of Enam Securities in Bombay. The hope is Singh will constrain their protests. "These differences will be kept within the limits of prudence," Singh told reporters on Oct. 6. In late September, for example, the communists squawked when Singh tried to name McKinsey and World Bank consultants to a special advisory committee. In response, Singh scrapped the panel. Why was that clever? Because the communists, too, suddenly lost their places on the committee. Singh has a tough job to do. But to date he's shown a lot of savvy.

By Manjeet Kripalani in Bombay

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