India's Sensex index appeared to have found its feet again early this year after a torrid 2011. But with stocks up by more than 10% in the first few weeks of the year, the past month or so has seen the rebound stall. "Political uncertainty has gone up, and this means economic uncertainty, in terms of what the government [can and will do, has] too," says Surjit Bhalla of OxUs Investments.
With the government "reeling from the loss of mid-term elections" in early March, last month's budget was a disappointment, says Jeff Glekin on Breakingviews. In particular, it "lacked the political wriggle room" to lower fuel subsidies, which are raising the budget deficit.
But it also neglected the basic structural reforms needed to boost investor confidence. Reducing the time it takes to open a business, for example, wouldn't have cost much political capital. Land and mining reform would also have been feasible.
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Unfortunately, these days it seems the government "never miss[es] an opportunity to miss an opportunity". A series of corruption scandals over the past 18 months haven't helped, and investors' nerves were frayed further by a measure imposing a retroactive tax on foreign companies. "Gouging foreigners by using arbitrary and retrospective tax is unacceptable," says Damian Reece in The Daily Telegraph.
Meanwhile, growth has slowed sharply over the last year or so, to the extent that the official forecast of 7.6% over the next year is "optimistic", says Wayne Arnold on Breakingviews. Yet higher taxes and rising food and oil prices are threatening to stoke inflation: the central bank has not cut interest rates in recent months, despite signs of ebbing growth.
With its young, well-educated population and array of internationally competitive firms, especially in technology, India has plenty of long-term potential. Still, it seems that the reforms investors have been hoping for, along with an end to corruption, are likely to take longer than expected.
With the near-term growth outlook unpromising, weak governance a new worry, and the markets' price/earnings ratio at a comparatively high 15, the latest rally's prospects have dimmed. "Earlier this year we were in a bull run," says Bhalla. "Now we're in a trading range."
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