Can India's Congress Party Deliver for Business?

It took less than a minute for exuberant investors to weigh in on the results of India's elections. Buoyed by the weekend news of the surprisingly strong win by the ruling coalition, India's stock market soared on May 18, the first business day after the tally was announced. When the market opened at 9:55 a.m., it quickly hit the upside barrier limiting the amount of one-session movement, and traders had to pause for two hours. Trading briefly resumed at 11:55, and again, stocks soared before hitting their upward limit. By noon, the market was already closed for the day, with the benchmark Sensex index rising a record 17% in just 55 seconds of trading.

Investors have good reason to be thrilled. The Congress Party-led coalition scored a decisive victory on May 16, allowing India a stable government unencumbered by the demands of allies from the leftist parties that had fought major economic liberalization in the past five years. The returning Prime Minister, Manmohan Singh, is an economist by training and has shown a tendency to embrace economic reforms in the past. This is the "strongest government platform in India over the last two decades, and the opportunities could be substantial," wrote Citigroup (C) analyst Aditya Narain in a note to clients May 18. "The big question: Is it a 'game changer'? Can India get back to the high growth-high valuation of recent years? This event probably does open up meaningful possibilities."

The thumping approval the stock market delivered on Monday may be premature. India's market is relatively volatile and has been a poor leading indicator in the past. Until Friday, the market was up 26% for the year, even though the broader Indian economy has shown few signs of a solid recovery. Indeed, exports were down 33% for the last quarter. With the Indian rupee advancing the most in two decades on the back of Monday's rally, exports will get more expensive. "The elections are certainly good news from the perspective of economic reforms," says HSBC (HBC) senior Asian economist Robert Prior-Wandesforde. "Whether it is worth 17% is debatable."

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