India waiting for a decisive vote

INDIA's equity and currency markets appear optimistic about the country's election outcome and, therefore, about policy action and growth implications in the coming 12 months. In the run-up to the nationwide parliamentary elections, the Sensex has pushed into record territory.

But, to keep the market trending higher, this vote, heralded for its sheer size, will have to channel its enormity into a strong mandate for the winning party or major coalition, in our view. Such results could signal a sea change for India's economy, which has struggled with stagflationary conditions in the last few years despite favourable demographics and significant potential for catch-up growth - suggesting that the impediments are largely cyclical.

Deterioration in productivity growth, prompted by inept policy choices - for example, maintaining a high fiscal deficit, advocating high rural wage growth, creating an unfavourable business climate through general policy uncertainty amid weak external demand - fostered the sluggishness. Weaker economic growth and slower job creation have resulted, attended by elevated inflation, which has eroded purchasing power and likely raised income inequality.