It is something that has never happened before. Trading at India’s stock market was halted early this morning after surging ahead by 17%. Thanks to a surprising electoral victory, regulators closed the market and told investors to come back tomorrow when jubilation calms.

India’s Congress Party alliance unexpectedly won 261 seats out of a total of 543 inside its Parliament. It means the country’s once-powerful communist parties are back in the minority and a pro-business, pro-growth government is taking the reins.

While restrictions currently remain on foreign investments and the government still owns large stakes in the country’s oil and banking industry, the election paves the way to a less-regulated economy and future growth.

The region’s analysts are predicting strong infrastructure spending and plenty of reforms. Add the spending and the capital-friendly reforms to a market that now has significantly less political risk to discount and you have a recipe for a strong, sustained bull run.

Investors are paying attention to the situation. Not only did the country’s equity markets surge, so did the value of the nation’s currency. The rupee made its biggest gain in over 23 years.  The action is trickling across the investing world today.

Is it wedding season already?

The Blackstone Group’s India Fund (NYSE:IFN) is up by close to 20% on the news. Rediff.com (NASDAQ:REDF), an Indian Internet provider, is soaring by over 35%. And just to show the gains are across almost all sectors, Sterlite Industries (NYSE:SLT), an Indian mining company, is up by over 20% as well.

Even with the today’s jubilation, investors must be cautious, especially if they believe the action will spread to all BRIC countries. Brazil, Russia and China were grouped with India during the recent economic boom, but now that things have soured the countries have great financial worries of their own.

Today’s news is purely political and will benefit companies working within India’s borders. It will do very little to change the fundamental economic problems facing the rest of the world’s moderate-growth markets.

Investors must remain cautious, but have every reason to be optimistic about India’s long-term success. This weekend’s political moves could be the start of sustainable pro-business growth. If capital begins to flow back into India as many investors are guessing it will today, the country could be set for several years of bullishness.

Now, if only the positive political action would shift to the Middle East.

Source: India’s Political Fog Begins To Rise

Yet India remains one of the world’s great growth opportunities and investors at this level may well be getting in on the ground floor of a very major long-term profit play.

Let me explain …

India’s economy expanded at a breezy 9% clip last year. The rate of growth is expected to throttle back to about 8% this year, but that’s still excellent, justifying fairly lofty price-earnings ratios in the local stock market. Even so, market valuations there do not now appear excessive; the overall market is trading at about 18 times earnings, which is not particularly high given the economy’s growth potential.

As with China, if India can get its house in order – both politically and economically – we’re looking at the very real prospect of very rapid growth before that country’s standard of living starts to approach that of the West, causing India’s rate of growth to slow dramatically.

The bottom line: With 1.1 billion potential Indian consumers, we’re looking at a huge potential purchasing power for all kinds of consumer products.
Now, there are some potential pitfalls to be concerned about in the near term.

For instance, the current Indian government, in office since 2004, is a coalition between the Congress Party, which had ruled India for most of the period since independence, though without any great success, and the Communists (who are a pretty mild lot, but are nevertheless pro-government and fairly anti-market).

Although India Prime Minister Manmohan Singh is a moderate, the government as a whole has seen India’s economic emergence as an opportunity to fund favorite projects and social programs. For instance, this year’s budget proposes an 18% increase in public spending for the 12 months that end next March, over and above the 24% increase in public spending for the year-to-March 2008. Even after several years of rapid growth, the state budget deficit (the federal shortfall plus the local deficit) is around 7% of Gross Domestic Product (GDP). With any kind of downturn at all, that 7% could quickly swell to 10% – a point at which deficits become difficult to finance.

Now there is some hope on the horizon – an election is due in May 2009, at the latest, and the center-right opposition is currently leading in opinion polls. Even so, shrewd investing veterans know better than to rely on that alone for their investment profits.

The other current problem is inflation, right now running at 8% per annum, which means that it’s higher than the level of short-term domestic interest rates. Higher commodity and energy prices have affected India as they have other countries: India’s position is made more difficult by the poverty that afflicts much of the population. The Indian government, like the good socialists that they are, has seen fit to restrict exports of rice and to subsidize other foods and gasoline (the latter makes no sense socially, since automobiles are largely owned by the middle classes, not the poor). Needless to say, these subsidies and restrictions make the budget deficit worse; and they will pose an additional problem in the future, when they are lifted and consumer prices soar in response.

Having described some of the challenges that India faces, let’s be clear on a very key point: No market is perfect. Ironically, if it were, it would be a much less alluring investment opportunity. I mean, let’s face it: If India didn’t face the problems that we’ve detailed here, the market would be trading at a hefty 40 times earnings, well above its current multiple of 18.

The underlying truth remains that economic growth has achieved real momentum in India, that any government we can picture will do no more than slow the country’s economy incrementally, and that the economics of providing manufacturing and services from a base in India – especially in the era of the Internet – is so compelling from a cost and logistical standpoint that it must inevitably continue to produce huge profits for long-term investors for decades to come.

When it comes to India, it’s almost as if the central question no longer is “how much should I invest in India?” but rather “how can I afford not to invest in India?”

Let’s take a look at how best to invest in this fast-growing economy.

India Profit Plays

The simplest way to invest in India is via an Exchange Traded Note (ETN), in this case the Barclays IPath India Index ETN (INP), whose returns are linked to the Morgan Stanley Capital International India Index (unlike a conventional ETF, an ETN is technically a 30-year note, so it distributes assets to holders at the end of 30 years). In January, INP was trading at about a 15% premium to its net asset value (NAV). But now it’s trading very close to its NAV, having slipped backward.

As an alternative you might consider the Morgan Stanley India Investment Fund (IIF) or the India Fund (IFN), both actively managed funds investing in India, which currently trade at discounts to NAV of 2.0% and 0.3% respectively.

Individual shares to look at would include Infosys Technologies Ltd., (INFY) the India-based software giant, which following the fall in the Indian market has declined to a fairly reasonable 19 times earnings, or 16 times next year’s earnings.

Another possibility is the pharmaceutical company, Dr. Reddy’s Laboratories Ltd. (RDY), which, as a major generic drugs manufacturer, can expect to benefit from the expiration of many U.S. pharmaceutical patents in the next five years, and right now carries a P/E ratio of only 15.

Finally, you might consider an India-based automaker that’s been in the news a lot recently: Tata Motors Ltd. (TTM), which is trading at only 11 times earnings, reflecting the risk involved in a medium-sized company taking on the world automotive industry. In the luxury end of the market, Tata recently bought Jaguar and Land Rover from Ford Motor Co. (F), for $2.3 billion. At the economy end of the market, Tata has announced the Nano, a car for the Indian market that will sell for $2,500 – 40% cheaper than any other car on the world market. And that’s after Tata had a smash hit with a light truck designed for the India market, as well.

As I’ve previously articulated in several Money Morning articles, it is highly likely that – years from now – the worldwide center of auto-making will migrate from Detroit to someplace in either China or India, or both, thanks to the combined allure of low costs and potentially huge consumer markets. That means that Tata, as India’s largest manufacturer, is likely to be a key player in the global auto market of the future.

So if you know what the ultimate outcome of that global game is going to be, why not deal yourself a winning hand right now, and then sit back and wait for this scenario (and your profits) to play out?