The Indian market zoomed 17% on Monday on the news that the Congress Party had been re-elected with an increased majority. It’s certainly true that some of the other alternatives – for example a weak leftist Third Force coalition including the spectacularly corrupt Mayawati Kumari (India’s richest politician, a keenly fought title) – would have been worse.

Nevertheless, you have to remember that the Congress Party (also known as the India National Congress, and referred to by its initials, INC) is responsible for most of India’s woes, both recently and in the 60 years since independence, and that putting it back into power is unlikely to bring much of a step forward – economically speaking.

Condemned to Slow Growth

For more than 40 years after independence – albeit with one short exception – India was ruled by the Congress party and condemned to slow economic growth. Then, after 1991, then finance minister Manmohan Singh began opening up the economy. However, growth had already slowed again in the mid 1990s and it was only under the Bharatiya Janata Party (BJP) government of Atal Bihari Vajpayee in 1998-2004 that India removed many of its longstanding statist obstacles to growth, and began to enjoy economic growth rates comparable to those of China.

The Vajpayee government was rejected by the Indian electorate in 2004, in a stunning act of electoral ingratitude second only to Britain’s shocking 1945 rejection of Winston Churchill, who had helped engineer the Allied victory in World War II.

Since 2004, India’s Congress Party has been back in power under Singh – this time as prime minister – in a coalition with the left. The nation’s leadership has made endless promises of reform, but has really accomplished very little. Economic growth has continued to be rapid, largely because of the Vajpayee government’s reforms, which were particularly extensive during that administration’s last two years in power in 2002-2004. The Congress Party’s main achievements were run-ups in both public spending and the fiscal deficit, the latter of which seems likely to run at a rate of about 12% of gross domestic product (GDP) for the 2009-2010 period – if state deficits are included.

By the 2009 election, Vajpayee had retired, and his successor as BJP leader – L.K. Advani – was both old and associated with the party’s Hindu nationalist wing, so it’s not surprising that the BJP failed to make progress. The collapse of support in the election for the mostly leftist third parties is itself a good sign, making a swing back to the BJP under new leadership more likely whenever the next election occurs, probably in 2014.

In the five intervening years until that happens, India will have to endure a Congress Party government, either under current Prime Minister Singh, or possibly under newcomer Rahul Gandhi – grandson of former Prime Minister Indira Gandhi, which would make him the latest member of the Nehru/Gandhi dynasty to hold that office.

Don’t Expect Reforms

Congress’ claim to reformism becomes especially thin when you look at the party’s allies. For example, West Bengal’s Trinamool Congress led the violent opposition to Tata Motors Ltd.’s (NYSE ADR: TTM) “Nano” automobile plant in that state. Tata had managed to do a deal with Bengal’s Communist state government to produce the revolutionary $2,000 car, but the Trinamool Congress was able to force Tata to relocate the plant to Gujarat at a cost of more than $500 million, delaying the full production of the Nano by more than a year. In the recent elections, Trinamool, in alliance with the national Congress Party, was rewarded with 26 of West Bengal’s 42 parliamentary seats, and its leadership will doubtless be part of the new government.

The new government’s policy is thus unlikely to be very reformist, especially as it rejoices in the support of the egregious Mayawati. In welcoming the election win, Prime Minister Singh indicated further areas where India’s public spending and transfer payments needed to be increased, with no suggestion that privatization or reining back the immense public-sector deficit were a priority. It’s thus likely that the Indian government will continue as an ever-increasing drag on the economy, with a funding crisis possible if public spending increases too much.

In such an environment, it is unlikely that India’s 8% average growth rate of the last five years can continue; the average of the next five years is much more likely to be in the 4% to 5% range, possibly with an acute foreign exchange crisis at some point. There’s no question that India’s stock market – trading at a Price/Earnings (P/E) ratio of roughly 20 – is expecting much better than this. That means it’s time to step back.

When – and How – to Make Your Play

Once the euphoria has dissipated, and the Indian market has dropped at least 30% from its current level, to below 10,000 on the Bombay Stock Exchange’s Sensex Index, Indian shares will once again be worth looking at, if only because of the country’s immense long-term-growth potential – an upside great enough to overcome even the immense drag of most of its governmental shortcomings.

At that point, the heavy capital investors such as Tata Motors should be avoided, because of the unpredictability of capital availability in a capital market whose savings can be sucked into the government’s immense maw. Look instead at such non-capital-intensive exporters (the exchange rate is likely to remain relatively weak) as the software company Infosys Technologies Ltd. (Nasdaq ADR: INFY), or global pharmaceuticals producer Dr. Reddy’s Laboratories Ltd. (NYSE ADR: RDY).

Both stocks are currently somewhat expensive, with Infosys trading at about 18 times the consensus analyst estimate for forward earnings, and Dr. Reddy’s roughly 14 times. But both stocks should be purchased for long-term growth during periods when investor enthusiasm for the Indian market has had a chance to cool down.

Source:  With India, Long-Term Profit Potential Trumps Near-Term Concerns

“We are considering all options and will soon announce definite steps to help the company overcome the current crisis as it is the question of saving jobs and an international brand,” Commerce and Industry Minister Kamal Nath said Monday. “The Prime Minister is closely monitoring the developments on Satyam.”

Indian authorities last Friday detained former Satyam Chairman B. Ramalinga Raju on charges of forgery, breach of trust and criminal conspiracy after the founder of India’s fourth-largest software exporter confessed to falsifying about $1 billion in cash on Satyam’s books and exaggerating his company’s profit margins.

The subsequent plunge of Satyam stock wiped out more than $2.2 billion of investor wealth, and sparked at least three class-action lawsuits in the United States, Bloomberg News reported.

However, the scandal also undermined India’s reputation for corporate governance and jeopardized the reputation of much of the nation’s prominent outsourcing industry, particularly in Satyam’s home base of Hyderabad. The government has responded with vigor -dismissing the company’s entire board of directors, and replacing it with a new three-man board.

The new, government-appointed board includes Deepak Parekh, chairman of the Housing Development Finance Corp., Kiran Karnik, former president of the National Association of Software Services Companies, and C. Achuthan, formerly of the Securities Exchange Board of India.

Parekh said earlier this week that Satyam has urgent “working capital issues” that need “immediate attention,” but noted that company accounts must first be re-audited before any real progress can be made there.

“No one has faith in the numbers being produced so far,” Parekh said. “Unless the accounts are restated, the outlook for Satyam can’t be the same.”

The board has named Deloitte Touche Tohmatsu International and KPMG International as auditors to replace PricewaterhouseCoopers International Ltd. in its first step to restore confidence at the company hit by fraud.

The new board must now hire new executives to fill the posts vacated by Raju and former Satyam Chief Financial Officer Srinivas Vadlamani, who was also arrested.

But it must also keep the company afloat while the delicate transition takes place -even as investor confidence wanes.

Satyam’s new board has already asked clients to accelerate payments, but the global financial crisis has left many businesses squeezed for cash and credit lines remain tight. If its situation doesn’t rapidly improve, Satyam could be faced with a mass exodus of clients, which would force the company to fold.

That would be a devastating development, for Satyam’s 53,000 employees would be lost. Those losses would not be limited to India, either. As many as 30% of Satyam’s employees -or about 15,900 people – live and work outside India, The International Herald Tribune reported.

The company’s demise would also disrupt such key operations as billing and computer-system maintenance among Satyam’s customers, which include some of the largest companies in the world. Most important of all, however, a collapse would undermine India’s vast IT sector, a showcase industry for the country with export earnings of more than $40 billion.

“The government cannot allow Satyam to plunge, as it will lead to the loss of jobs, hit foreign investment and the record economic growth,” C.L. Bansal, who teaches corporate law at Management Development Institute in Gurgaon, near the capital New Delhi, told Bloomberg. “The efforts at saving Satyam are aimed at actually salvaging the image of corporate India.”

With the jobs of 50,000-plus Satyam employees, as well as the health of India’s outsourcing industry, hanging in the balance, the government may have to intervene with a monetary bailout.

“The government stands ready to help out,” said interim board member Parekh. “But it depends on how big the hole is.”

Nath, the commerce and industry minister, said that the government will consider “topping up” the stimulus packages already under way in India.

“There are sectors not doing well and we are addressing those sectors by ensuring liquidity … perhaps another relief package for them which puts them in a level playing field in the global market,” Nath told reporters.

Source: Indian Government Ponders Satyam Bailout in Wake of Raju Scandal

This from Money Morning:

In a surprise to many, India’s central bank has cut its base-lending rate four times since October, going from 9% to its current rate of 5.5%. After all, isn’t India’s economy growing nearly as fast as China’s? And isn’t that growth already being fueled by an unprecedented level of middle-class spending?

The answer to both questions is a resounding “yes.”

But there’s a pesky asterisk here – and that’s the global financial crisis, the cash drought that has sapped nearly every country directly through their banking systems, or indirectly through fluctuations in exchange rates and gyrations in revenue received from key trading partners.

And the Reserve Bank of India’s rate cut proved two things:

First, its new governor, Duvvuri Subbarao, is less afraid of inflation than he is a global slowdown.

“A 100-basis-point cut is an indirect admission that not all is ‘hunky dory’ with the India growth story,” Nandkumar Surti, chief financial officer at JPMorgan Asset Management India Pvt. Bank in Mumbai (JPM), told Bloomberg News. “One way to look at it is that the global problem has begun to affect us.”

For years, India doggedly raised rates to keep widespread inflation in check. It even went as far as subsidizing food and forcing the state-owned oil companies to sell gasoline to domestic consumers below cost.

And second, Subbarao believes India should taper its economic growth outlook for 2009.

This installment of “Outlook 2009,” report will chart India’s growth next year – its headwinds, tailwinds and possible factors that could turn the direction of either.

It will also reveal the two best ways investors can ride along with India’s economic growth, and take home profits from India’s bullet-proof industries – and in the process, perhaps even offset some of the losses they’ve incurred here in the U.S. market.

India’s Headwinds

India’s economy logged an annual growth rate of 7.6% for the quarter ended Sept. 30 – its slowest rate of growth in nearly four years.

India’s farm sector employs about 60% of India’s 1.14 billion people. That was great during last year’s run-up in commodity prices, but those prices have subsequently fallen, and so has the ag sector’s rate of growth – 2.7% in the quarter ended Sept. 30, which is well below the 4.7% pace of a year ago, according to The Wall Street Journal.

Manufacturing – also a powerful economic engine – has also stopped chugging as hard. That sector advanced 5.0% in the last year, a significant drop from the 9.2% growth from the same period the year before.

The global deceleration bears much of the blame for those drop-offs, as the United States far and away, remains India’s top trading partner.

But India is now dealing with a major share of homegrown problems – issues that have become ever more glaring as India’s economy grows in size.

The biggest problem of all: India’s domestic infrastructure is sorely deficient.

The country’s roads and highway systems are a mess, and its power grid is grossly insufficient for an economy of India’s size and rate of growth. That’s an observation that Money Morning guest columnist and well-known India-investment expert Karim Rahemtulla observed firsthand in India last year, when he lead an investor’s field trip around the country.

And while India has a prosperous and growing middle class, more than 200 million people living there are living in poverty. The government has taken many measures in the past decade to reduce poverty, but Rahemtulla says that the nation’s poor are “mostly against reform because they see little benefit from it.”

In a way, that, too, is an infrastructure issue. India’s poor don’t feel any kind of real connection to the country’s financial system. Indeed, many work day-by-day in the thousands of farming villages. A wave of government reform won’t affect them because they are living at such a far distance – physically, socially and culturally – from the parts of India that would benefit from any changes, new programs, or financial-stimulus efforts.

Even with those obstacles, the World Economic Forum (WEF) and Confederation of Indian Industry predict India will grow 7.4% to 7.8% in the 2008-2009 fiscal year.

But not everyone agrees with that assessment.

“Not going to happen,” Rahemtulla said. “There will be positive growth because India will reduce rates and devalue the rupee in order to stave off economic contraction which it can ill afford.”

But Rahemtulla was just as quick to credit the Reserve Bank of India for taking action as the global financial crisis spread across the world.

“They have explicitly stated they will aggressively promote fiscal and monetary stimulus to promote growth,” Rahemtulla said.

India’s Tailwinds

No question, the global financial crisis has crippled economic growth around the world. But the malaise – combined with the significantly reduced inflation that’s resulted from the downturn – has opened up a straightaway into which India can shift its cautionary policies, refuel its economic engine, and ultimately re-accelerate growth.

“Taking note of the downturn in the inflation rate, RBI has lowered the policy rate as well as the reserve requirements. RBI’s policy is now biased towards stimulating growth,” India’s former finance minister, Palaniappan Chidambaram, said in reference to the steps taken by the Reserve Bank of India.

“If the rate of inflation continues to decline, the policy rates may also moderate and the bias in favor of growth may deepen,” he told economic editors during a meeting late last year, Reuters reported.

India’s annual inflation fell near a 10-year low of 6.38% in December, a dramatic drop from the 13% growth rate in August. The trend is expected to continue, with inflation slowing to 5% or less by March, Pronab Sen, secretary at the ministry of statistics and program implementation, told Reuters.

That could open a door for the Reserve Bank of India to cut interest rates further, encouraging banks to lend money. And though lower rates may weaken the rupee, Rahemtulla says that will make India’s exports more appealing – especially as countries around the world tighten their belts amid the global financial crisis.

Low inflation isn’t the only tailwind that’ll rebound India’s economy back to its high speed.

India’s overall economy sputtered, but a pair of critical sectors posted promising numbers: Construction is up 9.7% from a year earlier, while India’s service sector has advanced at a robust 10.8% in that same span.

Credit goes to India’s middle class, which, like China’s, is growing in both numbers and overall strength.

Also very promising: Only $1 billion of the Reserve Bank of India’s $510 billion loan portfolio is in toxic Western assets.

That explains why – at a time when the global turmoil has claimed several major U.S. banks – none of India’s banks have gone bust.

India is unmistakably frugal. And its monetary policy proves that it is willing to accept a reputation for being a stifler of growth – instead of being known as being clumsy, overzealous and even reckless, as many U.S. banks are now accused of being.

Two Ways to Play India… for Cheap

Like every major economy, India is falling short of previous economic forecasts in large part because of the global financial crisis.

But make no mistake: Next to China, India’s economy will grow four-to-five times faster than most of the world’s other major economies – many of which are stuck in recession.

For now, investors should target the companies in India that are internationally competitive and are active exporters. That’s because any budget or inflationary difficulties will probably be reflected in a weakening of the rupee, which will help countries exporting from India.

Infosys Technologies Ltd. (ADR:INFY) is India’s premier exporter of software. The company carries almost no debt, and its shares are trading at a current Price/Earnings (P/E) ratio of 12.6, with a dividend yield of 1.48%. That P/E is quite low for a company in a high-growth market such as software.

Dr. Reddy’s Laboratories Ltd. (ADR:RDY) is India’s premier manufacturer of generic pharmaceuticals, and is positioned to benefit in the 2008-2012 period as many popular drugs lose their patent protection and are opened to international competition. In the near term, too, as household and corporate budgets tighten around the world, people will more likely opt for generic prescription drugs, instead of high-price name brands.

Dr. Reddy’s has moderate debt (about 50% of equity), and is trading at 19 times forward earnings – not at all pricey, given the high promise of the generic-drug sector. The stock also features a modest dividend yield of right around 1.0%.

Both stocks are down nearly 50% from their 52-week highs, suggesting value.

This is the eleventh installment of Money Morning’s”Outlook 2009” series, which looks at the global investing outlook for the New Year.

Source: India’s Economy Standing Firm Amid the Growing Global Financial Crisis