The market expects that, free of the shackles of the Left and with the trust vote behind them, the ruling alliance will be able to put a brick on the escalator and zoom ahead on the road to reforms.
The market also has a sense as to which companies would benefit more under the new dispensation and which may suffer. While it is understandable that the Samajwadi Party will be able to get its back scratched, it may not be allowed to ride roughshod over others. Once the vote is in place, the prime minister's esteem will rise and he will be able to call the shots.
But the ability of the government to carry out reforms will be limited to the extent that it does not have to go back to Parliament and risk another vote.
So, some serious reforms like labour, on top of the dhobi list of the FIIs, will not even be considered. Anything in the power of the Cabinet, like changing spectrum rules, selling the government's residual stake in those companies where divestment has already happened, will be done.
There is a huge difference between the political will of a poll-bound government and that of one that comes with a strong, five-year mandate. The ability of the current dispensation to pick up the blue book of reforms is questionable.
While internally, we may have removed the millstone around the government's neck, the economy continues to throw up negative surprises. The Index of Industrial Production for May showed a growth of just 3.8 per cent as against expectations of 6.5 per cent. The markets were not really prepared for this number so, at the time of writing, they were trading water.
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Clearly, the capital goods space has slowed again with a growth of just 2.5 per cent as against 22 per cent last year. While IIP numbers were a surprise, the inflation was not. It came in at 11.89. If it goes like this every week, we could be knocking 17 per cent by the end of the year.
Then, we have the old bully back again. With crude at $142, the markets can't be calm. The thinking during the week was that crude had topped out and accordingly, the market would move in the opposite direction. As things stand, that does not seem to be the case.
Then, we have the issue of financial institutions in the US, which may be going belly up. Indy Mac, the largest independent, publicly-traded US mortgage lender is on the verge of a collapse and could prove a headache for the US regulators since more than $17 billion of its deposits carry federal insurance. The total war chest of FDIC, the central authority that guarantees deposits, is just round $53 billion.
Then, we have the government-sponsored Fannie Mae and Freddie Mac, which are refinance mortgage companies. Shares of both have fallen sharply of late on concerns about their capital levels.
Meanwhile, the former St Louis Federal Reserve president has termed them as insolvent. Together, they have less than $90 billion in capital reserves, which amounts to less than 2 per cent of potential liabilities.
Furthermore, many of the loans carried by Fannie and Freddie are low doc or no-doc ARMs with negative equity. Treasury Secretary Henry Paulson, however, believes they are adequately capitalised.
The political thaw can give our market a bounce but economic issues will come back to haunt it sooner than later.