Political Shakeup Rattles Indian Outsourcing Firms

Experts say any damage will be limited, but the fallout from last week's election continues.
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The political earthquake that swept India's nationalist government out of power last week is unlikely to damage the country's thriving outsourcing businesses, short-term damage to related shares notwithstanding.

Analysts, academics and business people who follow developments on the subcontinent said the 15 years of economic reform that transformed a backward, colonial-style economy into a global power were the product of a national consensus. In fact, the victorious Congress party began the reforms in the early 1990s, and there is a strong possibility that Manmohan Singh, minister of finance at that time, will be reappointed to his former post.

"Dr. Singh was an icon, and what he did for Indian reforms was staggering," Vivek Paul, vice chairman of

Wipro

(WIT) - Get Report

, India's third-largest software services exporter, told

Reuters

news service. "It is difficult to get worried about that."

Martin Kenney, a professor of human and community development at the University of California at Davis, said of India's booming computer services industry: "It is inconceivable to me that Congress would do anything to disrupt this at all. The elites in India are on board."

That said, instability of any kind generally shakes investor confidence, at least in the short term, and the surprise change in India's government is no exception.

After sliding 6% Friday, the Bombay Stock Exchange suffered its worst-ever session Monday: The benchmark Sensex fell as much as 15.5% intraday before closing down 11.1% in a session in which trading was twice suspended by regulators in an effort to quell the decline.

After falling nearly 10% Friday, shares of Wipro were recently down $2.55, or 6.6%, to $36.25. Meanwhile,

Infosys

(INFY) - Get Report

was recently off $3.48, or 4.7%, to $71.17 after declining 6.6% Friday, and

Satyam Computer Services

(SAY)

was down $1.64, or 8.9%, to $16.73 after losing 7.5% Friday.

"There was some initial nervousness about the danger of a hung parliament," analyst Sameer Nadkarni of W.R. Hambrecht said of the outsourcing firms specifically. But in the longer term, he said, the change in government is at worst neutral and maybe even a positive, as the victors shore up parts of the economy beyond high tech that have been neglected.

To be sure, there are still massive economic inequalities in India, an issue that led to the downfall of the BJP government. "But I don't think there is any real belief that going back would improve the lives of people who voted against the BJP," Kenney said in an interview.

"There is no huge difference on what the two parties espouse" regarding outsourcing and technology-related issues, said Brean Murray analyst Ashish Thadani. The change of government could even slow the

appreciation of the rupee, and that would be a plus for India's computer services industry.

Rafiq Dossani of the Asia-Pacific Research Center at Stanford University noted that some analysts have positioned the election as a contest between the countryside and the cities. "That's nonsense. Voters in Delhi and Bombay

among other urban centers supported Congress," he said. "When a country is poor, there is hostility toward incumbents."

Dossani said that the pace of economic reform has slowed in the last several years, as the major political parties jockeyed for position. But once a new government is seated, he said, India is likely to see a period of reform that will last at least until the next election cycle, which begins in three years.