Dr. Manmohan Singh’s second innings as India’s Prime Minister as the head of a Congress-led coalition is significant in many ways. Unlike his last five-year term that ended in May 2009, this time Mr. Singh has a comfortable majority to escape from the clutches of bullying allies when it comes to undertaking crucial reforms. The new regime led by the economist Prime Minister is secure in terms of numerical majority in the Parliament. But how far that cushion will translate into tangible actions is the big question.

Elections to India’s 15th Lok Sabha (Lower House of Parliament) took place in five phases from 16 April - 13 May 2009. Of the total electorate of nearly 715 million, over 400 million people voted to elect 543 Members of Parliament. More than 4.5 million officials participated in the election process and 2.5 million of security personnel were deployed. The results came out on 16 May 2009, the day of counting of votes.

Foreign Policy Priorities

The new Indian government’s perspectives on key foreign and security policies are eagerly awaited. But the early signals are out. India’s key foreign relations with the US, China, EU and Pakistan and also the approaches to environmental concerns will be unveiled in detail very soon.

Surprisingly, foreign policy was never a major election issue. A six-page manifesto published by the Congress party barely mentioned foreign policy. But there are glaring issues at the foreign policy front which India has to tackle in the near future.

Relations with Pakistan have strained after the Mumbai terror attack and subsequent aggressive posturings. There is international pressure on India not to shut doors of dialogue even while sharing India’s frustration with the neighbour in what it calls “sponsorship of terror against India”.

The current thinking in New Delhi was evident in the statement of Prime Minister Dr. Manmohan Singh after the oath-taking ceremony where he expressed hope that Pakistan would cooperate with India by not allowing its territory to be used for terrorism. That means, officially, there is no appetite to resume talks or any relationship with Pakistan until there are demonstrable steps, at least against the accused in the Mumbai attacks.

In Sri Lanka, after the decimation of LTTE and its leader through a military offensive, pressure is more on India to persuade Sri Lanka for a political settlement of the issue as there is no better time than this to make a solemn beginning. The Nepal situation is another headache for India, after the Maoist PM resigned. In Bangladesh, the Awami League victory really gave leg space for dialogue and cooperation and to stem its drift into the hands of forces inimical to development.

New Foreign Office

Dr. Manmohan Singh has picked up a new face for the foreign ministry. The new incumbent S.M. Krishna is a veteran with long experience having held many positions of power. This former chief minister of Karnataka and Governor of Maharashtra was educated in George Washington and Southern Methodist Universities in the US and started his career as a lecturer in international law.

Krishna’s deputy Mr. Shashi Tharoor, is a former UN bureaucrat who lost the election to South Korea’s Ban Ki-moon for the post of UN Secretary General in 2007. Tharoor quit the UN position later and plunged into the hurly burly of Indian politics a year ago. This former UN under-secretary-general is expected to effectively complement the senior Minister. Tharoor, who knows the UN system from inside, is expected to articulate India’s position strongly for a seat in the expanded UN Security Council. Mrs. Preneet Kaur, the royalist Congress MP from Patiala in Punjab is the other member in the foreign ministry.

Hillary Clinton’s Visit

Ahead of the visit of Secretary of State Hillary Clinton to New Delhi in July, India has underlined its credentials as a responsible nuclear power and reiterated its commitment to universal nuclear disarmament amid speculation that India is under pressure to sign the global non-proliferation treaties.

External Affairs Minister S.M. Krishna has ruled out any change in India’s position on the CTBT and NPT. “India will reiterate its long-standing position on the treaty, which it regards as discriminatory, during Ms. Clintons’ visit”, Krishna told the Economic Times in an interview

The appointment of non-proliferation hawk Mr. Robert Einhorn, a vocal critic of the India-US nuclear deal, as the US State Department’s special advisor for non-proliferation and arms control has revived apprehensions in India that the Obama administration could be tough with New Delhi on nuclear issues. The choice of Einhorn as Clinton’s advisor, along with the appointment of former Congresswoman Ellen Tauscher as undersecretary of state for arms control and international security and Mr. Timothy Roemer as US Ambassador to New Delhi are indicative of a more stringent non-proliferation agenda by the new US administration

India’s Foreign Secretary Shivshankar Menon also made clear to media, “We will welcome real action towards disarmament. What we want is a time-frame and legally binding steps towards a world free of nuclear weapons”.

India has refused to sign both the CTBT and NPT on the ground they are “discriminatory” and tend to create a system of “nuclear apartheid”, dividing the world into the nuclear haves and have-nots.

Hillary Clinton is expected to be India around July 20 in the first-ever high level visit from the US after the Obama administration took charge. Nuclear issues like CTBT are going to top her agenda. US Undersecretary of State William Burns will also visit Delhi to prepare the agenda for Clinton’s visit.

Elated Economy

The shadow of the global economic crisis is also showing up in India. India’s exports fell for the seventh consecutive month, showing 30 percent dip on the back of a weakened international demand.

Stimulus packages and populist policies have created a bulging deficit in the budget. Observers from all political hues are expecting bold, decisive actions in the first 3 months from the new government and make provision for raising adequate resources than doling out more subsidies and salvation packages for different sectors.

That the election results have brought a new cheer and boosted the sentiments of all operators in the economy is stating the obvious. The return of Manmohan perked up the Sensex, or Bombay Stock Exchange Sensitive Index, by 17 percent. Trading on the BSE had to be suspended for about two hours. The rupee jumped 2 percent against the dollar in its sharpest one-day rise in a decade.

Observers say the United Progressive Alliance (UPA) government’s victory can be a “game changer” as it could unlock higher levels of growth in the medium and long term. In terms of investment, with a reduced political risk, India’s risk premium is down significantly and will positively influence India’s equity market and FDI.

Main Challenges

Still the challenges are not out. In the short term, the new government will have to weather the downturn. It has to really work hard to slash the budget deficit, even if it means a contractive effect on the economy. Then there are critical issues to address such as low spending on infrastructure and curbing state’s over play in the economy and banking sector.

The sound economic fundamentals of India are a matter of relief as it is supported principally by domestic demand and not export driven. India’s household consumption is set to triple in the next 15 years. Domestic consumption already constitutes 67.8 percent of India’s GDP growth. Specific sectors, such as Banks, Insurance, Infrastructure and Mining are expected to outperform the broader market despite the downturn.

Sectors such as Infrastructure, Energy and Agriculture will be the biggest long term winners. Telecommunications, Retailing and Defence industries are also likely to benefit from more foreign participation and domestic investment. Opportunities await in sectors such as healthcare, consumer staples and financial services. In the long term, companies with high levels of debt will start raising capital resulting in a slew of equity issues (IPOs), particularly in real estate, infrastructure and commodity sectors. Obviously, these developments will be paving the way for a long-term rally in stock prices. Finally, the market is getting more than it could hope for in the form of steady governance and diminished left group that is in no shape to stonewall new reforms.