By Myles Neligan
BBC News Online business reporter
The financial markets' reaction to news that India's pro-market BJP government had unexpectedly lost power to a leftist-tinged coalition led by the Congress party was swift and merciless.
Mrs Gandhi has withdrawn from the prime ministerial race
Shares on the Bombay stock exchange posted their second biggest one-day fall on Monday, closing more than 11% lower amid fears that the new government would slow or even reverse its predecessor's programme of economic reform.
Foreign investors attracted by India's recent strong economic performance were the first to withdraw their cash, spooked by threats from one of the Congress party's leftwing partners to abolish the privatisations ministry.
Even before Monday's stock market crash, foreign funds had sold over $500m worth of Indian shares, roughly one eighth of the amount they had bought since the beginning of the year.
Altogether, some $40bn has been wiped off the value of India's biggest companies in the past week, with state-run enterprises earmarked for privatisation suffering the biggest falls.
The slump partly reflects the stock market's traditional dislike of surprises, but there are also good reasons for believing that the Congress party coalition, led by Sonia Ghandi, may pull back on the BJP government's commitment to modernising the economy.
The coalition owes its election victory to the support of poor rural voters who felt that the BJP's aggressive reforms had enriched an urban elite without delivering any improvements for the broad mass of the Indian people.
This mandate makes it very difficult for the new government to push through unpopular measures such as liberalising labour markets and reducing public subsidies.
Since the Congress-led alliance depends on the support of a range of leftwing parties, including the Communist Party of India (Marxist), the process of selling off the country's sprawling state-owned companies is also thought likely to suffer.
There are fears that without these reforms, India's yawning budget deficit will widen further, with higher government borrowing reducing the amount of capital available for private enterprise.
Good times, bad times
"(The election result) has raised many question marks as to the sustainability of economic reforms," said Deepak Lalwani, director of the India desk at London-based brokers Astaire & Partners.
Underlying all these concerns is a fear that India's recent economic boom, which delivered double-digit growth in the final quarter of 2003, may come to a premature end.
However, some analysts believe that concerns over how the change of government will affect the economy have been exaggerated.
India's agricultural sector could be in line for a boost
They argue that since it was the Congress party which initiated the first round of economic liberalisation in India over a decade ago, it would be a mistake to dismiss its reformist credentials outright.
In a further sign that Congress may be more serious about modernisation than its detractors claim, the coalition is thought likely to appoint Manmohan Singh, the architect of the initial reforms, as its finance minister.
"I don't believe that Congress will be swayed that far by the communists," said Sanjeev Sanyal, senior economist at Deutsche Bank in Singapore.
"The reforms may not be as rapid, but India will still be one of the fastest-growing economies in the world."
Wait and see
Optimists also point out that while the withdrawal of foreign funds is hurting the stock market, the wider economy's dependence on cash from overseas investors is relatively low.
And there are signs that the Congress-led coalition may step up investment in India's creaking infrastructure, a move which could deliver a major boost to the country's economically significant agriculture sector.
"The BJP did relatively little for rural agriculture," said Ravi Bhatia, India editor at the Economist Intelligence Unit.
"There may be attempts at, for instance, improving irrigation, which would do a lot to stimulate the agricultural economy."
The Congress party itself has been quick to reassure the markets, pledging on Monday to press ahead with an ambitious reform agenda, and to target an annual growth rate in excess of 7%.
The acid test of the new government's intentions will come later this year, when it publishes its economic programme and draws up its first budget.
But until then, investors with an interest in India are likely to continue treading very carefully indeed.