Long-term investors toughing out India graft scandals – Reuters

Posted on February 15, 2011 by

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SINGAPORE – Corruption scandals have consumed Indian political life, wrecked its parliament’s work and rattled its markets, but they will not stop long-term investors ploughing money into the country. More than $80 billion may have been lost to the state in separate mobile and satellite bandwidth scams, if claims are accurate. Even Indians inured to constant low-level corruption are angry, and the opposition is gunning for market-friendly Prime Minister Manmohan Singh, who heads a fractious coalition. Foreign investors spending money on the infrastructure, industry and commercial projects that are modernising Asia’s third-biggest economy, and many with cash in its stock market, are looking a few steps further ahead. “The specific concern across the board is that the scandals will undermine the current coalition and force a general election,” said James Winterbotham, director of corporate finance advisers India Advisory Partners. That, he said, would be “hugely disruptive, will skew public spending towards populist and vote winning measures — but the elephant will continue to march on.”

Though it has the numbers to pass the budget later this month, the government has been completely derailed from its legislative agenda by dealing with scandal after scandal, the most recent of which broke last week. “Parliament has been paralysed. Any new legislation which was to come, that is not coming,” said D.H. Pai Panandiker, head of New Delhi-based private think tank RPG Foundation. “That is how the government gets affected. This affects policy-making.” He said rather than the government collapsing over the issue, Singh’s administration was likely to limp on. This does not change the fundamentals that make India attractive to investors. India reckons its economic growth for the 2010/11 fiscal year will be 8.6 percent, way ahead of Europe and the United States, and its 1.2 billion population is forecast to exceed China’s in 15 years, meaning internal demand for goods and services will carry on rising. Still, foreign direct investment (FDI) fell to $19 billion in 2010 up to November, down from $25 billion in the comparative period of 2009, according to Reserve Bank of India (RBI) data. The bank blamed the decline on the environment ministry’s opposition to mining and construction projects. If that was the main reason, recent moves may signal a reverse is likely. Indian authorities last month gave the go-ahead, after three years of delay, to a $12 billion steel mill to be built by South Korea’s POSCO, the biggest single foreign direct investment in India. POSCO, world number three steelmaker, wants access to India’s market, which is growing while demand from mature economies slows. “I am not aware of major FDI projects being deferred on account of the corruption scandals,” IAP’s Winterbotham said. For years, investors have been resigned to corruption as part of the Indian commercial landscape. “If you are a company looking at going into India, you have to look at these issues and you have to do your due diligence,” said Richard Heald, chief executive of the UK India Business Council, which promotes trade between Britain and India. Britain is one of the top five direct investors into India, and its prime minister, along with heads of state from China, France, Russia and the United States, was one of many high-profile leaders to visit India in the past year to boost trade.

TIPPING POINT? With India’s economic growth, and with the spectacular amounts alleged to have been skimmed off, is coming greater clamour to clean up. “You have an increasingly vibrant consumer middle class, an ambitious corporate sector … there is a lot of pressure on the perception of India as somewhere that corruption is tolerated,” UKIBC’s Heald said. In the short term, a politically driven backlash against corruption may trouble investors more than day-to-day graft itself. “The risk is that the frenzied environment represents a tipping point. In the long term systematic government action to root out corruption would be positive,” said Nick Paulson-Ellis, country head for India at Execution Noble, part of Portuguese investment bank Espirito Santo, which specialises in emerging markets. “But in the short term a more aggressive stance will mean a period of unpredictable investigations and resultant volatility.” Stock market investors can move their money far more easily than direct investors. After spending a record $23.9 billion on Indian equities in 2010, foreign fund managers had taken around $900 million out of the market by late January, according to Thomson Reuters data, though this was mainly due to higher inflation and rate rises eating into corporate profits, analysts say. India’s is Asia’s worst-performing major stock market in recent months, and some individual stocks have fallen dramatically, but for investors with a longer-term view, dips in share prices can be buying opportunities. “There was a tumultuous end to 2010. The financial sector, real estate, infrastructure and telecoms sectors have all come under varying degrees of pressure, as the federal investigator has probed a number of large and mid-sized companies in a major bribes-for-loans scandal as well as examining the sale of spectrum licences,” said Ronnie Petrie, head of Asia Pacific equities at Standard Life Investments in a report last month. “At one point the stockmarket had fallen 10 percent on indiscriminate selling, although it recovered towards year end. Such volatility provides opportunities for investors with a longer-term view.”

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