Even by standards of emerging economies, the scale and frequency of India’s recent scandals borders on the baroque: parliament is frozen and the government is threatening to revoke dozens of licences for operators in the booming cellphone sector.
An outperformer all year thanks to a record influx of foreign funds, the Indian stock market lost momentum in November and saw outflows at the end of last week as another investigation unfolded –– this one over alleged bribes-for-loans that saw eight executives detained, including top officials from state banks.
While investors tend to shrug off corruption scandals as a risk of emerging markets, anything that adds to regulatory uncertainty threatens to taint India’s attractiveness as a destination for foreign firms dazzled by its prospects.
“Normally, I would say it doesn’t have an impact,” Andrew Holland, chief executive for equities at Ambit Capital in Mumbai, said of the latest scandals.
“But if they did cancel the 2G licences, that could send a very poor signal to foreign companies looking to invest in India and its infrastructure,” he said, soon after India’s Telecoms minister announced a crackdown on recipients of cellular licences at the centre of a government corruption probe.
Regulatory uncertainty often haunts investors in India — whether or not corruption has been involved. Direct investors — companies building factories or power plants or buying local firms — often have less flexibility and more to lose than fund investors and are especially sensitive to regulatory uncertainty.
Leading global companies such as Wal-Mart Stores, Vodafone and Posco have been frustrated for years in their efforts to negotiate regulations in a promising but perilous market, and foreign direct investment has suffered.
India is investigating whether ineligible companies received coveted second-generation (2G) mobile licences and has threatened to revoke permits held by carriers including the local ventures of Abu Dhabi’s Etisalat and Norway’s Telenor.
Corruption is nothing new in emerging markets, but the stakes in India have risen in recent years as the economy modernises and investment surges but the political system remains heavily reliant on patronage, and graft is rife.
India’s economy grew nearly 9% in the September quarter but the country scores a 3,3 rating on Transparency International’s Integrity Score list, where 10 is perceived to have lowest levels of corruption. China came in at 3,5. — Reuters.