Worried about investment, Indians now rank corruption as No.1 concern

Corruption scandals in India are shaking both voters and foreign investors, suggesting that India may face some short-term upheavals as the issue continues to play out.

Over the past year, high-profile corruption cases erupted not just in government, but also in business, the military, and the media. The fallout continued this week with the arrest and detention of former telecom minister Andimuthu Raja on corruption charges.

Corruption has become the No. 1 concern among Indians for the first time since the current government took power in 2004, according to pollster Yashwant Deshmukh. In an indication of how deeply the issue is being felt, corruption concerns beat out inflation.

It's the first time in his 17-year career that he's seen the Indian public express more concern about corruption than inflation during times of high prices, says Mr. Deshmukh, managing director of Team CVoter, a South Asia research company. “That is a very, very dangerous signal to anyone who is in power.”

January also saw big changes in investor sentiment as India’s stock market dropped 12.1 percent. Foreign institutional investors (FIIs) became net sellers for the first time since May 2010, shedding some $1.4 billion in holdings, according to data analysis from Espirito Santo Securities in Mumbai.

“We’re not claiming FII flows are driven simply by corruption concerns; clearly inflation, interest rates and punchy peak valuations have played their part. But in all our interactions with FIIs the tone has changed and corruption and ensuing political risk has without question become a major concern,” reads a January assessment from Espirito Santo.

India has not necessarily grown more corrupt in recent years. Measurements by Transparency International show only a marginal worsening of the situation. What has changed is the aggressiveness of the media and the impatience of the public.

“I believe it was always like that, it’s just that it has come out in the public domain more now,” says Mr. Deshmukh. “People are running out of patience.”

Espirito Santo analyzed data from Factiva and found the number of articles on India’s corruption in the print media soared in the last quarter of 2010. The coverage reached levels double that of the international scandal that erupted when the computer services firm Satyam admitted in 2009 that it was cooking its books.

If the media pressure on the government triggers a wider crackdown on corruption, investors may face risks in sectors where a certain tolerance for corruption was assumed, says Nick Paulson-Ellis, country head for Espirito Santo.

“People probably knew these things were going on but didn’t highlight them as particular risks for those investors,” says Mr. Paulson-Ellis. Those invested in public sector organizations, real estate, infrastructure, and mining would face the risk of more scandals in any wider reform push.

In the long-term, most investors would welcome such reforms, adds Paulson-Ellis. But his group sees foreign investors staying neutral or withdrawing for the next six months, partly due to the unsettling corruption scandals.

Now might be the best time to take the short-term pain, argues Harish Bijoor, a business strategy consultant in Bangalore.

“I think there’s no better way than to spook investors in the short term and get going. The timing is right now because we’ve got all our engines running [and] can afford to bite the bullet on corruption,” says Mr. Bijoor.