Anti-corruption movement to boost India

By Vikram Barhat | August 31, 2011 | Last updated on August 31, 2011
3 min read

As the Arab Spring rolled over into summer, many of your clients have been following events in the Middle East and North Africa. Less attention has been paid to political churning in India this summer, but it could arguably have more of an impact on investors.

The impact the months-long standoff between social activist Anna Hazare and the Indian government remains to be seen. But emerging markets experts are coming to the conclusion that India’s ongoing anti-corruption movement is a game changer and bodes well for the country’s economic future.

Hazare’s Gandhi-style hunger-strike for an effective anti-corruption Lokpal (ombudsman) bill is expected to have a long-lasting positive impact on the way India is run. The bill, once enshrined in law, would give sweeping powers to a central government body to investigate and initiate prosecution against corrupt government officials.

Given India’s favourable demographics and the still unmet demand for infrastructure and consumption, institutionalizing greater economic transparency will serve to further enhance India’s already robust long-term growth prospects, says Paul Mesburis, senior portfolio manager with Excel Funds.

“Corruption has been an issue, but look how well the country has done over the past decade; it’s managed to grow at 7% [per year] with all its issues,” says Mesburis. “Now that they have this independent mechanism coming into place, there’s a lot of potential for positive change here.”

While no one expects corruption to be eliminated altogether, he says the proposed mechanism can reduce the existing grey areas of the nation’s economy.

“Down the road, having lower corruption and red tape is going to further enhance its economic growth,” says Mesburis. “This could be the launching pad to take up that Indian growth rate up to 8% a year.

The improved outlook for India means investors may be willing to pay more for companies there, thus driving up the P/E multiples. “And that’s how investors will value this type of initiative and that’s how the market will end up paying more for a better way of doing business for companies,” he says.

Some analysts, however, refuse to rush to conclusions, preferring to reserve judgment on the real impact of the reformist movement in India. One of them, Chuk Wong, co-manager of the Dynamic Emerging Markets Class, points to a whole new dimension to India’s mass movement against political venality.

“My concern is, the government while addressing these anti-corruption issues will spend less time dealing with economic challenges facing India in the near term,” he says.

He agrees that the long-term consequences of corruption are a drag on the economy and financial markets, though. “If India gets its act together this time, and introduces a bill that goes to the root of the problem, it will be very positive for India and Indian equity markets in the long term.”

Wong refers to the anti-corruption campaign as “growing pains” of an emerging economic superpower. “It is about time India addressed these issues before India could truly emerge as an economic power.”

Of course, the issue of corruption is not unique to India; it remains a plague throughout emerging markets and developed economies alike. India’s war on corruption could serve as a catalyst for similar movements in other countries.

“It’s hard to say; corruption exists in many Asian and Western European countries,” says Wong.

It is, however, difficult to tell how a movement like Hazare’s pans out or if the timing of it can affect the valuation of the market, adds Wong.

Bhim Asdhir, president and CEO of Excel Funds Management, calls the Lokpal stir a movement of the middle class and a watershed event in the modern Indian history.

“This is a significant step forward for India; it shows that the middle class matters,” he says. “I’m quite pleased that this happened; it’s the light at the end of a tunnel, there’s every reason for the Indians to be jubilant.”

As key decisions are made in India, the country will see increased capital inflows as time goes by, says Asdhir.

Vikram Barhat