Investors have turned bearish on India despite government forecasts of 9 percent economic growth, as concerns over widespread corruption and high inflation knock confidence, analysts say.
Only a few months ago, investors were pouring into Indian equities, seeing the country as a promising high-growth market and talking about the “India story.” However, now the mood looks to be on the turn.
The government’s lack of progress on economic reform, massive corruption scandals, including the cut-price sale of telecoms licenses, and eight interest rate hikes to try to tame high inflation have all had an impact.
Citigroup economist Rohini Malkani said she had met about 50 investors in Singapore and Hong Kong this month and about 70 percent were “bearish on India.”
Fears about reduced investment in infrastructure, high inflation and the fallout from political scandals topped the list of investor worries, she said.
The Bombay Stock Exchange Sensitive Index, or SENSEX, has dropped more than 8 percent this year, making it Asia’s worst large market performer — after it climbed 17 percent last year on the back of US$29 billion poured in by foreign investors.
Foreign institutional investors sold US$2 billion worth of shares in January and last month.
“Concerns about stubbornly high inflation pushing up interest rates, a high current deficit fueled by higher oil prices and corporate and government corruption scandals have all contributed to the selling,” said Deepak Lalwani, head of London-based, India-focused investment consultancy Lalcap.
Market analysts expect that for the first half of this year at least, shares will continue to slide as the challenge of maintaining growth while cutting inflation, now at 8.3 percent, proves increasingly tough.
India’s central bank, the most aggressive in Asia in tightening monetary policy, lifted its benchmark borrowing rate to 6.75 percent this month — its highest level in three years.
While the government projects 9 percent expansion for the next fiscal year starting April 1, most economists’ forecasts are lower amid expectations the bank will raise rates further by as much 100 basis points, slowing investment and growth.
Credit Suisse economist Robert Prior-Wandesforde said he believed growth could decelerate to 7.7 percent next year from 8.6 percent in the current year as resurgent oil prices and rate rises take their toll.
Citigroup’s Malkani said she had penciled in a “relatively optimistic 8.4 percent” growth forecast, but calculates that expansion under a worse-case scenario could be just 7.2 percent if investment were to slump sharply.
On top of economic worries, concerns about governance loom large, with Indian Prime Minister Manmohan Singh portrayed by the opposition as a weak leader presiding over a corrupt administration.
Global consultancy KPMG said in a report that “corruption could be a major hurdle in India’s growth story in the coming decade.”
“From what started as petty payments demanded by babus [civil servants] during the license raj days, corruption has taken a much larger form and scale,” said Deepankar Sanwalka, KPMG India’s head of risk and compliance.
“It is not about petty bribes or ‘bakshish’ any more, but scams to the tune of billions of dollars that highlight a political-industry nexus, which if not checked, could have a far reaching impact,” Sanwalka said.
At the heart of corruption concerns is the once high-flying telecoms sector, with a former telecoms minister alleged to have cost the treasury up to US$40 billion by selling off mobile licenses at low prices in exchange for kickbacks.
Graft is also rampant in property and construction, KPMG found.
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