Politics & Corruption Impact on Stocks – Sectors to Stay Out

The most important problem India is facing now is Rampant Corruption from Taluka Panchyat Office to the Offices of Union Government. We expressed our concern as FIIs are unlikely to invest in Economies run by Corrupt Governments [Read here & here] After that most FIIs published report on “Scams & Corruption” in India which has led to the stalemate in our parliament hindering Major Policy Decisions and Blocking the most sought after GST – Goods & Service Tax Bill which was supposed to be implemented from April-1st-2011. This has led to the overall change in Macro sentiment reducing the Market Premium which Indian commanded in the past.

License Raj was the form of Corruption until early 90s. Post Liberalization by Shri P V Narsimha Rao, the political class leverages its custodian rights over public assets by demanding rents for access to the same. Global experience suggests that sectors most likely to be exposed to political corruption are Public Works, Real Estate, Oil & Gas, Heavy Manufacturing and Mining.

The following Table ranks Corruption across various Sectors in India [In Brackets how corruption is possible]
Public Works Contracts & Construction – Highest
Real Estate & Property Development – High [ Local Goons & Mafia working at the behest of their Political Bosses]
Oil & Gas – High
Heavy Industries & Manufacturing – High
Mining – High
Pharmaceuticals – Medium [Licenses]
Utilities – Medium [Access to Raw Materials]
Aerospace, Defence & Arms – Medium [Contracts]
Power, T&D – Medium [Network]
Telecom – medium [Spectrum and Policies]
Agriculture, Food & Civil Supplies – Medium [Selling Ration Stock to Black marketers a, massively Organized Crime, Import Export Restrictions]
Information Technology – None
Banking & Finance – Low [ Some small instances of Loan Approvals etc. Otherwise, Thanks to RBI for being Vigilant]
Light Manufacturing – Low

Equity Analysts are very smart and if you look at the Forward P/E discounting of widely held stocks in the above sectors, Sectors with High Corruption get very low P/E rating.

State Politics Making Dr. Manmohan Singh’s Government Weaker – The state politics in West Bengal, Andhra Prdesh, Tamil Nadu and Maharashtra could have a bearing on the United Progressive Alliance in 2011 UPA is the Congress-led ruling coalition in New Delhi and 30% of the UPA’s seats at the Centre come from these four states. All this means, Critical reforms are held back, populist measures follow and quality of fiscal consolidation suffers.

In the Worst Case, Mid-Term elections will be inevitable and the economy comes to an halt. Corruption as an issue has ousted the Indian National Congress from power twice earlier – Rajiv Gandhi in the Bofors Scam and PV Narsimha Rao Government for BUYING support for the No Confidence Motion.

Dr. Manmohan Singh’s inability to Lead or Leave makes India a dull investment choice on the basis of macro, while bottom up stock picking is a better Mantra for now.

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