This great nation has been plagued by governmental scandals that have essentially hamstrung its ability to truly transform itself from a developing nation into a developed one, but those times appear to be changing, writes Mark Mobius of Investing Adventures in Emerging Markets.

The global investment community has been up in arms (and rightly so) about the Indian government’s attempt to address possible past tax evasion through retroactive tax measures.

Many investors started to express their disapproval by withdrawing their dollars, and amid the pressure, the Indian Finance Ministry decided to hold off on enacting the “general anti-avoidance rule” (GAAR) for a year. I believe this is a step in a positive direction, although the debate has simply been delayed and not completely resolved. And, retroactive capital gains taxes are still on the table.

The tax-evasion question leads to another thorny subject: corruption. Corruption can muddy the investment outlook and erode investor confidence, and no nation—developed or emerging—is completely immune.

The good news is that in today’s era of information technology, it’s harder to sweep corrupt practices under the rug. Social media has intensified the pressure on policymakers to address these problems, because citizens are watching and reporting them to the world.

India has recently found itself in the uncomfortable position of having the media spotlight on some of its struggles with corruption, and the world is watching as the country searches for solutions to squash it.

Activism and Change
I believe there are a number of needed reforms in India, but I am optimistic the country will find a way to work through these challenges.

India has a lot of potential in its favor, for both its people and for long-term investors, in my view. It’s important to keep those factors in mind, and not be overly influenced by some of the shocking headlines. And I still believe all the BRIC nations have a better economic outlook right now than many developed economies, which are still weighed down by sluggish growth and debt.

Over the past year, fierce protests in India have pushed corruption to the top of policymakers’ agendas. I see activism as the first step to address these problems, and I think the actions of anti-corruption activists have made great strides toward rallying public support and engaging officials. This is a good thing in my view.

However, a handful of people backed by the power of social and electronic media can only influence the system so much. Inevitably the state has more power to bring about change than individuals do, so these protests must be met with action at the state level.

In one recent corruption scandal, India lost up to $211 billion in revenue by selling coalfields too cheaply, according to a draft report by the state auditor which was leaked to the press. However, it should be noted that many nations undergo such periods where national assets are misused or misallocated to people close to those in power. In that sense, India is not an isolated example.

On the brighter side, after a multitude of corruption cases were exposed, today it appears to be much harder to indulge in blatant corruption as it was over the last decade or so. I doubt the existing crop of politicians and bureaucrats will reform the system entirely, but dire consequences are apparent for the next generation of politicians who are likely to be extra cautious in their dealings and, I hope, not as corrupt or pliable.

The Road Ahead
The positive thing about scandals coming to the forefront is that they can provide impetus for change. The power of the media, the Right to Information Act, and the increasing use of information technology in delivering public and private services should help reduce corruption in public and private transactions in India. I am optimistic that India will eventually be able put some of these high-profile scandals behind it.

To accomplish that, I do believe there are some areas where India will need to build on the small steps they’ve already taken:

  1. Title rights and licenses. Having clearly defined title and licensing rights—be it in telecom licenses or mining rights—is key. Once the title is clear and marketable, I believe the opportunities for corruption will decline.
  2. Creation of surpluses. One of the root causes of corruption is the general shortage of surpluses in the economy. By creating surpluses and opening up the economy, this could support an eventual reduction in corruption.
  3. Clarity in law. With clarity, the courts and citizenry are better able to comprehend what is correct or incorrect. Some recent court rulings in India seem to show that India’s judicial body supports the fight against corruption and considers citizen and country interests as paramount.
  4. Citizens Charter. This was part of the proposed Jan Lokpal Bill or Citizens Ombudsman Bill, which is a draft anti-corruption bill drawn up by the civil society. The intention is that the Citizens Charter will give citizens the right to service within a certain time frame without being subject to endless waiting time.
  5. Independence of police and investigative arms. This was another element of the Lokpal Bill, written in with the apparent intention of enabling an independent ombudsman body called the Lokpal, to be completely independent of the government and free from ministerial influence in its investigations.

I think that while there is still room for significant improvement, India has enacted measures showing it is starting to adopt the right path, particularly in the public sector. As part of its public welfare effort, the government announced plans to provide a unique identity number (known as Aadhaar) to all Indians in the next four to five years in an effort to prevent fund leakage.

Many state-owned companies in India are also opening up following the development of “integrity pacts.” Forty-four state-owned companies have adopted and implemented integrity pacts with Transparency International India. Of participating state-owned companies, a reported 95% believe the integrity pacts have helped to make procurement processes more transparent.

While it is easy to become discouraged by scandal, I choose to continue to look for long-term investment opportunities in India. I think India’s vast natural resources and current positive (if uneven) trends of a growing middle class, GDP growth and domestic hunger for consumer goods hold opportunity for the diligent researcher.

Our approach is, and always has been, bottom-up evaluation of individual companies. Investing in India is no exception.

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