Mumbai: Political risk will continue to haunt Indian shares this week after a corruption scandal involving allocation of scarce radio waves to telecom companies threaten to unravel the government of Prime Minister Manmohan Singh, and hasten profit-taking in one of world's best-performing stock markets this year.
Foreigners who have ploughed a record of almost $29 (Dh106.43) billion into Indian shares since the beginning of January, lured by an economy growing at nearly nine per cent, could start voting with their feet if the scam pulls the government down.
"There is a sniff of political instability in the air," said equity trader Mehul Patel. "If the fears bubble above the surface we could see a full-blown sell-off."
The scandal, which a government auditor estimates cost the authorities about $31 billion in lost revenues, has already triggered the resignation of Telecoms Minister A. Raja, a member of the Congress party's coalition partner DMK, and rattled shares like Reliance Communications Ltd, the country's second-largest mobile operator, and property developer Unitech Ltd that has a stake in phone company Uninor.
The Supreme Court has asked the prime minister to file an affidavit explaining why he had done nothing for over 11 months, in response to a petition by Janata Party leader Subramanian Swamy, asking for action against Raja.
"Manmohan Singh has certainly squandered some moral capital over this spectrum scandal," the widely circulated Indian Express wrote in an editorial on Friday.
"The image of integrity is arguably the biggest strength he has, and by letting this scam fester for so long, the prime minister and the Congress party have put that at risk."
The controversial allocation of 2G spectrum at throwaway prices happened about two years ago, and companies that grabbed the precious radio waves cheaply later sold large stakes to foreigners at several times the price and pocketed the gains.
"At the moment the government and the Congress party faces a crisis of credibility for accommodating the telecom swindle for so long," the influential Indian Express said.
"The investigations into the full dimensions of the spectrum scam — the political actors, the civil servants, lobbyists and corporations — must be thorough, just and punishing," the newspaper wrote.
The Congress party-led coalition was voted to office in New Delhi for a second five-year term last year, but the government has been painstakingly slow in pushing much needed reforms. Still, a strong economic recovery thanks to the country's spend-thrift new middle class has been a major driver for attracting foreign investors in droves.
The corruption scandal could undermine investor confidence. Just a week before the telecoms scam broke, the chief minister of Maharashtra was forced to step down after his links to a housing scandal in the fi nancial capital of Mumbai unraveled.
The top-30 Sensex has slid nearly seven per cent over the past two weeks, but is still among the top performers in emerging markets.
Analysts said the benchmark could come off another 10 per cent if the political fallout is not contained quickly.
"The Sensex trades at about 20 times estimated earnings," said Patel. "You need to be a brave man to buy at these levels. The wise ones would be looking to take some money off the table."
The writer is a journalist based in India.
