Increasingly reforms have to be addressed to please foreign investors rather than to appease domestic interests
By Mohan Sule
Each crisis teaches a lesson. If the 1991 depletion of foreign exchange reserves demonstrated the perils of being inward looking, the 1997 Asian currency turbulence showed the dangers of addiction to foreign money. The 2013 current account deficit storm illustrates that reforms have to be ongoing and not selective. The vast domestic market is no doubt attractive to foreign investors, but making them stick around is challenging just as ensuring that the flows are shepherded to the right sectors and do not cause bubbles. There is consensus now that foreign direct investment is more stable and productive, triggering employment, supporting ancillary industries and boosting infrastructure, rather than foreign portfolio inflows. Yet India is witnessing a strange paradox of foreign money gravitating to the equity and debt markets even as huge FDI projects get stuck due to lack of clarity on regulations. Foreign money is reluctant to come to the infrastructure sector due to inadequate last-mile reforms, while overseas investment in the commodity sector is not percolating to the ground level due to delays in getting environmental and land acquisition approvals. Two large foreign investors Posco of Korea (US$5.3-billion steel project in Karnataka) and Arcelor-Mittal of Europe (US$12-billion steel project in Orissa) have pulled out. Approval for the Etihad-Jet deal is still pending, reflecting the cautious stand following criticism of crony capitalism. One of the largest foreign investors, Vodafone of the UK, was slapped with retrospective capital gain tax. MNC retail giants are not displaying enthusiasm despite opening up the multi-brand segment as the green-lighting vests with states, many ruled by those opposing the reform. Despite hiking the FDI cap in insurance ventures to 49% recently from the earlier 24%, no foreign partner is known to have expressed interest in taking up the offer.
In contrast, the capital market is seeing an influx of foreign investment. In fact, the government has been treating overseas portfolio investors with a feather touch. The phasing out of P notes, through which anonymous foreign investors can invest in Indian stocks, was rescinded after the market displayed withdrawal symptoms. Differentiating investment from tax havens between good and bad is in a limbo to pacify sulking investors. Thus, a preferential and differential treatment is being meted out to overseas investors in stocks and bonds as against those investing in green- and brown-field projects despite the flighty nature of the former. Expediency is scoring over permanency. Since the global financial meltdown of September 2008, foreign investment in equity and debt has been abreast of FDI, except in the fiscal ended March 2012. In FY 2013, portfolio investment raced past FDI. Not surprisingly, the sudden exodus of these investors from the debt market after the US Federal Reserve indicated that it might gradually withdraw its liquidity-pumping program was the prime reason for the recent plunge of the rupee. The Reserve Bank of India had to raise interest rates to stop the mass exit. The bottom line is that the nation is paying a heavy price due to the setback to the timetable to bring the economy back on to the growth path by small but consistent doses of interest-rate reduction.
A vibrant capital market is important for companies to raise funds for their growth plan. But the glow should be derived from the robustness of the listed securities. The current status of some sectors getting a torrent of foreign inflows while some others languish capture the unhealthy state of Corporate India due to uneven reforms. The resistance to increase FDI cap in insurance, banking and aviation to 51% is to ring-fence public sector players, while keeping prices of coal, and till recently petroleum products and power, below production cost is to insulate end users. Thus, an important lesson is policies cannot be tailored only for the domestic audience. When the finance minister stands up to read the budget speech in parliament, investors from New York to Singapore are listening. Apart from company-specific approach, the big picture of government spending and revenue, capital inflows and outflows, and inflation and interest rates concerns them. Just like they accord importance to the growth potential of a stock to base their buy and sell decisions, hassle-free entry and exit is a crucial factor. In fact, the new boss of the RBI had to capitulate and ease restrictions on outflow of forex, subsidise dollar deposits and promise to treat MNC banks on par with domestic ones for foreign investors to take a second look at India.
By Mohan Sule
Each crisis teaches a lesson. If the 1991 depletion of foreign exchange reserves demonstrated the perils of being inward looking, the 1997 Asian currency turbulence showed the dangers of addiction to foreign money. The 2013 current account deficit storm illustrates that reforms have to be ongoing and not selective. The vast domestic market is no doubt attractive to foreign investors, but making them stick around is challenging just as ensuring that the flows are shepherded to the right sectors and do not cause bubbles. There is consensus now that foreign direct investment is more stable and productive, triggering employment, supporting ancillary industries and boosting infrastructure, rather than foreign portfolio inflows. Yet India is witnessing a strange paradox of foreign money gravitating to the equity and debt markets even as huge FDI projects get stuck due to lack of clarity on regulations. Foreign money is reluctant to come to the infrastructure sector due to inadequate last-mile reforms, while overseas investment in the commodity sector is not percolating to the ground level due to delays in getting environmental and land acquisition approvals. Two large foreign investors Posco of Korea (US$5.3-billion steel project in Karnataka) and Arcelor-Mittal of Europe (US$12-billion steel project in Orissa) have pulled out. Approval for the Etihad-Jet deal is still pending, reflecting the cautious stand following criticism of crony capitalism. One of the largest foreign investors, Vodafone of the UK, was slapped with retrospective capital gain tax. MNC retail giants are not displaying enthusiasm despite opening up the multi-brand segment as the green-lighting vests with states, many ruled by those opposing the reform. Despite hiking the FDI cap in insurance ventures to 49% recently from the earlier 24%, no foreign partner is known to have expressed interest in taking up the offer.
In contrast, the capital market is seeing an influx of foreign investment. In fact, the government has been treating overseas portfolio investors with a feather touch. The phasing out of P notes, through which anonymous foreign investors can invest in Indian stocks, was rescinded after the market displayed withdrawal symptoms. Differentiating investment from tax havens between good and bad is in a limbo to pacify sulking investors. Thus, a preferential and differential treatment is being meted out to overseas investors in stocks and bonds as against those investing in green- and brown-field projects despite the flighty nature of the former. Expediency is scoring over permanency. Since the global financial meltdown of September 2008, foreign investment in equity and debt has been abreast of FDI, except in the fiscal ended March 2012. In FY 2013, portfolio investment raced past FDI. Not surprisingly, the sudden exodus of these investors from the debt market after the US Federal Reserve indicated that it might gradually withdraw its liquidity-pumping program was the prime reason for the recent plunge of the rupee. The Reserve Bank of India had to raise interest rates to stop the mass exit. The bottom line is that the nation is paying a heavy price due to the setback to the timetable to bring the economy back on to the growth path by small but consistent doses of interest-rate reduction.
A vibrant capital market is important for companies to raise funds for their growth plan. But the glow should be derived from the robustness of the listed securities. The current status of some sectors getting a torrent of foreign inflows while some others languish capture the unhealthy state of Corporate India due to uneven reforms. The resistance to increase FDI cap in insurance, banking and aviation to 51% is to ring-fence public sector players, while keeping prices of coal, and till recently petroleum products and power, below production cost is to insulate end users. Thus, an important lesson is policies cannot be tailored only for the domestic audience. When the finance minister stands up to read the budget speech in parliament, investors from New York to Singapore are listening. Apart from company-specific approach, the big picture of government spending and revenue, capital inflows and outflows, and inflation and interest rates concerns them. Just like they accord importance to the growth potential of a stock to base their buy and sell decisions, hassle-free entry and exit is a crucial factor. In fact, the new boss of the RBI had to capitulate and ease restrictions on outflow of forex, subsidise dollar deposits and promise to treat MNC banks on par with domestic ones for foreign investors to take a second look at India.
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