WITH policy-making in dire straits, economic reforms on the back burner, and political uncertainty growing, foreign investors are showing signs of unease with India. Foreign institutional investors (FIIs) withdrew $497 million this calendar year till June 22. This is in sharp contrast to the enthusiasm they showed in 2010, when they invested $29.36 billion.
Even Pakistan, despite all problems it faces, fared better in 2011, having received $230 million.
A variety of factors have been attributed to the FII activity. While soaring inflation and interest rates, scams, and slowing growth rate are some of the internal factors, zooming crude prices have also played a key role. The political turmoil over black money has also strained the inflows from the Mauritius route.
As FIIs play a key role in our stock market, pulling out by them has adversely affected the bourses. Unsurprisingly, capital market return registered a negative growth, –14.18 per cent. Emerging economies such as China (–3.96 per cent), Indonesia (10.27 per cent), South Korea (8.07 per cent), Russia (2.58 per cent), and Brazil (–5.93 per cent) did better. Capital markets in rich countries also showed good performance, with the US giving 1.93 per cent, Germany 11.5 per cent, and France 11.46 per cent.
It would be premature to suggest the India Story has loitered into the realm of tragedy or that foreign investors have completely lost interest in our country, but the stress signs are clearly visible. Not all signs, fortunately, appear apocalyptic. For instance, foreign direct investment (FDI) registered an impressive 43 per cent rise in the first month of this fiscal. This came after 25 per cent decline in FDI in 2010-11. In April, the country received $3.1 billion.
What is equally important is that the inflows were not concentrated in a few sectors; the major chunk of FDI was for auto, construction and services industries. Nomura, a global financial services group, expressed cautious optimism in a recent note, saying, “One month does not make a trend, but there are reasons to believe that this may be the start of a new phase. In our view, FDI inflows should remain supported by several large FDI proposals in the oil & gas, metal and telecom sectors; simplification and fast-tracking of the approval process; a relaxation of the rules; and a possible increase in the FDI ownership ceiling in some key sectors.”
One only wishes all this to be true, but facts suggest that the foundation of even cautious optimism may not be very firm. Consider the case of outbound FDI. According to the data recently released by the Reserve Bank of India, FDI by Indian corporations zoomed $43.9bn in 2010-11, compared with $18bn in the previous fiscal.
The RBI attributed this rise to liberalizing measures of the government. “Indian overseas investment policies have been progressively liberalised and simplified to meet the changing needs of a growing economy in a globalised environment,” the RBI said in a statement.
It further pointed out, “The policy which was evolved as one of the strategies for export promotion and strengthening economic linkages with other countries has been streamlined significantly in scope and size.” This is true to a large extent.
At the same time, it is also true that India Inc is getting jittery by the anti-business stance, populist rhetoric, and meddlesome ways of the Manmohan Singh government. As HDFC chairman Deepak Parekh said in December last year, “What is happening is a very sorry state of affairs if you look at the big houses in India today. The Tatas are investing abroad, not in India. They want to, but they can’t.”
Another vocal industry representative is Tata Group chief Rata Tata. In November last year, he expressed the fear of India “going down the route that would lead us into a banana republic.” He told a television interviewer: “Banana republics are run on cronyism, people of great power wield great power, people of lesser power or people who have fallen out of power go to jail without adequate evidence or their bodies are found in the trunks of cars,” Tata said.
So, what should be done? He said that “you could degenerate into that kind of atmosphere unless necessary parts of government play their role in upholding the law.” That, unfortunately, has not happened since he expressed his dismay at the state of affairs.
In our country, the representatives of big business are loath to speak their minds about issues that are related to politics or policy. But things have come to such a pass that some of them have decided that they can no longer be mute spectators. At any rate, the business environment in the country fails to enthuse them.
Similarly, overseas investors—be it portfolio or direct—do not get much excited hearing the sordid tales of corruption, bureaucratic hassles, infrastructural bottlenecks, and policy paralysis. The FII and FDI numbers may be an index of their growing impatience with India.