Global Policy Forum

India Removes Cap on FDI

Print

By Arun Bhattacharjee

Asia Times
October 15, 2003

The Indian government's decision to remove the cap on foreign direct investment signals a major step forward in economic reform after years of hesitation. It follows a recommendation by a parliamentary joint committee to the Reserve Bank of India, the country's central bank, which also urged reform of foreign exchange regulations to permit Indian companies going transnational to buy hi-tech companies overseas. Why not? With foreign investors seeking key Indian stocks and the share market index benchmark shooting up by 50.9 percent against New York's 27.48 percent, Hong Kong's 32.77 and London's 30.57, India feels it is time to go global.


Strong industrial performance and a good monsoon led to the expectation of a buoyant economy and a government forecast for 6 percent growth. Research by the Economic Times Intelligence Group reveals that more than 100 companies posted a price to earning ratio of 100 and those are among the top performers. Performance of another 1000 companies was found to be equally as good.

Another survey shows that net profit by 3,150 companies increased by 76 percent in fiscal 2003 over 2002. While other incomes of these companies increased by only 8.25 percent to US$4.48 billion, net profit off other income increased from $6.299 billion to $11.09 billion over the 2002 financial year.

Many feel this euphoria may not last long as the budget deficit, more than 5.6 percent of gross domestic product, and almost equal to projected economic growth, could upset the government's calculations. The other worry, voiced by the opposition, concerns the selling of government-held industry units. They feel government is using the huge earnings from the equity sale to Indian and foreign investors of public sector units to meet the budget deficit without using the income for infrastructure development and social investment.

The new investment-policy draft, to be placed before the parliament after state elections, prescribes 76 percent foreign equity in almost all sectors except for cement. Even the controversial cap on investment in the media is being removed to fall in with the general policy. Economists here point out that Indian capital market buoyancy picked up since mid-March this year. The poor performance of the last three years was due to a lack of economic stimulus, as foreign investors shunned it partly because of the global economic downturn, and in absence of proper regulatory measures to control a capital market that suffered from major manipulations and inside trading scandals.

Government officials forecast 6 percent growth for the current financial year, "which may even reach 8 percent." This is supported by private investors, who are confident that 7.5 percent growth is possible but warn that rising debt could cap growth at 5 percent unless the government takes into account the impact of interest payments. The other hurdle, the cap on foreign investment in capital markets and industry, will be addressed by the new investment policy.

Several factors are expected to help economic growth. Among those is the equal treatment of foreign as well as nonresident Indians and their overseas companies investing in India. Favorable forecasts and certifications by independent global consultants such as A T Kearney, and by the World Bank have raised investor confidence. Kearney's Foreign Direct Investment (FDI) chart moved India to sixth place from last year's 15th. Another survey shows that a fifth of global executives say India's investment outlook improved last year, with British and US private investors ranking India the third most attractive FDI destination, although Canadian investors consider India as the fourth desired. The fast growth of the service sector, particularly telecommunications and information technology, has made India equally attractive to service sector investors as the fourth desired destination.

Unfavorable factors are delay in tax reform, political pressure against the privatization of government-owned monoliths and the slowdown in the country's ability to transform its offshore attraction into large FDI inflow. At a recent speech to the Indian industry associations, Finance Minister Jaswant Singh assured that tax reform is on its way. The recent Supreme Court decision on the removal of double taxation on investment from Mauritius and a clear directive against shadow companies of Indian origin in that country has removed a lot of shady areas that existed on the tax front.

One major worry will be fiscal debt and rising inflation, which has already reached 5 percent, equal to the savings interest rate. Unless the government can restore primary investor confidence in the capital market, real and stable growth is not likely, as current capital market growth is fueled mostly by foreign portfolio investment. Many feel that interest rate cuts on non-resident Indian deposits, of which India is flush with nearly $89 billion (as of Oct 1), will divert deposits to India's offshore bond market such as in Tokyo, Bahrain, Nassau and the recently opened offshore facilities in Mumbai. Un-hedged deposits by non-resident Indians earn today around 2.31 percent; with exchange risk covered, the deposits yield only around 1.3 percent compared to the debt fund return of around 5 to 6 percent for liquid short-term fund and around 7 percent for long-term deposits.

The government's economic advisor Ashok Lahiri, is willing to revise the earlier estimate of 5.6 percent growth by the former Reserve Bank Governor, Bimal Jalan. He says that the good monsoon and other economic indicators mean growth could be as strong as 8 percent. The major concern is the decline in export earnings. Instead of 12 percent, first-quarter growth was only 9 percent or only $22.5 billion. Imports during the same period reached $ 28.54 billion, which reflects a much higher trade deficit by year-end. Government economists are optimistic that higher imports will drive industry sector and growth, which is far better than industrial and economic stagnation.


More Information on Foreign Direct Investment
More Information on International Trade and Development

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.


 

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.