Global Policy Forum

By Indrajit Basu

The relentless rise of the price of oil over the past two years has hardly been good news for India's stock markets and economy. While high oil prices gave the country's stock investors many sleepless nights, its impact on the economy was greater, including a spike in inflation rates and higher costs across industries. Lately, however, there seems to be at least one upside emerging from the oil-price rallies. A part of the immense wealth that the Islamic - primarily Persian Gulf - countries generated from the years of escalating oil prices is trickling into India's stock markets and other investment avenues, such as the property and commodities markets, for the first time.

Of course, direct or indirect investments from Islamic countries are not new to India. Every year, India sees inflows of billions of dollars in its stock and real-estate markets, and even industries, but until recently, much of it came from the huge population of non-resident Indians working in such regions as the Persian Gulf. Islamic investors hardly invested any money in India. Now, however, say industry sources, India (along with China), which has been ignored for so long, has begun to feature prominently on the radar screens of Islamic investors as they look to expand beyond their traditional markets - mainly the United States and Britain - and explore emerging investment destinations. "Over the last year or so, there has been a marked increase in investment inflows from Islamic countries," said Anand Tandon, founder and managing director of Gryffon Investment Advisors, a Mumbai-based firm that is trying to promote Islamic investments in the country. "And although it is hard to put a number to the amount of investments that have come in lately, anecdotal evidence indicates that the interest of the Islamic investors for investing in India is significant."

Indeed, thanks to almost five years of high oil prices, the coffers of the Gulf countries are overflowing. Although those countries do not provide much information about their outward investments and wealth, according to the estimates of the Washington, DC-based Institute of International Finance, a global bankers' group, the total export earnings of the member countries of the Gulf Cooperation Council (GCC - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) during 2002-06 exceeded US$1.5 trillion, which is more than double those in the previous five-year period. About $1 trillion went toward imports. The remainder of the earnings - some $542 billion - represented surplus funds that entered global capital markets and contributed to an increase in the GCC's foreign-asset holdings. Again, no firm numbers are available on how much of that booty went where, but the Institute of International Finance estimates that of the accumulated surplus of $542 billion, about $300 billion must have gone to the US, $100 billion to Europe, $60 billion to the Middle East and another $60 billion to Asia, while $22 billion was invested in other locations.

But the India story may not be all about numbers. "The point is," said Talah Sareshwala, "after investing in Islamic countries in Asia like Malaysia, Indonesia and Pakistan, Islamic investors are turning to India because they realize that India may be the best option for them now." Sareshwala is the co-founder of Parsoli Corp, an Indian stock-brokerage firm that adheres to Islamic investment laws and has also created the country's first Islamic equity stock index, the Parsoli Islamic Equity Index. To understand why India is emerging as the best option, it is important to understand the principles or rules that govern investments of the Islamic community in general. One of the biggest drawbacks of Islamic investments is that the principles (sharia) laid out by the Koran do not allow the division or separation of profit from risk in any of a person's commercial dealings. Muslims who follow sharia investment principles therefore cannot invest in ventures that earn from giving or taking interest, and as an extension of sharia, neither can they invest in ventures that are involved in activities that the Koran identifies as unethical, such as tobacco, fashion, pornography, alcohol, hotels and entertainment. "To a large extent, therefore, the investment options of the sharia investors are limited compared [with] the options available to non-Islamic investors," said Dr Shariq Nisar, an expert on Islamic finance.

Against this background, India's biggest attraction for them is that it offers investment opportunities in a wide variety of sectors. Take the stock markets for instance. A study undertaken by Gryffon Investment Advisors on the compliance of stocks of the Bombay Stock Exchange (BSE 500) reveals that the market capitalization of sharia-complaint stocks is more than 58% of the total market capitalization. And according to a study conducted by Idafa Investment, the other Indian stock brokerage that adheres to Islamic investment law, there are more than 840 sharia-compliant stocks in the indices of the Bombay (BSE Index) and National (NSE Index) stock exchanges. "That is higher than the sharia-compliant listed stocks in countries like Malaysia, Pakistan, Indonesia and the GCC countries put together," said Sareshwala. "Moreover, it is also a fact that over the past three years the returns on investments like stocks and real estate in India have also been higher than [in] most other Asian economies."

The shift in the center of gravity for Islamic investments is actually not a recent phenomenon. According to Nisar, investors started slowly moving away from established and wealthy economies like Europe and North America as far back as just after the September 11, 2001, terrorist attacks on the US. After those attacks "and the restrictions imposed on money flows from Muslim states, Islamic investors realized back then that they must look elsewhere and reduce their dependence on developed markets, which have been their favorite destinations for decades", Nisar said.

Consequently, China and India in particular, with their red-hot economies, have emerged as ideal alternatives. The fact that Gulf investors are now increasingly looking at China as well is evident from the fact that in the recent $19 billion initial public offering made by the Industrial and Commercial Bank of China - the largest ever - Middle Eastern investors picked up as much as $2.5 billion worth of shares. Besides, reports suggest that GCC investors in recent times have also poured $1 billion in China's property markets and infrastructure sector. However, Nisar said that while China, riding high on its manufacturing capacity, has recorded tremendous economic growth recently, it is still viewed with suspicion by Islamic Investors, mainly because of its political ideology and economic structure. On the other hand, India, the world's largest democracy, offers some very clear advantages. "With a population of over 1.3 billion, huge human and natural resources, and with costs that are at the very low end of the global average, India represents economic opportunities on a scale almost equivalent to China," Nisar said. "But its legal framework, which protects foreign investments, is one of the best in the region, and that's where India scores higher over many Asian countries."

Nevertheless, entry to India is not always easy. According to Ashraf Abdul-Haq Mohamedy of Idafa Investments, while China welcomes Islamic investors with open arms, India still treats money from Islamic countries with suspicion. "For instance, any money from the United Arab Emirates and Mauritius is scrutinized microscopically and seen as terrorist funds," said Mohamedy, "which is why you will find Islamic investments these days are mostly taking other routes, like the Singapore or the United Kingdom route, or are coming in through joint ventures with local partners." That may be another reason Islamic investment inflow numbers are hard to track - most so far have been in the country's real-estate sector, which is largely unorganized, or in sharia-complaint industrial ventures via local partners.

However, that's changing. According to Nisar, over the past few months Islamic investment of close to $750 million in the stock markets and infrastructure sector have been announced. During the same period last year, India saw just $50 million of Islamic investments in its capital markets. "The recent announcements, therefore, may be a precursor to the billions that may be waiting to get in," he said. The trend is clear, said Amrit Pandurangi, director of global audit firm PricewaterhouseCoopers, in a comment to India's Economic Times. "Everybody is looking at India as a good place to invest."