Rapid growth and the reform agenda make the country an attractive market.
Even as a slew of infrastructure projects are in search of capital to get them off the shelf, an expert panel at the India Economic Summit reached the consensus that India, with its promise of galloping gross domestic product (GDP) growth and a broad reform agenda, will not have to compete really hard for capital investments. To sustain its growth, it must attract many different types of private capital, both domestic and foreign.
“India will not have to compete really hard for capital because of its high growth rate. The policy of the government to continue with reforms is going to attract foreign capital easily into India,” said Kevan V Watts, country head, Bank of America Merrill Lynch India, even though India is likely to face competition from other emerging and evolving economies.
The global community is also riding high on the promise of reforms in the financial sector which, although it is expected to be a long drawn out process, is acting as a major source of optimism for foreign investors. Chief executive officers welcomed the prime minister’s opening statement on financial reforms, particularly in deepening markets for pensions, insurance and bonds. The prime minister had on Sunday assured investors of policies which will facilitate direct, institutional and portfolio investment in the country from overseas.
Another positive for India in the long run is its very high domestic savings ratio, which currently constitutes around 36 per cent of India’s GDP, and comes around to $ 400 billion a year. “The fact of the matter is that we have been more dependent on domestic savings than foreign capital. Our domestic savings are much larger than the net inflow of FDI into the country,” said Ashok Jha, chairman of the MCX Stock Exchange, India.
Out of the domestic savings, 65 per cent are from the household sector, 23 per cent from the corporate sector and 12 per cent from the public sector. The challenge, as stated by the panelists, who included Jim Quigley, global chief executive officer of Deloitte, USA; and Robert Morrice, chairman and chief executive, Asia Pacific Barclays, Hong Kong, is to channelise savings into investments, since this will help fund projects. This means providing different investment opportunities for Indian households from the visible assets, bank deposits and real estate they currently favour.
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While India’s relatively low dependence on exports for its growth, limited its exposure to global demand shocks, but experts believe that global financial shocks could prove to be an impediment in the country’s growth. In such an eventuality, it is important that domestic institutions need to be strengthened.
For increasing investment, attention was drawn towards the need to boost the corporate bond market, which constitutes only about 4 per cent of the entire bond market. The government with its huge borrowing programme, Rs 4.51 lakh crore for 2009-10, is the biggest player here. Though it has been categorically stating that its borrowings will not impact corporate fund raising, the private sector continues to be skeptical.
Limited competition in Indian stock markets, with only two major exchanges in place and limited funding option for small and medium enterprises, were also discussed at the summit as the major challenges for capital availability in India. SMEs, especially in the manufacturing sector, are seen as a vital driver of Indian growth and a source of employment for the 300 million new workers coming into the workforce. But the compliance requirements for SMEs to access capital markets are too stringent. One solution would be to create a separate stock exchange for SMEs or a separate trading platform on existing exchanges.
While FDI, institutional investors and external commercial borrowing do not represent a large proportion of total capital flows, FDI brings not only money but also better management systems, improved corporate governance and new technology, which can greatly benefit local partners. FDI is considered the most stable form of private capital – and intermediaries such as global banks can help channel this into India. FDI flows to India have improved as capital markets have deepened. However, participants said it is worrying that FDI is unevenly spread across the country, with well-governed states in the south and west drawing in the majority of funds.
Jha also criticised the Indian central bank’s view on consolidation of banks rather than giving licences for new banks to come up. “I am not too sure what the policy followed by the Reserve Bank of India on banks is trying to achieve. Even if the largest Indian bank (State Bank of India) wants to bring together all its subsidiaries under itself, it would still be a very small bank, going by global standards,” said Jha.
All panelists asserted that there is tremendous scope for deepening the equity market in India, with only 40 million taxpayers and only 15 million demat accounts. The way forward, according to most members of the panel, was to encourage the remaining taxpayers to make long-term investments through the equity market.
Another challenge pointed out by Tejpreet Singh Chopra, National Executive for India, GE, was to create infrastructure projects which will attract foreign investors to put money into them. “I can only think of few major infrastructure projects in India where you will invest as a foreign investor. I feel there is need to create good infrastructure projects to get foreign investments into them,” Chopra said.