A vote for India

The decision of the California Public Employees' Retirement System (CalPERS) to include India in its list of emerging markets eligible for its investments is an endorsement of the Indian stock market.

CalPERS is known to be ultra-conservative in its choice of markets and has tough benchmarks that markets have to meet before it decides to invest in them. Markets which do not meet CalPERS' stringent criteria include China, Indonesia, Thailand and Russia.

The CalPERS decision is thus a reason for celebration for several reasons. There is no doubt that the attractions of India as an investment destination contributed to the decision.

Foreign institutional investors have been pouring money into the Indian secondary as well as primary markets, and the "India Shining" story is one that has caught the imaginations of investors worldwide.

There is no question that India now occupies an increasingly larger mindshare in the United States, thanks to successes in information technology and now in business process outsourcing.

With the Indian economy notching up one of the highest growth rates in the world, US investors would like to have a slice of the investment opportunities presented by this country.

To take one example, at a recent meeting organised by foreign institutional investors, one institutional investor revealed that it now routinely asked companies in which it wanted to invest about their India strategy. These considerations undoubtedly exert an influence on those who manage pension funds in the US.

At the same time, it is by no means the sole reason for deciding to invest in India. After all, China too has been a great investment destination for foreign investors, and so are Thailand and Indonesia.

The decision to include India therefore also means that the improvements in the market mechanism, in risk containment mechanisms, in stringent supervision and in setting up a nationwide state-of-the-art trading system have paid off.

Clearing and settlement systems in the Indian markets are now comparable to the best worldwide, and transaction costs are very low. CalPERS' decision to invest in India is accordingly a vote of confidence in India's markets. That's not all. CalPERS' investment decisions take into account factors such as transparency, political stability, corporate governance, and respect for human rights.

On all these factors, accordingly, India has passed the test. Putting it another way, India now has the institutions and the systems that make investing for the long haul worthwhile, which is why a pension fund like CalPERS has decided to invest.

Having said that, CalPERS' decision is unlikely to have an immediate impact on the market. To start with, its total investment in emerging markets is a mere $2 billion, and the proportion allotted to India is unlikely to be significant.

Nevertheless, CalPERS' example is likely to be emulated by other pension funds, and that could lead to substantial additional investments in the Indian markets.

Further, CalPERS has a history of actively encouraging corporate governance, as seen by its recent actions against the Coca Cola and Citigroup managements. Its investment in Indian companies should, therefore, provide a further boost to good corporate governance practices in India Inc.

But far more important is the fact that pension funds have the potential to provide a stable source of long-term funds for the Indian market. The CalPERS decision is therefore unambiguously positive for the long-term health of the Indian market.