The uncertainties of the coalition politics, perpetuated by the latest election results, which show that no single party or political group is on course to score a parliamentary majority, are unlikely to be a major deterrent to foreign investors, bankers said on Wednesday.
Capital flows (to the stock markets) will continue to come at a steady pace, said Rana Kapoor, general manager at ANZ Investment Bank, the investment banking arm of Australia and New Zealand Banking Group Ltd. We expect foreign direct investments flows to pick up this year, he said.
Bankers said they thought foreign investors were prepared to live with Indias unsure politics although some analysts said more political clarity and economic reforms were needed before major commitments were made. If you look at the last seven or eight months, there has not been much strong decision-making, said S Venkitaramanan, former governor of the Reserve Bank of India. This has not really affected flows much, he said.
Foreign direct investment flows into India stood at $2.5 billion in April-December 1997 against $2.7 billion in the year-ago period, according to central bank data. Net inflows from foreign institutional investors (FIIs) in February totalled $198.6 million.
bruarys inflows reversed a three-month trend during which there were outflows of $385.2 million as foreign investors pulled out of Asian markets after a meltdown in regional markets.
Kapoor said he did not expect the composition of the future government to have a major impact on foreign investment inflows as all political parties had the same agenda of attracting foreign investment and boosting economic growth. Putting the economy back on track will be high up on the agenda of all political parties, he said.
But some analysts said a coalition government could lead to political compromises and weak decisions which could slow economic growth and deter foreign investors. Many foreign investors do not really see India as a country where they are comfortable doing business, said an analyst at an US investment firm, who did not want to be named. What we need is a strong majority government which can take tough decisions and really open up the economy, he said. This is unlikely in a coalition scenario.
The analyst said a government headed by the BJP would be better for the country from an economic angle.
A Congress-United Front (UF) coalition would mean that communists would play a big role in decision-making, he said. And that will take us back to a situation like last year, the analyst said, referring to the laboured policy-making of the previous UF coalition of centre, left and regional parties.
Objections from left parties ensured that key issues such as the opening up of the insurance sector and labour reforms were deferred.Foreign investors will keep investment decision on hold till the political climate clears up, the analyst said.
