After globalisation, trends show that foreign investors gravitate towards emerging markets and India is no exception. Since investors buy when prices are low and sell after prices increase, India’s entrepreneurship boom has attracted massive foreign investment. This, in turn, has increased liquidity in local markets and expanded India’s investor base overall.
Great news. Now there is a bigger question. Many critics state that this is just a temporary ‘surge’ and this amount of foreign investment will not last for long, particularly during economic slowdowns. However, there are ways that the central government can ensure that foreign investment can be long-term. Looking at some of the major determinants for current foreign investment may help give a clearer indication of what can be done for guaranteed longstanding foreign investment in the country.
A major determinant of foreign investment is volatility in the Indian capital market. While volatility introduces risk for investors, it also potentially means superior returns. Experts have quoted many factors for volatility in India including the US ripple effect, a fiscal slippage (in terms of deficit target), a rise in crude oil prices (India is highly dependent on oil for its energy; rises negatively affect the entire country) and new budget proposals (especially with India’s budget session coming up in the next few weeks). Despite this, foreign investors are attracted because India proves to be a prime example of a pre-downturn emerging market. With its young population and a strong GDP, India is by far the world’s fastest-growing economy. Another strong reason attracting foreign investors is aggressive action by the Narendra Modi government. The Modi 1.0 and 2.0 government have shown that the Centre is looking at long term economic well-being and not short term gain for political capital. For example, India is the only emerging market that pays for its commodities (ie. oil) abroad in local rupees rather than using the US dollar. This means that India’s capital investment, even in the future, is not dependant on the US dollar.
The amount of foreign investment looks fantastic in the short term. In order to maintain a high level of overseas investment in India consistently, the government can take several steps to maximize long term gain. One idea is to enforce more specific regulations like applying a selective control measure for foreign investment flow. Tax measures would also keep attracting investors, especially during economic growth slowdowns. Additionally, appropriate policy rules and regulations would also prevent existing foreign companies and MNCs in India to dominate retail trade.
This, in turn, would encourage Indian start-ups to enter the playing field which also keeps investors interested.
Another way to ensure long term foreign investment is to ease restrictions on FDI by joint ventures as well as owned subsidiaries of Indian companies. The existing legal framework under Foreign Exchange Management Act (FEMA) does not allow for FDI by an overseas joint venture or Indian wholly-owned subsidiary without RBI approval. There are also restrictions on Indian firms investing overseas in foreign firms. Overseas direct investment is crucial, especially in times of economic growth slowdown and a lack of investment by the Indian corporate sector. This would help increase foreign funds into Indian business activities. India’s investment in foreign entities would also lead to long term interests overseas which in turn helps foreign investment flow in.
The capitalisation of publicly traded companies is another major determinant of foreign investment flow because it increases it. This capitalisation is important to long term because, over time, a firm increases good performance and an increase in employees. Market capitalisation can also positively and significantly impact GDP growth. But for this, India needs more clarity. Many market experts blame weak availability of domestic data as a huge blow to the stock market. To add to that, the weakening of the Indian rupee, over-taxing foreign portfolio investors and poor corporate earnings also contribute to weaker market sentiment.
Continued focus should be given by the government on a stock market that aims for economic development. This would help attract long term foreign investment. Examples of this are agriculture, green energy and aviation. A controlled and consistent Indian capital market would be irresistible to international portfolio investors. Development based investment is also generally aimed for long term gain and would, therefore, be mutually beneficial for India as well as for overseas investors.
Of course, there are other determinants for foreign investment in India including unforeseen circumstances that can potentially occur. But it is promising to note that the central government is focusing on long term economic stability versus short term gains. For example, this can be seen with PM Narendra Modi’s aggressive focus on development via infrastructure, aviation, diversifying exports, expanding foreign policy, health-care, education, etc. Continued progress at the grassroots level through projects like the Awas Yojana, Ujjwala Yojana and Ayushman Bharat also eventually help the economy by developing the country.
Eventually, as the market becomes regulated with active foreign investors, financial policies should focus on allocating resources and maintaining a healthy financial market. With patience comes great things. As a young, working professional in India, I would rather take a few economic road bumps now in order to gain a strong, diversified and stable market in the near future. It is sad that critics and even experts in the field do not share this patience. Rather, they choose to publish their stances only considering short term conditions.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)