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India removes cap on FDI
By Arun Bhattacharjee
NEW
DELHI - The Indian government’s decision to remove the
cap on foreign direct investment signals a major step
forward in economic reform after years of hesitation. It
follows a recommendation by a parliamentary joint
committee to the Reserve Bank of India, the country’s
central bank, which also urged reform of foreign
exchange regulations to permit Indian companies going
transnational to buy hi-tech companies overseas.
Why not? With foreign investors seeking key
Indian stocks and the share market index benchmark
shooting up by 50.9 percent against New York’s 27.48
percent, Hong Kong’s 32.77 and London’s 30.57, India
feels it is time to go global.
Strong industrial
performance and a good monsoon led to the expectation of
a buoyant economy and a government forecast for 6
percent growth. Research by the Economic Times
Intelligence Group reveals that more than 100 companies
posted a price to earning ratio of 100 and those are
among the top performers. Performance of another 1000
companies was found to be equally as good.
Another survey shows that net profit by 3,150
companies increased by 76 percent in fiscal 2003 over
2002. While other incomes of these companies increased
by only 8.25 percent to US$4.48 billion, net profit off
other income increased from $6.299 billion to $11.09
billion over the 2002 financial year.
Many feel
this euphoria may not last long as the budget deficit,
more than 5.6 percent of gross domestic product, and
almost equal to projected economic growth, could upset
the government’s calculations. The other worry, voiced
by the opposition, concerns the selling of
government-held industry units. They feel government is
using the huge earnings from the equity sale to Indian
and foreign investors of public sector units to meet the
budget deficit without using the income for
infrastructure development and social investment.
The new investment-policy draft, to be placed
before the parliament after state elections, prescribes
76 percent foreign equity in almost all sectors except
for cement. Even the controversial cap on investment in
the media is being removed to fall in with the general
policy.
Economists here point out that Indian
capital market buoyancy picked up since mid-March this
year. The poor performance of the last three years was
due to a lack of economic stimulus, as foreign investors
shunned it partly because of the global economic
downturn, and in absence of proper regulatory measures
to control a capital market that suffered from major
manipulations and inside trading scandals.
Government officials forecast 6 percent growth
for the current financial year, “which may even reach 8
percent.” This is supported by private investors, who
are confident that 7.5 percent growth is possible but
warn that rising debt could cap growth at 5 percent
unless the government takes into account the impact of
interest payments. The other hurdle, the cap on foreign
investment in capital markets and industry, will be
addressed by the new investment policy.
Several
factors are expected to help economic growth. Among
those is the equal treatment of foreign as well as
nonresident Indians and their overseas companies
investing in India. Favorable forecasts and
certifications by independent global consultants such as
A T Kearny, and by the World Bank have raised investor
confidence. Kearny’s Foreign Direct Investment (FDI)
chart moved India to sixth place from last year’s 15th.
Another survey shows that a fifth of global
executives say India’s investment outlook improved last
year, with British and US private investors ranking
India the third most attractive FDI destination,
although Canadian investors consider India as the fourth
desired. The fast growth of the service sector,
particularly telecommunications and information
technology, has made India equally attractive to service
sector investors as the fourth desired destination.
Unfavorable factors are delay in tax reform,
political pressure against the privatization of
government-owned monoliths and the slowdown in the
country’s ability to transform its offshore attraction
into large FDI inflow. At a recent speech to the Indian
industry associations, Finance Minister Jaswant Singh
assured that tax reform is on its way. The recent
Supreme Court decision on the removal of double taxation
on investment from Mauritius and a clear directive
against shadow companies of Indian origin in that
country has removed a lot of shady areas that existed on
the tax front.
One major worry will be fiscal
debt and rising inflation, which has already reached 5
percent, equal to the savings interest rate. Unless the
government can restore primary investor confidence in
the capital market, real and stable growth is not
likely, as current capital market growth is fueled
mostly by foreign portfolio investment.
Many
feel that interest rate cuts on non-resident Indian
deposits, of which India is flush with nearly $89
billion (as of Oct 1), will divert deposits to India’s
offshore bond market such as in Tokyo, Bahrain, Nassau
and the recently opened offshore facilities in Mumbai.
Un-hedged deposits by non-resident Indians earn today
around 2.31 percent; with exchange risk covered, the
deposits yield only around 1.3 percent compared to the
debt fund return of around 5 to 6 percent for liquid
short-term fund and around 7 percent for long-term
deposits.
The government’s economic advisor
Ashok Lahiri, is willing to revise the earlier estimate
of 5.6 percent growth by the former Reserve Bank
Governor, Bimal Jalan. He says that the good monsoon and
other economic indicators mean growth could be as strong
as 8 percent. The major concern is the decline in export
earnings. Instead of 12 percent, first-quarter growth
was only 9 percent or only $22.5 billion. Imports during
the same period reached $ 28.54 billion, which reflects
a much higher trade deficit by year-end.
Government economists are optimistic that higher
imports will drive industry sector and growth, which is
far better than industrial and economic stagnation.
(Copyright 2003 Asia Times Online Co, Ltd. All
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