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March 02, 2009

"Foreign investors to react to new govt's moves"

In his column for Business Standard, Akash Prakash points why the new govt's moves, post election, would be a key determinant of foreign fund flows into the Indian market.
We have to recognise that India has no God-given right to receive billions in capital; we have to make our policy framework attractive to capital, and build confidence in global financial investors that the country means business. We have to be able to convince long-term investors that we can take the hard economic decisions which are needed to sustain our long-term growth. We will have to compete for the limited capital which is available with many other attractive emerging markets. Global investors have to once again get excited about our structural growth rates and ignore the macro-vulnerabilities. I sometimes think we are too complacent, we feel investors have to be in India: While partly true for FDI, there is no such compulsion for financial capital. No investor has to be in India. Investors will only go where they see returns.

The only way to tackle the structural fiscal deficit issue is either to aggressively target our expenditure and subsidies or undertake significant disinvestment and creatively sell government assets like spectrum. In the absence of these moves we will be stuck with a double-digit deficit, high interest rates, poor infrastructure and a potential sovereign credit downgrade. We could easily spin into a negative loop, with the poor fiscal causing a credit downgrade, which would further spook investors, reduce capital inflows, lower growth, spike rates —and the cycle would feed on itself.

However, lest I sound too pessimistic, all is not lost. If the new government moves ahead decisively to tackle the fiscal and delivers on second generation reforms in areas of education, labour policy, financial system etc, then we can regain investor confidence and claim our rightful share of global capital flows.

India is actually very well-positioned for the new post-US consumption world. We are a large economy with very little dependence on exports. Consumption is about 65 per cent of the economy, our demographics suggest it will remain strong. Our banking system is solvent. Capital investment will lead to huge productivity gains. We have good entrepreneurs and as the government share of the economy falls, there are huge growth opportunities in the domestic market. We do not need a growth model change like in China, which has to move away from exports/capital investment and towards consumption as its growth driver.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in