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FDI inflows in India and China since 1990s
Sep 27, 2014

"Aren't the markets currently too frothy to invest in? Shouldn't we rather wait for it to correct than invest now?"

These have sort-of become the regular queries that we receive from our subscribers these days. Many even point out to the fact that India has come close to becoming the most expensive amongst emerging markets.

Now, it is really heartening to see that investors are keeping a close eye on valuations rather than being in a buying frenzy, with advice from brokers and pink papers. However, it is important to put India's economic fundamentals and valuations in perspective. For only then can you fairly asses whether Indian markets are too expensive for a global investor looking at emerging markets.

Let us look at the inward flow of foreign direct investment (FDI). Like we have said many times earlier, for a developing economy like India sustained inflow of FDI is extremely critical to achieve high growth rate. Investment from the government and private sector need the boost of foreign capital and intellectual know how so as to help GDP growth rate reach the inflection point. Take the case of China in the early 1990s. One would recall that this was the time when China started investing heavily in its infrastructure and industries. And it relied that much more on FDI. The fact that the economy put in reforms and incentives to attract foreign capital helped it sustain strong FDI inflows for nearly two decades.

India today looks strikingly similar to China in early 1990s. Assuming that India is to embark on a similar investment phase in both infrastructure and industries attracting such FDI is inevitable. Not only will it reduce the pressure banks and financial institutions for long term funding. But also allow companies to focus on their growth plans rather than constantly worry about funding requirements.

The fact that initiatives by the government to bridge deficits and attract foreign capital will also enhance India's sovereign rating will be yet another positive. In fact the S&P has already upgraded India's rating from negative to stable. Going forward such rating upgrades will up India's appeal on the FDI radar.

Thus there are enough reasons why India's growth rate in the the coming decade could look far more appealing than that of other emerging markets. And going by the key signs of the Megatrend that India could be witnessing, several companies here could offer more attractive investment opportunities than in any other markets.

Hence we believe that retail investors should not try to time the markets and wait to invest at the most attractive valuations. Instead they should be very selective in the company they wish to invest in and invest small amounts consistently over a period of time. Besides giving the opportunity to take advantage of valuations whenever there is a temporary hiccup, this will also help ensure that you do not 'miss the bus'!

Data source: UNCTAD

Which are the other similarities according to you between India today and China in the 1990s?

This Chart Of The Day was published in The 5 Minute WrapUp - A striking indicator as to why India today is where China was in 1990

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