How to attract investors to India?

Dec 26, 2012

In this issue:
» PM's New Year resolution - take care of savers
» Can the FM meet his budget goals?
» The biggest deterrent for FDI in aviation
» A US$ 100 bn target for Indian Pharma
» ...and more!

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In the world of investing, there are success stories and stories of failure. But if we were to compile the wisdom of all the successful investors there would be a couple of points which would be universal. One of these is to invest in stocks that have strong fundamentals and robust business models. What makes this kind of an investment attractive? The attractiveness lies in the predictability of this company's cash flows. If you can predict with some certainty as to what will happen in the future, there are lower chances of things going horribly wrong. This rule is actually applicable to all asset classes. And therefore is true even when it comes to investing in a country. For a country, the predictability lies in the country's investment environment. And unfortunately for us India seriously lacks this quality.

This fact was highlighted by the head of the Russian sovereign wealth fund, RDIF (Russian Direct Investment Fund). The fund's CEO, Mr Kirill Dmittriev has stated that to increase India's attractiveness, the investment environment has to be made more predictable. His opinion was based on the plight of Russia's Sistema whose investments in India are currently facing uncertainty following the cancellation of its telecom licenses. The latter had tied up with an Indian operator to carry out telecom services. But its licenses came under the scanner following the recent telecom scam and were cancelled earlier this year. The company now faces a huge uncertainty on what will happen to the amounts already invested by it in the networks. The government is yet to communicate any concrete policies or plans on this issue.

The thing is that policy dillydallying does not help anyone. Yes if there is a scam then it needs to be looked into and the perpetrators need to be punished. But policies cannot be something that are formulated at random will. Policy makers have to be strong and need to think all matters through. At the same time they cannot afford to waste too much time on policy issues either. Things have to be prioritized and speed tracked at times.

India is an excellent long term investment option. It has sectors and companies that have sound fundamentals and good growth prospects. It has a banking system that is not going down the drain like that in the developed countries. The country has a rich demographic dividend that can yield high returns in the long term. All it lacks is a good regulatory and policy framework that makes the environment predictable. Getting this part right will provide the insurance to investors that that their investments in the country are not going to vanish. But are the policy makers ready to provide them with such an environment?

Do you agree that India needs a policy overhaul to make its environment more conducive to attract investors? Do share your comments with us or post your views on our Facebook page / Google+ page

 Chart of the day
The Reserve Bank of India (RBI) has adopted a hawkish stance when it comes to the key interest rates. This stance has been unchanged given the country's high inflation rates. But it has been a little more liberal when it comes to liquidity levels. These are essentially regulated by the Cash Reserve Ratio or the CRR which is the amount of funds that the banks have to keep with RBI. As a result, any cut in the rate results in more funds available to the banks that they can lend out. The RBI has cut the CRR rate 3 times this year. This has injected liquidity in the monetary system. However, till such time as the headline inflation comes within RBI's acceptable limits, it is unlikely that it will touch the repo rate or the benchmark interest rates in the country.

Data Source: RBI

The government plays a large role in managing the savings of every household in India and if it does not manage those savings properly, the public lose their trust in them. But time and again, policymakers have taken savers for granted. Government protects the interest of savers by controlling inflation and managing its fiscal deficit. But the Indian government has failed on both accounts. Inflation has remained stubbornly high over the past couple of years. This forced the RBI to raise interest rates.

The fiscal deficit situation is no better. Fiscal deficit as a percentage of GDP has gone to levels of 5.9% in 2011-12 from levels of 4.9% seen in 2010-11 and levels of 2.8% seen in 2007-08. The recognition of the inflation and fiscal deficit problems has been forced on the government due to the fall in the rupee that has lost over 20% against the dollar in the last one and half years. There is an economic cost to financial repression of savers. Putting the interests of borrowers ahead of savers hurts the latter and the economy. Thus come the New Year, the priority of the government should be to protect the interest of savers as they are the backbone of the economy.

Is it really possible to meet sales and profit targets for a firm on a consistent basis? Certainly not we believe given the sheer unpredictability of the business environment. Thus, a CEO that routinely promises to make the numbers will at some point be certainly tempted to 'make up' the numbers. It won't be wrong to call India's finance ministry one of the biggest victims of this temptation. For we regularly encounter situations where fiscal deficit targets set at the beginning of the year magically meet their mark as the year draws to a close. This, even as the target looks awfully impossible to achieve for most part of the year.

To be fair to the FMs though, they don't have to try all that hard. The accounting that goes into the making of country's financial statements is quite faulty to begin with. Lot of emphasis is given to cash and practically no attention is paid towards finding out the true financial implications. For e.g. a mere one day delay in the payment of subsidies from March 31 to April 1 pushes the expenses to the next year and deflates the numbers for the current year. Then there is the problem of not accounting for expenses that various ministries are entitled to but haven't yet ended up spending. This certainly makes current year's figures look impressive. But it does extract a higher cost in the form of cost overruns for projects. Examples like these are plenty. But the point is that the Government better stop such shenanigans. And instead look for real ways to lessen the chronically high fiscal deficit.

The civil aviation sector is one tough sector to operate in. Given the high involvement of the regulators coupled with volatile input costs, the business becomes quite unpredictable. The Indian civil aviation - apart from the abovementioned aspects - has additional factors working against it. These include the high airport costs, taxes, congestion and poorly developed air navigation services, amongst others.

Now, with the government allowing up to 49% FDI in the aviation sector , it definitely is good news for the cash-strapped, debt-burdened airline companies. But at the end of the day, it does not change the fact that the industry needs a major restructure. According to the Director General and CEO of the International Air Transport Association (IATA), while the liberalisation is a step in the right direction, the industry will not see a flood of foreign carriers coming into the country. This is obviously unless the operating conditions are improved for the airlines. His reasoning is simple - foreign capital needs returns on investments as well.

The Planning Commission has a lot of its hopes pinned on the Indian pharma sector . It has set a target for the Indian pharmaceutical industry to reach US$ 60 bn in size by 2017 and US$ 100 bn by 2020. Overall, the Commission expects the industry to account for 5% share of the global drug industry in the next five years. Currently, the Indian pharmaceutical industry is valued at US$ 22 bn. It is the third largest in terms of volume and 13th in terms of value globally. The big thrust would obviously be on exports.

At present, Indian companies are capitalising on a wave of patent expiries in the US. The latter is the world's largest pharma market both in terms of branded drugs and generics. However, this market is highly competitive with considerable price erosion. Further, although the patent expiries over the next couple of years are healthy, there is set to be a decline thereafter. Thus, growth in exports would also depend on a considerable ramp up in semi regulated and emerging markets. Thus, overall the growth potential for the pharma industry certainly exists. But whether the Commission's targets will be reached remains to be seen.

In the meanwhile after opening the day on a positive note, Indian equity markets continued to trade above the dotted line. At the time of writing, the Sensex was up by 191 points (0.9%). Among the stocks leading the gains were Bharti Airtel and Sterlite Industries. With the exception of Malaysia and Taiwan, other major Asian stock markets have closed the day on a positive note.

 Today's Investing Mantra
"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing" - Warren Buffett

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    3 Responses to "How to attract investors to India?"

    Rajendra Kumbhat

    Dec 28, 2012

    It is good that RBI is not reducing interest rates. Indian corporate houses are notorious for mis-appropriating cheap credit (using it for a unproductive purpose other than the purpose it is sanctioned for). This dishonesty on parts of the Indian corporate houses, to a large extent is responsible for the high NPAs. The incident of high NPA is more in PSU banks because corruption is much higher in PSU banks due to lack of accountability. Why bother! it is tax payers' money after all.



    Dec 26, 2012

    Before trying to attract foreign investors into India, we have to create a congenial atmosphere with stable economic policies. During the past 65 years Indian Rupee has lost 99% of its intrinsic value. The present statistics about the corporate status and health are to be viewed in relation to the depleted rupee value.
    Then only we can say what is the real growth.


    hemant moharir

    Dec 26, 2012

    This is for Ajit Dayalji.With so much talk on FDI, do they really have the money to invest.Since last 2 years the dollars which are getting printed are being routed to us.Do we end up finally with the dollar paper down the line?I am told our domestic saving is in the range of 35%of GDP which is one of the do we need foreign investment or foreign currency(which anyway is going to be toilet paper after some years!!) enlighten!

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