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A global Indian - Views on News from Equitymaster
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  • Jun 29, 2007

    A global Indian

    An easier economic climate in India over the past six years thanks to easing of capital controls and other restrictions has seen significant shifts in money flows in and out of the country. Though Indians are now saving enough for a trend growth in real terms to be about 7%, the extra resources required to propel India's annual growth to a higher trajectory of 9% to 10% would require additional funds from abroad. Thus, a study of money flow patterns helps assuage the Indian paranoia about 'hot' money and the likely impact of it drawing out of India.

    One of the steadiest streams of income into India has been the remittances from the 22 m Indians living outside India. The Indian diaspora is the second only to the Chinese (55 m), amongst the world's expatriates. And the canny investors they are, they are putting their monies where their heart is even as India emerges from her post-socialist cocoon. Indians along with the Mexicans (across the US border) and the Chinese are among the world's staunchest believers in their mother country.

    Source: World Bank

    In nominal dollar terms at US$ 26 bn the remittance flows into India have doubled since the turn of this century and globally, Indians accounted for 13% of the world's remittance inflows in CY06. Beyond this, they invest in India through NRI deposits, in commercial ventures and of course in the stock markets as FII money.

    Though we cannot quantify how much of the money coming in is thanks to Indians alone, the changed perceptions of India's capability has seen more and more of this money being retained in India. The share of investment income taken out of India as a percentage of the net foreign investment reduced drastically from 112% in 2000 to 21% in 2006. This is accompanied by a definite increase in Foreign Direct Investment (FDI) in Indian firms from the earlier bias towards more Portfolio Investments. FDI in 2006 was US$ 16 bn, the highest ever, while portfolio investments into India (this includes the more long term private placements) touched US$ 9.5 bn.

    Source: RBI

    2006 also marked another watershed in Indian balance of payments as Indian companies lapped up overseas assets. Of all the FDI inflows into India in 2006, Indian corporates spent 54% for snapping up promising global partners. From using up a meager 2% of the total inflow into India in 2000, policy changes and increased business confidence in India has seen this number boom. Sitting as it does on ample reserves in excess of US$ 209 bn that are forcing the Rupee to appreciate, the Reserve Bank of India (RBI) is more than happy to let Indians take more money outside India. As the Rupee gets stronger, it makes more sense for Indians to buy assets abroad as it is cheaper to do so. Thus more the money spent, less will be the pressure on the Rupee to appreciate, and that will be the good news Indian exporters are hoping to hear.

    Source: The RBI

    As the RBI gradually lowers its barriers, Indian finance will get more attuned to global developments. Money flows into India would continue so far as the growth in the Indian economy warrants a better return. Thus, instead of being appraised against just the Steel Authority of India (SAIL), Tata Steel will now have to prove itself against an Arcelor. No wonder then Indian companies are busy increasing their overseas footprint. These efforts of Indians going global will finally decide the exchange rate parity of the Rupee depending on market forces of demand and supply of dollars.



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