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Indian Economy: An opportunity knocks - Views on News from Equitymaster
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  • Sep 3, 2001

    Indian Economy: An opportunity knocks

    There is an opportunity knocking on India's doors. An opportunity which if capitalised on could propel us into a much-wanted higher growth trajectory of 8% per annum. However, for that to happen, our polity needs to work together to achieve one purpose – a better investment climate.

    The global economy is slowing down much faster than anticipated. Amidst the gloom two economies, India and China, continue to post robust rates of growth. As India continues to buck the global trend, the chances for attracting foreign investment are brighter than ever.

    There are several reasons why foreign investment is necessary. We discuss three of these.

    First, it will give India access to the best technologies in the world. This will give a boost to productivity, which is a must to alleviate poverty. Secondly, by adding to the foreign currency assets of the country, it will improve India's balance of payments (BoP) position. A better BoP environment would mean that India would be in a position to ease restrictions on imports, say for example for capital goods. Also, it would then be possible to permit Indian companies to make larger investments/acquisitions abroad. This would permit the Indian industry to diversify in terms of exposure to markets. Third, and most importantly, foreign investment would be able to fund the large investments required in the country.

    Unfortunately, even as China attracts over US$ 40 bn in annual FDI inflows, India’s share seems to have stagnated at just over US$ 2 bn.

    The reasons for this are not far to seek.

    First is the policy environment, which unfailingly presents itself as a hurdle to fresh investments from foreign companies. The best example here is the power sector.

  • Foreign Investment in India

    Second is the quality of infrastructure in the country. Deficient and low quality infrastructure is a big hurdle in getting FDI into the country. Unfortunately the state of the infrastructure continues to deteriorate by the day. However, precious little is being done. It almost seems as if our polity does not realise that better infrastructure is needed to pursue our objectives of higher growth. These concerns are compounded by India's inability to speed up reforms in the infrastructure sector.

  • Performance of India's Infrastructure sector

    Third, the deterioration in the fiscal health of the government is a cause for concern for many investors. Indeed, India's fiscal health has continued to deteriorate in the first few months of the current financial year. A higher deficit implies that the government needs to borrow more money from the market, thus putting upward pressure on interest rates. Higher interest rates impact investment and consumption activity in the country (the ‘crowding out’ effect).

  • Financing the Fiscal Deficit

    These are just three key reasons why India continues to miss out on large global FDI flows.

    Indeed, there are several reasons in support of India getting more FDI. First, there is abundant and low cost English speaking skilled labour. Second, we are a democracy, which ofcourse gives a sense of comfort to international investors. Third, India is a large market with a lot of potential demand for goods and services.

    However, the negatives far outweigh the factors in favour. Until our politicians can close ranks and work towards improving the macro environment, it is unlikely that there will be a significant change in India's position in the international markets.

    Until then, the opportunity will remain as it is.



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