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Wake up to the FDI reality

Sep 16, 2003

India is gaining importance as one of the most promising emerging markets in the world and this can be observed from the rate at which foreign institutional investors (FIIs) are investing in the country from the beginning of this year. Even the MSCI index, which is a reference for FIIs investing in emerging markets, has upgraded India’s weightage in its emerging markets index. While these are good signs for the Indian stock markets, we must also understand that India, in order to sustain this kind of FII interest, has to do much more than what is being done.

Current P/E ratios
Kospi 50 11
BSE Sensex 13
Hang Seng 16
Straits Times 18
Set 50 (Thailand) 9

While one may argue that the Indian markets seem undervalued as compared to its other South East Asian counterparts, we would like to point out that the ‘so called’ under valuation is not too large and that in some cases, it is overvalued! However, we would also like to point out that to a certain extent, there is a justification for the same. If one were to look at the broad economic policy reforms measures, nothing much has changed, but what has changed is the fact that the economic prospects are looking much better due to good monsoons as well as higher productivity of India Inc.

Cumulative FDI inflows
% of GDP 1990 2002
China 7 36
Hong Kong 270 266
India 1 5

What we are trying to indicate here is that in terms of economic reforms, we are way behind our peers in the region. This is indicated from the fact that FDI flows into India have been very poor in comparison to countries and regions like China and Hong Kong. We are stressing here on FDI because, for any emerging or developing country, FDI plays a vital role in the overall development of the economy. It creates employment as well as wealth for the citizens of the country, and has a cascading (developmental) effect on the economy. FDI also takes the burden off the government as far as stimulating growth is concerned.

One may, however, counter-argue at this stage that, due to its lack of aggressiveness on the reforms front, India was spared from the South East Asian economic crisis that occurred in 1997-98. While the argument holds ground, what one fails to realise is that the countries that were affected by the crisis have recovered well from the same over the years and are now showing strong growth prospects for the future. It must also be noted here that post their reforms period, these countries have witnessed a strong growth in their economies. The strong FDI inflows have helped the development of these economies to a large extent. China is one of the prime examples of this phenomenon.

Considering the above, India too needs more of economic and structural reforms to attract FDI into the country. Unless the government initiates more steps in the direction of labour reforms, fiscal discipline, disinvestment and making the country a more investment friendly destination, we will continue to languish and will have to be satisfied with GDP growth rates of 6%. It is time for the government to act!

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