Recently crowned as World’s 3rd largest economy by the Organisation for Economic Cooperation and Development (OECD), is the Indian economy already trembling?
The
financial crisis in global markets has made the outlook of Indian
economy grim. While the consistently volatile markets and the rupee
plunging to an all-time low against the USD are some major concern at
this moment, natural calamities and economic scandals seem to be the
icing on the cake. Two decades ago, in the early 90’s, India faced a
similar crisis. At that time India’s major concerns were the problem in
balance of payments and poor foreign exchange reserves.
During
the crisis, Dr. Manmohan Singh, the Finance Minister of India at that
time, came up with a solution to reform the Indian economy. He
liberalized the economy by ending the license raj and gave rise to the
phenomena of foreign investments in India. Thus, opening the gates for
foreign players to come and invest in India.
*License
Raj: A term used to describe the regulation of the private sector in
India between 1947 and the early 1990s. In India at that time, one
needed the approval of numerous agencies in order to set up a business
legally.
Since then, foreign
investments have been the backbone of the Indian economy and like the
90’s this time too, it would seem that foreign investments might be
holding the magic wand that may be able to pull India out of the current
economic slump.
Foreign
investments are flows of capital from one nation to another in exchange
for significant ownership stakes in domestic companies or other domestic
assets. There are two types of foreign investments that play a major
role in the growth of Indian economy; Foreign Direct Investments (FDI)
and Foreign Institutional Investments (FII).
| FDI Inflows into India | |
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| *Data from Financial Year 2000-01 to 2012-13 (up to January 2013) Source data: Website of Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India |
FDI
Foreign
Direct Investments (FDI) is investment of foreign assets into domestic
structures, equipment, and organizations. FDI inflows are into the
primary market and do not include foreign investments into the stock
markets. It is a long-term investment and is used by the developing
countries as a source of their economic development, productivity
growth, to improve the balance of payments and employment generation.
Its aim is to increase the productivity by utilizing the resources to
their maximum efficiency. Exit is relatively difficult in this
phenomenon.
FII
Foreign
Institutional Investments (FII) denotes all those investors or
investment companies that are not located within the territory of the
country in which they are investing. It is generally a short term
investment and invests only in the financial assets. FII inflows are
only into the secondary market with an aim to increase the capital
inflows. Exit is relatively easier in FII.
While
both the type of foreign investments are important for India but for a
long term economic growth, Indian government should focus on FDI as
compared to FII. As it has been proved that due to low exit barriers in
FII, the foreign investors can exit from the Indian market whenever they
want resulting in a crash in the Indian stock markets.
This
calendar year as of (May - 2013) (source: PTI) India had received an
FII inflow of more than $ 15 bn and the FII outflow for the month of
June and July had already crossed $ 10 bn, resulting in an uncertainty
in the markets. This clearly shows that FII inflows are not sustainable
and can be redeemed anytime according to the will of the FIIs and the
situations prevalent in their home countries.
So
to prevent this uncertainty, it becomes necessary that the foreign
money which comes to India should stay here for an adequate time, so
that this money could help to promote economic and industrial
development. This can only be achieved if the money comes via FDI route.
The Foreign-direct
investments were seen sliding about 21% last fiscal. This is despite,
the government passing a law in September 2012, allowing big retailers
to open stores directly, yet none of the foreign dream-merchants have
really taken the bet. Reasons being too many prerequisites, constraints
on whom goods can be purchased from, a raft of regulations limiting
franchise models and factory construction, and the infuriating need to
negotiate separately with each of the states.
However
the recent announcements by the government of India on 100% FDI in
telecom & defence sector, 100% FDI in single brand retail & 51%
FDI in multi brand retail and 49% FDI in Insurance give us some ray of
hope for the economic development.
Moreover
though this could be temporary slowdown or reversals in FII and FDI
inflows based on interest rate cycles, flow of funds, global contagion
etc, over the long term, given the nascence of many Indian businesses,
the growth potential and 1.2 billion people pining for a taste of
globalization, one could expect a kick-start of inflows in near future.
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