Foreign investments in India: the need for a new narrative

Make it easy for the others to help you

 by Pranay Kotasthane (@pranaykotas)

This week, I attended a lively talk at the Bangalore International Centre on “Geopolitics and Financial Markets” by Srini Pulavarti, Chief Investment Officer of UCLA Investment company. His talk summarised the broad geoeconomic trends over the last ten years. He also explained how US investors perceive the other important economies in the world.

An observation that was apparent from the talk was India’s relative superiority as an investment destination for the US investors at this point in time. Foreign investment in Chinese markets has been historically low — foreign investors own less than 4% of the capital in the Chinese stock market. This low base, coupled with the Chinese government’s meddling in the stock market over the last few weeks is sure to deter foreign investors further. Russia’s over-reliance on oil & natural gas, amongst many other factors, makes it an unattractive market. Similarly, Brazil is at the centre of multiple economic crises, and foreign investors are staying away from this economy.

This leaves India — a country which has a robust equity market and a growing economy but an extremely unfriendly investment environment at an interesting juncture. Given that the Indian economy is relatively well placed at this moment vis-a-vis other economies, many investors are banking on India for higher returns on their capital. But converting this investor sentiment into actual results requires India to fast-track investor friendliness, which requires a not so trivial political push.

The question is whether the government will invest its political capital given the golden opportunity the Indian economy has. And this is where the problem lies. In fact, the assessment that India is a relatively better economy is likely to make the government complacent in implementing the big reforms.

This possible complacency when coupled with the reality is that this window of opportunity is temporary, means that things are not so rosy for India after all. Though the Indian economy appears relatively stronger today, nothing prevents other economies from doing a few things right and getting ahead of India. Thus, foreign investment needs a new narrative that can press the government into action on these issues.

And that narrative is simple: make it easy for others to help you.

Indian businesses are in need of taking big risks so that they can create a truly awesome businesses, products or services. Taking a big risk needs big capital — a need that can neither be fulfilled by the government or the private enterprises in India. While the asset managers in India have not betted on anything beyond a few million dollars, the government will find it tough to raise money even for its flagship “Make in India” initiative.

What option does that leave India with? Only one, let the others share a significant part of your risk. Allow a corporate debt market to function. . Make it easy for foreign investors to contribute to India’s success. Of course, there is no element of altruism here; it is purely a symbiotic relationship. India needs capital while investors need higher returns.

There is no reason why India should not lay a red carpet for US or even Chinese from investing in Indian equities and bond markets. For example, HDFC — a hot favourite of the stock market over the last few years is has 80% ownership in FIIs. Some others like LIC Housing Finance or ICICI Bank have foreign share holding of around 40%.  If we can trust FIIs to finance our homes and banks, there is no reason we should block them from  investing in other businesses.

Will a liberal investment regime mean that India will be dependent on foreign investment? Yes, indeed. But that is not a problem because: one, risks can be distributed across various economies — US, China, Japan, EU. Two, we can build multiple leverage points with the investing countries by diversifying the trade relationship. And three, if multiple countries are invested in the future of one country, there is an incentive to sustain each other, pretty much how US and China have ended up being locked with each other. Moreover, well guided investment policies can easily protect India’s core interests while leaving the other areas open for foreign investments.

International relations are amoral. Instead of being hung up on ideologies on an amoral plane, better to let the others help you where you can, and accelerate the pace of gaining economic power.

Pranay Kotasthane is a Research Fellow at The Takshashila Institution. He is on twitter @pranaykotas