It is good to notice that foreign investors — in the both primary (FDI) and secondary (FPI) markets— have renewed their interest in India. For the first time, FDI-boosted foreign exchange reserves with RBI are being used to fund India’s current account deficit. The stock market is witnessing fresh FPI raids. BSE’s 30-share sensitive index (Sensex) is hovering around 30,000. With stocks rallying to record peaks and the rupee appreciating to a 20-month high on the back of $13 billion moving into the stock and bond markets this year so far, India’s market capitalisation has hit a record $1.92 trillion.
Analysts say the renewed surge in foreign investments marks the rising overseas investors’ confidence in Prime Minister Narendra Modi’s government, especially after BJP’s latest assembly election victory in Uttar Pradesh, India’s largest and most populous state. Many have predicted that BJP will romp home in the next 2019 national election, indicating continuity of the government’s economic policies. The government and its investment promotion agency, Invest India, are in talks with close to 300 companies to channelize investment of nearly $62 billion into the country. Chinese companies alone — manufacturing from toys to cellphones — propose to invest over $20billion.
However, the exuberance over growing foreign direct investment (FDI) and foreign portfolio investment (FPI) in India appears to be somewhat irrational. It will be naive to think that foreign investors are rushing to India to build its economy. The ground realities on India’s real economy continue to be rather depressing. Major public sector companies (PSUs), which contribute substantially to the country’s basic economy covering a major portion of the core and infrastructure sectors, are facing a demand crunch. Many of the PSUs, key to India’s lasting economic growth, are languishing. Coal production during 2016-17 has missed the target. Power generation tempo has slowed down. Engineering and capital goods sector is nearly stagnating. Finished goods imports are surging. Several pet Narendra Modi projects such as ‘Clean Ganga’ are behind the target. Infrastructure projects are yet to pick up speed. Industrial credit off-take is slow despite lower borrowing rates. RBI has raised reverse repo rate to mop up surplus funds with banks. Real estate developers are facing glut in several markets. Public sector banks are saddled with high NPAs. And, finally, India’s industrial entrepreneurs are less enthusiastic to commit funds to new projects.
On the contrary, many Indian investors, using mostly loan funds from state-owned banks, are turning to other countries to invest in core and infrastructure projects there. The pack of such Indian investors abroad is led by Gautam Adani of the Adani group who is investing billions of dollars in Australia and Malaysia in mining, port development and infrastructure. A good part of these dollars are taken in exchange of Rupee from RBI’s forex kitty supported mostly by FDI and FPI inflows. Only a few days ago, major Indian and Malaysian companies in the oil and gas, infrastructure and engineering sectors signed investment proposals worth $36billion. Companies such as Adani Ports, Andhra Pradesh Gas Distribution Corporation and Natco Pharma signed 31 memoranda of understanding (MoUs) with Malaysian companies and industry bodies to facilitate these investments. Malaysian Prime Minister Najib Razak, who was in India, was very happy. One wonders why those Indian companies are not equally enthusiastic about investing enough in similar important projects in India.
In fact, good number of Indian entrepreneurs are selling their strategic assets, some even bearing security implications such as communication towers, to foreign investors with little intervention from the union home ministry and other concerned departments. Several major telecom companies have lately sold their tower business to foreign investors (FDI) to reduce their debt burden. These towers are strategic assets for both the telecom industry and the country. Similarly, increasing number of foreign airlines are investing (FDI) in India to operate in domestic routes as India is witnessing the world’s highest air travel growth rate in the last 23 months in a row. FDIs expect quick returns. They would like to invest in assembly lines and going concerns, taking over companies as they did in India’s cement industry, air-conditioning and refrigeration business, civil aviation and other low-technology products.
This is absolutely fine and most welcome. In fact, the record surge in FDI inflows is being used by companies and the central bank also to redeem past borrowings. These include a near $26billion outflow due to redemption of special dollar deposits India raised from NRIs in 2013 to prop up a free-falling rupee at the time. Gross FDI from April 2016 to January 2017 had totalled $53.3 billion, compared with $47.2 billion in the corresponding period, last year. These FDIs will grow the country’s GDP, but not necessarily in the direction that India as a nation would like to have for its sustainable growth that would increasingly include the population beyond the 300-350 million rich and middle-class.
The cellphone boom, high excitement over big-budget IPL and ISL and growing craze for fashion wear, perfumes, liquor and night club parties till wee hours can’t ensure a sustainable economy in India. Instead, investment in quality education, healthcare and social and economic infrastructure, environment protection and sustainable development that’s what is most desirable. Foreign investors are not here to spend money on national development. They are only interested in their businesses and make good and fast money. If outside equity investors are not coming to invest in core and infrastructure sectors, the government must come out with programmes that will substantially boost the real economy and GDP growth on desired lines. (IPA)