India better bet for long-term FDI

Tags: News
Long-term overseas investors seem to be more bullish on India than portfolio investors.

A comparative analysis of foreign direct investment (FDI) and foreign institutional investors (FII) inflows into the country indicates that the former, who view investments from a long-term perspective, are more bullish on the country’s economic prospects than the portfolio investors.

According to the government data issued Friday, FDI inflow for this financial year up to October-end stood at $14.78 billion, which is down 27 per cent from $20.29 billion in the same period a year ago.

However, this data compares well with foreign inflows into the country’s stock market. Despite the surge seen into the stock market, April-October period saw inflows worth only $9.19 billion, according to Sebi data.

A similar trend was noticed even in the last financial year, when FDI inflows stood at $36.5 billion compared with about $9 billion into equity markets. Significantly, the year-ended March 31, 2012, saw the government facing a policy logjam and unfriendly tax proposals.

At a recent conference, Rajiv Lall, vice-chairman and managing director of Infrastructure Development Finance Company (IDFC), said, “Usually, FDI and FII inflows are neck-and-neck. But last financial year’s higher FDI inflows indicated that long-term investors are still positive on India’s long-term growth story. Short-term investors, however, are cautious.”

Foreign portfolio investors are known for their knee-jerk reactions. For instance, the global financial crisis of 2008 saw FIIs pulling out nearly $10 billion, triggering a major fall in the Indian stock indices.

FDI for October grew by over 65 per cent to $1.94 billion on a year-on-year basis, according to the department of industrial policy and promotion (DIPP). This is significant because it comes after the government’s mini-reforms in September.

In October 2011, India attracted FDI worth $1.16 billion.

Sectors, which received large FDI inflows in September, include services ($3.6 billion), hotel and tourism ($3.11 billion), metallurgy ($1.21 billion), construction ($691 million) and automobiles ($743 million).

Thanks to the global liquidity surge due to quantitative easing-3 (QE3) from the US Federal Reserve, European Central Bank’s (ECB) bond-buying programme and the domestic economic reforms unleashed since September, the Indian equity markets are witnessing a surge in foreign inflows.

For this calendar alone (January to December 21), FIIs pumped in over $23 billion. FIIs own about 17-20 per cent of the Indian equity markets, by far the biggest single investor group after promoters.

It is likely that the FDI figure for November will show further growth when the figures are released next month.

BlackRock, world’s largest asset manager, in a note, said it was bullish on the Indian economy and the equity markets in 2013. It said the latest reforms to open up the country to investment may be the real thing at a time when many investors are skeptical. The other reasons for betting on the country include India’s entrepreneurship and need for infrastructure investments. Given India’s dependence on imported energy, a weaker or stable oil price is essential to this idea.

Further, a recent government initiative to transfer subsidies and other entitlements directly into people’s bank accounts is a positive for growth. It could result in efficiency gains as the programme to provide each Indian with a unique ID number expands, it said.

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