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Capital idea

18 November 2011 By Jeff Glekin

There are signs that India is getting serious about allowing more international funds to flow into its economy. External pressure for reform is slowly starting to tell on New Delhi’s policy makers. But shortage of capital is the key driver.

New Delhi is relaxing its stance in several ways. In the first instance, India is raising limits on foreign investment in government and corporate bonds. The change does not guarantee that more funds will materialise, of course. But money is likely to come, such is the international investment appetite for India. Increased inflows should also easing pressure on the Indian rupee – which has fallen 14.6 percent since late July.

International retail investors may also be afforded direct access to Indian stocks. Again, small investors may not want to take up the offer. Indeed, given the risks and administrative complexities there is unlikely to be a huge surge in demand. Besides, global retail investors can already access India’s capital markets through mutual funds. But the measure, if enacted, would strip away one of the final controls left in the equity market.

The government has also said it will open up its pensions. India has a healthy savings rate but 36 percent of rural savers prefer to keep cash in hand. Only 2 percent of households opt for any kind of insurance. India’s pensions sector is likely to be galvanised by international investment, while incoming industrial experience may be just as valuable. Helped by global partnerships, domestic capital may be better allocated to companies and projects which, in turn, will help raise capacity in the economy.

India needs more foreign capital. The government’s latest five year plan targets $1 trillion in infrastructure investment. The chances of meeting this target don’t look promising. The total value of new projects announced in the three months to September was at the second lowest level in the past five years, according to Centre for Monitoring Indian Economy data. Actual capital expenditure fell 45 percent in the first half of the fiscal year.

Reforms of the sort now in the pipeline do not provide all the answers. But India is helping itself by edging open its door to foreign capital.


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