We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Seeing red

8 June 2012 By Jeff Glekin

India needs to roll out the red carpet, not smother foreign investors in red tape. That sentiment was expressed by Narendra Modi, controversial opposition politician and chief minister of the state of Gujarat, in India’s Economic Times this week. The government may be listening a little. An initiative to open India’s capital markets to more individual investors is a good incremental improvement. But the government is dreaming to think this change will attract $45 billion of extra capital a year.

Foreign institutional investors have had access to the Indian securities markets since 1992. The stock market is already the most open route for foreigners to invest in the Indian economy. Overseas investors who do not qualify for direct investment in the country can buy depository receipts in Indian blue-chips such as Tata and Reliance in London and New York. They can also buy futures contracts in Singapore.

More direct access for foreign investors is certainly welcome. The regulatory loosening will reduce complexity and enhance flexibility. But the pot of money waiting to be invested probably isn’t anywhere near as large as the government suggests. Over the past five years, the highest total inflow from portfolio investment was $32 billion, in 2010. Even if the new route proves successful, it is likely that much of the money will be cannibalised from existing channels.

The finance ministry claims its estimate – $90 billion over two years – reflects feedback from meetings. It should exercise better judgment. The only way to attract that much new money is to change the fundamentals of the economy. Getting rid of slivers of red tape is good, but over-promising and under-delivering risks damaging credibility. The ministry should work on more aggressive cuts in red tape over the wider Indian economy.

 

Email a friend

Please complete the form below.

Required fields *

*
*
*

(Separate multiple email addresses with commas)