What do we really want?
To accelerate the economic growth in order to generate more
employment and improve the quality of life of Indian populace, the country
indubitably needs huge amount of fresh capital.
Various economists, government agencies and expert committees
have suggested that to attain optimum level of employment Indian economy would
need to grow 8-10% CAGR for next decade or so.
The capital investment required by private sector to create
critical infrastructure to support 8-10% GDP growth is pegged in the range of
US$10-12trn over next 10yrs. Energy sector alone may need investment of more
than US$1trn over next one decade.
It is well recognized fact that such kind of long term risk
capital may not be available internally. Foreign investment is therefore a
pre-requisite for the process of economic planning, development and growth. Any
debate on path, trajectory and sustainability of growth should therefore begin
with this assumption that adequate foreign capital would be available.
A pragmatic economic development and growth plan under the
current circumstances should therefore acknowledge the following in the
preamble itself:
(a) India needs huge
amount of long term risk capital to achieve the goal of fast, equitable and
sustainable economic growth and development.
(b) Meeting of this
goal is materially contingent upon flow of foreign capital.
(c) Despite
unprecedented liquidity sloshing the global financial system, the risk capital
that could be invested for long term in an emerging market like India is scarce
and circumspect.
(d) The long term
risk foreign capital will come to India at its own terms and not at the whims
and fancy of the politicians and myopic bureaucracy.
...do we want to follow the herd?
However, what is true for long term risk capital (commonly known
as FDI) may not be true for the short term arbitrage money (commonly known as
Foreign Portfolio Investment or FPI).
This is the money that usually is not invested by the owner of
the money. Instead professional investors, who are paid to maximize the returns
for owners of the money, exercise the control over such money. Mostly, their
interest in the investment is limited to the remuneration they would get. The
remuneration is usually based on the relative performance of the money invested
over a small period of time (usually 12 to 24months).
In order to maximize their remuneration, these fund managers
would chase the relative outperforming assets in a most secular fashion - with
no regional, racial or systemic bias. They would go to communist China, chaotic
Russia, democratic but unpredictable India, war torn Africa, vulnerable Chile
& Columbia, or struggling Venezuela and Argentina.
As most of them usually move in a herd, they are able to cheer
the target market by driving up the asset prices with huge collective inflows
in a short span of time. They invariably inflict severe pain and cause huge
volatility by their ruthless collective exit.
There is little evidence to establish their long term positive
impact on the investee market or economy. However, there is enough anecdotal
evidence to show the damaging impact of the excessive volatility caused by
their collective actions.
The South East Asian economies suffered tremendously at their
hands during 1990's. Emerging markets crashed during subprime led global
crisis, when some many of them were growing at 8% to 10% annual rate.
India too had have few instances of irrational boom and bust
cycle driven by collective withdrawal of FPI money. 1998 post nuclear blast
exodus, 1999-2001 dotcom bubble and bust, 2006-2009 easy credit driven boom and
bust, and 2011-12 Grexit paranoia led selling are some major instances.
Besides, we have also seen frequent collective actions to
pressurize the government and regulators over issues such as taxation (MAT,
DTAA, GAAR) and transparency (P. Note disclosures), etc.
On most occasions the government and the regulators have given
in to the pressure, deciding to maintain the status quo. Consequently—
(a) Many nagging issues
got accumulated to keep the FPIs and agencies at confrontational path for many
years.
(b) The message that
goes to FPIs is that Indian government and agencies accord significant
importance to the stock market indices and are willing to walk extra mile for a
few billion dollars of FPI flows.
Currently Indian markets are witnessing yet another instance
pressure tactics. This time most of the domestic participants are also pleading
with the government to yield to the FPI demands. The indications are that the
government will give in yet again.
The question that may still remain unanswered is "what do
we really want?"
Do we want long term risk capital that would support out economy
in achieving sustainable high growth? Or do we only care for the fleeting arbitrage
money that would stay in India only until a better opportunity arises in some
other corner of the world.
I am certainly not denigrating the importance and need of FPI
flows to Indian securities markets. But I strongly believe that unlike the long
term risk capital (FDI) these flows must be on our terms and within the
regulatory framework designed to ensure orderly development of securities
market.
