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| India needs foreign capital to meet growing demand: Macquarie |
| Press Trust of India / New Delhi Nov 12, 2009, 18:02 IST |
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Domestic demand in India is rising, but the country does not have the matching supply, making it essential for it to rely on foreign capital, says international research firm Macquarie.
The research firm says there is strong structural drivers of growth in India amid improvement in political scenario. "India is in the early stages of a new economic cycle... It offers a delectable mix of improving political backdrop, strong structural drivers of growth, and accelerating domestically-driven growth," the report said.
The report said that although the Indian economy is second only to China in terms of domestic demand, supply side constraints will make it rely on foreign capital. "Unlike China, India has a supply constraint and will have to continue relying on foreign capital... Barring any dislocating effect of global events, foreign inflows should continue although at a slower pace," the report added.
Also, the overseas capital inflow in the form of foreign direct investment (FDI), investment in equities and remittances would help the Indian economy overcome the supply side constraint. The report noted that the stimulus-driven domestic economic policy acted as an important tool for raising capital when the domestic bank lending weakened.
"The broader local asset reflation has been instrumental in raising capital for companies at a time when local bank lending has been weak," it said. "The government will have little choice but to begin consolidating its finances in the next year's budget that will be announced in February 2010. "Overall, reforms will be uneven and the pace uncertain, but the direction is entrenched, especially on disinvestment. Fears over the outlook for the government's fiscal health have been legitimate, but often exaggerated," Macquarie said.
Being a capital-starved economy, economic reforms in the country — no matter how slow and uneven — are likely to boost capital inflows on a sustained basis, it noted. The increasing FDI inflow in the country has also led to the Indian currency appreciating against the US dollar. Recovery of credit markets would see overseas borrowing by Indian firms picking up.
"Overseas borrowing by Indian companies will also pick up, as financial market healing continues and as expectations about the rupee's appreciation against the US dollar solidify," the report noted.
Barring global economic dislocation or heightened risk aversion, it is quite likely that the Reserve Bank of India will have a challenging time managing capital inflows. However, at this time, it does not appear that it will be totally overwhelmed by the magnitude of capital inflows, as it was in FY'08, Macquarie said.
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