Make it count

The global investment climate favours India

Portfolio investments into Asia (excluding Japan) have substantially increased as growth has decelerated across Japan and Europe. While India has been a beneficiary of this trend, portfolio investment flows into Taiwan and South Korea have been larger — both in percentage as well as in absolute terms. The negative interest rates, aimed at boosting growth, prevailing in Europe and Japan, and the resultant flood of liquidity, are the primary triggers for this trend of strong inflows. Several Asian economies are obvious destinations for cheap capital seeking higher returns. At the same time, investors have also turned a little wary about China’s apparent slowdown and that has led to an increased focus on other Asian economies.

 
The data indicate that Asia (excluding Japan and mainland China) has already received $33.7 billion of foreign institutional investment flow in the first eight months of 2016 compared to just $6.8 billion in all of 2015. India has received $5.7 billion of FII investments between January and August — a 93 per cent (annualised) improvement over inflows of $4.5 billion in the calendar year 2015. However, in the same January-August period, South Korea has received $8 billion (up 570 per cent annualised) and Taiwan $14 billion (up 492 per cent). Indonesia received $3 billion with a reversal of sentiments after experiencing outflows of $386 million in 2015. Thailand and the Philippines have also seen trends of strong inflows in 2016, reversing the trend of outflows in 2015.

The data, therefore, suggest that India is only one of several Asian economies that have become the focus of attention for the international investment community. External commercial borrowings (ECBs), another indicator of interest, have seen less impressive growth. In 2015-16, ECBs climbed to $17.1 billion, rising by a modest 4 per cent over the $16.4 billion registered in 2014-15. However, India has also seen substantial improvements in terms of foreign direct investment (FDI). It was a top FDI destination in 2015 and has seen enhanced FDI inflows in 2016 as well. FDI has risen to $55 billion in 2016 (first seven months), which is a lot more than either the $44 billion garnered in all of 2015 or the $35 billion in 2014.

When the numbers are all clubbed together, it does seem that investment into Indian assets has improved. Moreover, most of this data precede the recent liberalisations on the FDI front. Amendments such as the raising of FDI sector caps in defence, pharma manufacture, airport infrastructure, etc, and also more sectors being brought under the automatic clearance route should be well received. The passage of the GST constitutional amendment Bill has further improved sentiment. Many potential investors have also been waiting for sundry tax-treaties to be reworked. As the treaties are renegotiated, portfolio investors will start to re-enter Indian markets.

However, India still has an extremely complicated regime both in terms of tax laws as well as bureaucratic red tape. Moreover, the physical infrastructure is still very poor. Yet, the global investment climate does favour India, as one of the several Asian destinations which promise high growth. This government’s gradual approach has gained some traction, but it should accelerate the pace of reforms in order to exploit this window of opportunity.