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5 things govt needs to do to stop FIIs from leaving

FIIs have been patient with the government, but many may lose it if world markets keep on falling.

Shishir Asthana  |  Mumbai 

Investor image via Shutterstock

One good that has come out from the recent stock market crash has been that it has woken the government from its slumber. Finance Minister Arun Jaitley tried putting up a brave face saying that the market crash was "transient and temporary". Jaitley said both the government and RBI were watching the situation and hoped it would stabilise soon as domestic macroeconomic indicators remained strong.

But the crash saw over Rs 5,000 crore of investment being withdrawn by foreign institutional investors (FII) in a single day. The largest outgo of fund by FIIs after the present government came to power acted as a whip. A day after the crash, government realised that it will have to act rather than speak. Ministers were quoted saying that they are open to consider a joint session of the parliament to clear GST after the monsoon session was a washout.

Though the sell-off has been attributed to crisis in China and volatility in currency markets, the fact is that India along with every other country has been impacted and will continue to do so till China stabilises. Only countries with strong fundamentals will relatively survive the crash.

Till date we have seen only sound bites coming from government offices. Few actionable measures have been taken apart from those taken by Railway and Power ministry. FIIs have been patient with the government, but many may lose it if world markets keep on falling.

We look at five actions that the government will have to take to prevent FIIs from leaving.

1. Clear GST as soon as possible: Though the opposition, especially the Congress is at fault for making the Monsoon Session a complete washout, some blame also lies with the government for its inability to handle the situation. In the end, the rollout of GST has been hit and might be delayed by a year. Investors have been patient till date and have given the government a long rope only because there are fewer avenues of growth available globally. Had China been in a stronger position or there were other markets that were stronger, FIIs would have dumped Indian shares.

2. Ease of doing business: Improving the ease of doing business has been talked about from almost the first speech on the economy Prime Minister Narendra Modi has made. Although a number of announcements and commitments for investments have been made every time Modi travels abroad, there is no movement seen on the ground of the money arriving in the country.

3. Power sector reforms: To his credit, Power Minister Piyush Goyal addressed the immediate problem of the power sector by arranging coal supplies from domestic sources and international ones. But while the supply side of the issue has been handled, the demand side has not been. This means that the problem remains where it was. Unless the distribution companies are strengthened enough to buy power, no amount of coal supplies will solve the issue. Banks too are sitting on a pile of non-performing assets from the distribution companies. Till the power problem is sorted out and cheap and assured power supply is available, ‘Make in India’ will remain a dream.

4. Banking sector reforms: Banks, both private and public are not comfortable lending money to corporates. They prefer staying invested in the comfort of low-yielding government bonds, way above the statutory limit, to deploying the funds in the market. High non-performing assets are preventing banks to be brave enough to lend. Public sector banks are afraid to grow because they do not have enough capital on their books to meet the permissible level. The government has announced in the recently announced banking policy measures that they would be capitalising the banks, but the need is urgent. Banks are preserving their profits and are not passing on the interest rate cuts announced by the central bank in order to shore up capital. The government can kick-start the lending process by capitalising the bank adequately. Being the promoter of these banks, the government will have to invest money upfront before asking the banks to look for money from other sources. If a promoter is not willing to invest money in its own banks, why should anyone else?

5. Infrastructure push: Infrastructure growth has been talked about more by the present government than by any before it. But we are yet to see action on the ground. Steel and cement consumption and prices do not suggest a pick-up in activity. Infrastructure has a high-multiplier effect on the economy. Unless the government revives this sector fast, broad-based growth will be missing from the economy.

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First Published: Wed, August 26 2015. 12:57 IST
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