A welcome surge

Govt must leverage overseas investor confidence

The last quarter of the 2016-17 saw a revival in overseas portfolio investments. In March alone, foreign portfolio investors (FPI) bought a net Rs 30,906 crore of equity and another Rs 10,881 crore of debt. Between January and March 2017, FPIs bought a net Rs 39,631 crore of equity and Rs 28,995 crore of debt, making it the best quarter since the fourth quarter of 2014-15. For the whole year, foreign investors pumped in a little over Rs 49,000 crore into the Indian capital markets, in contrast to the hefty sum they pulled out in 2015-16. This surge has happened despite FPIs being net sellers in the demonetisation quarter — October to December 2016 — and indicates a change in attitude among foreign investors towards India. There are multiple reasons for this optimism. Globally, the consensus is that emerging markets (EMs) will outperform others this year. Thanks to dampers such as Brexit and the US Federal Reserve hiking interest rates, EMs across the board are expected to outpace the EU and the US in terms of economic growth. More specifically, India is expected to grow considerably faster than most EMs. 

To be sure, it is not just the fast-growing economies, such as India, China and Indonesia, that have attracted strong FPI inflows. Brazil, Argentina and South Africa, which are all experiencing slowdowns and political turmoil, have also seen FPI interest. Stock markets have been euphoric. The Vanguard Emerging ETF, which carries an exposure to 4,250 stocks across multiple EM stock markets, has returned 11.5 per cent in the last quarter. Rupee-denominated indices have returned over 12 per cent and the rupee has strengthened as a consequence of FPI inflows. The dollar-denominated EGShares India Small Cap ETF, which is focused on small Indian stocks, has returned over 30 per cent in the last quarter. 

In country-specific terms, overseas investors with an India focus are laying great store by the implementation of the goods and services tax (GST), which is expected to expedite inter-state trade and accelerate GDP growth. But many FPIs have also pumped in money during the fourth quarter of 2016-17 in order to avoid incurring potential higher tax liabilities during 2017-18. India is also reworking multiple bilateral tax treaties and the new general anti-avoidance rules (GAAR) came into force in April. In 2017-18, FPIs operating out of the three most popular locations of Cyprus, Singapore and Mauritius will have to pay the short-term capital gains tax on profits made in India. There are also fears that opaque instruments such as participatory notes (PNs) could soon come under scrutiny. Therefore, some of the FPI investment is front-loaded and there could be a slackening of inflows as the new treaties kick in. 

However, beyond all these tactical considerations, the basic rationale for India-focused investments remains: The economy is growing at a reasonable pace and the latest Reserve Bank of India projections suggest that gross value added (GVA) growth will accelerate by about 0.7 percentage points in 2017-18. As against American stocks, which are trading at record levels, Indian stocks are seen as good buys. However, this is “hot money” — it could flow out as quickly as it flowed in. It is incumbent on policymakers to leverage this investor confidence in India to accumulate more foreign direct investments as well.