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In equity markets stocks are available at the unimaginable prices now, thanks to the panic
selling particularly by Foreign Institutional Investors (FIIs). Since January 2008, they have
been net sellers in equities of Rs. 51,463 crore and since last six months they have been
continued to crowd the sell counters. So, is the interest in India growth story dying an
untimely death? Are the days of rosy pictures and obsequious prognosis over? Yes, to
some extent, India’s growth will slow down and many projects, excellent growth in earnings
will halt in short term. Certainly, in long term, India is set to grow exponentially. It’s intriguing
then why FIIs are cashing out on such a large scale? The reasons are many. Few of them
are- increased risk aversion amongst overseas investors, attempts to make exorbitant
losses incurred during subprime crisis good and permeated fears of deep global recession.
Contrary to this, Foreign Direct Investment (FDI) is consistently increasing. Since January
this year till July FDI equity inflows grew by 90% over the corresponding period in previous
year. The total FDI investments in this period was Rs. 98,860 crore against Rs 51,969 crore
in the corresponding period in previous year. A majority of this part comes from tax heavens
like Mauritius with 43.5% share followed by Singapore and the US each with 8% share.
Sectors that attract most investments are services sector (21%), IT (12%), construction and
telecom each over 6% of the total FDI inflows in rupee terms. States that usurp this pie are
led by Maharashtra (32%), NCR (18.2%), Karnataka (7%) and Tamil Nadu (6%).
Further, a total of 40 proposals involving FDI worth Rs.1, 498.51 crore was recently cleared
by the Finance Minister, following recommendations from the Foreign Investment Promotion
Board (FIPB). It includes Suzlon Energy (Rs 1800 crore), TPG India (Rs 806 crore) and
Pepsico India (Rs 249 crore). FIPB is a body that recommends FDI proposals,that are not
routed through the automatic path, to the Finance Minister. There are various FDI
proposals pending FIPB or CCEA approval. Considering the fact that growth is slowing
down, the government will be under pressure to expedite things to clear more FDIs to
bolster the growth particularly the infrastructure sector. There are other sectors which may
be opened for FDI such as defence and education. The government will carry on reforms
but then country is going to elect new government next year and it also depends much on
the new government and its stability.
Since FY06, there has been an unmistakable boom in investment. Two indicators tell the
story. The saving rate and the investment rate in FY04 were 29.8% and 28.2% respectively.
According to estimates made by the Economic Advisory Council to the Prime Minister, they
would be 35.6% and 36.3% respectively by the end of FY08. The savings rate is expected
to decline to 34% in FY09, according to the CMIE. This is significant because developed
countries like the US are witnessing negative savings rates. Unlike countries like Japan and
China that are dependent on exports to the US and Europe, India is a domestic economy.
Barring IT sector, India has very low dependence on the US. There are international players
who see huge growth potential in India and are set make investment in India unperturbed by
the slowdown concerns.
We see fanatic selling pressure these days. We reiterate our view about the strong
fundamentals of India which is the bottom line of the report. FIIs will return to the Indian
Deepak Tiwari markets once the dust settles.
Research Analyst
deepakt@arthamoney.com
T: + 91 22 4063 3032
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