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India invites foreign investment

Published by The Straits Times, Singapore on 2004-04-24

NEW DELHI--Earlier this week, Mr Arun Jaitley, the suave Indian minister for law and company affairs, appeared on a TV show to underscore the country's attractions for foreign investors. He rolled off impressive points: an educated middle class of more than 300 million--nearly a fourth of India's total population--that was fluent in English, the language of globalization; cheap labour and production costs; substantial tax concessions; a growing consumer market; and the ambition and drive of the under-35 cohort, who comprise 75 percent of India's ethnically and etymologically diverse people.

"And we have a vigorous equity market," Mr Jaitley said, almost as an afterthought. "It welcomes investment." But he quickly suggested that the figures for foreign direct investment (FDI) could be healthier. India gets some US$3 billion in FDI annually, well below neighboring China's figure of US$53 billion, and almost half of it received eight years ago when the global investment climate seemed more favorable for emerging countries. He was hoping, Mr Jaitley said, that the FDI figure would more than triple to at least US$10 billion, a figure that many Indian economists opine is highly optimistic at a time when the global economy is still sputtering.

The minister must certainly have been heartened by the news, just hours after his TV appearance, that the world's biggest pension fund, the California Public Employees retirement System (CalPERS), would put money in the booming Indian equity market. Earlier, the fund--which has some US$166 billion in assets--had been reluctant to turn to India because of reservations concerning the speed of economic liberalization and structural reforms.

These reforms--which began a decade ago--are intended to dismantle a "license Raj" of heavy bureaucracy and red tape that accumulated since independence from the British in 1947. Successive Indian governments expanded the state's role in economic development, citing the need for benign socialism in a country where more than half the population earns less than the equivalent of US$1 a day.

But now, said Mr Sean Harrigan, president of the fund's board of administration, CalPERS was satisfied that India has "made significant progress" and demonstrated that it now meets "our high standards for investment." He did not disclose how much money CalPERS would put into the Indian market, but it is generally believed that CalPERS has more than US$2 billion invested in emerging markets such as Argentina, Brazil, Chile, Czech Republic, Hungary, Israel, Jordan, Malaysia, Mexico, Poland, South Africa, South Korea, Taiwan and Turkey. Now it has added India, Peru and the Philippines.

The decision by CalPERS to enter the Indian market has brought good cheer to the ruling 22-party National Democratic Alliance of Prime Minister Atal Behari Vajpayee in week that saw the start of a general election. More than 650 million voters will decide who among 5,000 candidates from 700 parties and groupings will occupy 543 seats in the parliament. While Mr Vajpayee's coalition is expected to return to power in this Westminster-style parliamentary democracy, the size of its victory is certain to affect the tachometer of economic policy. While the government's openness to free markets and foreign investment are generally lauded by the financial community, the role of international money here is still viewed by the largely rural population and its political representatives as somewhat sinister.

It's such longstanding suspicion of foreign investment that dismays potential entrants into the Indian economy, whose growth rate has averaged a healthy 6 to 7 percent annually in the last few years. The equity market has much to offer, say economists such as Dr. Arvind Virmani, director and chief executive of the influential Indian Council for Research on International Economic Relations in New Delhi. The market cap of the Indian market is equivalent to 50 percent of the country's gross domestic product (GDP) of US$550 billion. But given the fact that some large companies in India are still unlisted, this ratio could be even higher up, Dr. Virmani said.

(The list of market cap ratio to GDP is headed by South Africa, which enjoys a market cap to GDP ratio of 176, according to the World Bank. The bank says that a majority of the countries that have higher market cap relative to GDP are smaller markets such as Brazil, Chile, Malaysia and Jordan. The Chinese market cap relative to GDP is at 38 percent, while Russia's stands at 43 percent, according to Bank estimates.)

Indian economists also fear that the current Indian stock market valuations could intimidate many foreign investors who may find other emerging markets cheaper on benchmarks such price-earning (PE) multiples and market capitalisation ratio to GDP. One economic survey pointed out that while Indian markets are quoting a PE multiple of 18, Russian and Korean markets, which have been among the best-performing markets in recent years, are available at a PE multiple of 11.1 and 15.7 respectively. (A PE multiple is the relationship between a company's earnings and its share price; it is calculated by dividing the share price of a stock by its earnings per share for a 12-month period.)

Nevertheless, investors continue to be drawn to the Indian equity market because the country's private-sector companies offer strong returns on equity capital, as measured by the price to cash-earnings ratio, which indicates the market's expectation concerning a corporation's financial health. (The figure is calculated by dividing price per share by cash flow per share.)

India is clearly hoping that the decision by CalPERS to enter the Indian equity market will influence other big investors. Not long ago, Warren Buffett, the U.S. billionaire whose Berkshire Hathaway company takes big stakes in emerging markets, bought into two Fortune 500 companies--Reliance Industries Ltd (RIL) and Indian Oil Corporation (IOC)--and the country's leading oil producer Oil and Natural Gas Corporation (ONGC). The size of his stake was not specified but it is believed to be around US$30 million.

Mr Buffett's purchases came after Berkshire Hathaway invested US$42 million in Petro China, the largest state-run oil and gas company in China. That investment increased his stake to 9.1 per cent in the company.

But there's more money available for emerging markets such as India in the international community. According to the United Nations Conference on Trade and Development (UNCTAD), the foreign direct investment figure globally was US$653 billion in 2003. Of this, the United States received US$86.6 billion, and the Chinese share was US$53 billion, or 8 percent.

Can India and China expect to get more by way of FDI?

"Yes," Harvard economist Shang-Jin Wei said in a recent paper for the World Bank. "If they can manage to seriously address the corruption and red tape problems."

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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