As reported in newspapers on Wednesday, the finance ministry has allowed qualified foreign investors to invest up to $1 billion in corporate debt bonds. The announcement by itself is insufficient and by itself, the measure may not lead to higher inflows. The reason why foreign investors are leaving India and inflows are weak has to do with the government’s macroeconomic mismanagement. Relaxing rules to permit inflows into areas closed so far does not amount to much. This is nothing more than a desperate attempt to somehow draw large and non-volatile flows of dollars into the economy to prop up the weak rupee.
The move comes after a tsunami of analysis, in the last few weeks, over the merits and demerits of having a weakening rupee. Exporters at least, say the non-alarmist voices, should be pleased. But again this paper reported on Wednesday that weak global demand and high import content of exports seem to have dimmed even those prospects.
Meanwhile, the somewhat inelastic import of oil and gold continues to widen trade deficits. It sounds like a potent cocktail of problems. But there is a domestic solution to deal with many of them.
Much of this hunger for gold is powered by India’s large pool of domestic savings that rarely finds its way into the economy. Households are wary of parking funds in any form except cash, gold or other relatively illiquid forms. So while citizens sit on pools of money and lockers full of jewellery at home, companies lament a thin debt market and an equity market dependent on shifty FIIs.
For years, there has been talk of somehow coaxing households into investing in financial instruments that can lubricate the economy. But direct participation in equity markets continues to be very poor. According to one estimate, in 2011, less than 2% of the population participated in equity markets. In the US this participation is around 18%, with China already at 10%.
Now is the time to take measures to change this. If these savings can be weaned away from gold and put into companies and start-ups, the impact on the economy will be substantial.
This will not be easy and the changes required can be effected only over the longer term, but this is the time to take the badly needed initial steps. Lack of retail investor participation in equity markets has much to do with lack of investor education in these matters as much as it has to do with fears of being hoodwinked. There are regulatory solutions to the problem. At least a start should be made to change this. And a difficult economic situation is often the best opportunity to initiate changes that seem impossible in good times.
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