Little under a fortnight ago, the Reserve Bank of India released the balance of payments (BoP) statistics for 2006-07. Even the optimists were surprised. The data showed that inward-bound foreign direct investment (FDI) grew by 153% to a record $19.5 billion last fiscal; and with outgoing investment rising 279% to $11 billion, net FDI has touched $8.4 billion. Suddenly, India seems to have been pitchforked into the big league as clearly, the story has never read better.
But RBI has now let us know (Mint, 9 July) that the inflow number includes private equity. It has adopted the norm laid down by the International Monetary Fund for compiling balance of payments statistics—inclusion of private equity, provided it accounts for more than 10% of the voting capital of the company. Private equity is the latest creation from Wall Street and has aggressively made its presence felt globally; like the name suggests, these firms collate funds from large investors and then direct these investments either by acquiring stakes in unlisted companies or invest in firms that will get unlisted. They prefer high growth or infrastructure projects, which have a clear and assured stream of cash flows. For the slew of infrastructure projects planned in the country, this offers major hope.
However, given the nature of these flows, unlike brick and mortar FDI, these may not be readily embraced by some key political constituencies in the country. Since private equity funds are yet to score a multibillion-dollar deal here, the operations of private equity funds have largely stayed under the radar. But given their growing presence, it is imperative to gauge the size of these inflows.
Unfortunately, the central bank does not have the disaggregate data, or at least that is what it claims, to share with us. But going by anecdotal evidence and industry estimates it can be hazardous that private equity inflows in the last fiscal aggregated at least $6 billion. Netting it out would obviously make last year’s FDI number less of a headline.
Does this change anything? There is no clear answer as yet. It has raised in its wake a host of questions, though.
First, the inclusion of private equity reflects that FDI has many colours. The popular notion is that FDI entails a strategic investment in business that presumes the infusion of technology and money. Private equity, on the other hand, comes from a financial investor who is certain to exit—that exit could vary from five years at the minimum to a maximum of 10.
Second, as a consequence, private equity inflows inevitably impact money supply, unlike FDI, which goes towards capacity creation. Additionally, it will not be as well calibrated as FDI, as it will accrue in fits and starts, subject to emerging opportunities. This means more uncertainty on the macro economic front, especially for a central bank that, like the rest of its tribe elsewhere in the world, has been battling the problems of plenty.
Any lessons here? It is clear that RBI has erred on the transparency front. It is one thing not to possess disaggregate data, and another not to state it while releasing the BoP. No analysis of global financial flows can be complete without looking at private equity. It dominates the face of finance in the 21st century.
It is apparent that India is a growing destination for private equity inflows. Indeed, particularly for the infrastructure sector where investment demand is estimated at $350 billion, private equity funds, with their deep pockets, are an ideal source. The government, too, by gradually putting in place transparent regulatory norms and competitive bidding, is creating ideal conditions for private equity inflows chasing assured returns. Since all this suggests a lot more of these funds coming in, RBI, even at the risk of not being politically correct, should tell the entire story.
(Do we need more clarity on the FDI data? Write to us at firstname.lastname@example.org)