×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

The cost of foreign investment

The cost of foreign investment
Comment E-mail Print Share
First Published: Thu, Sep 02 2010. 09 28 PM IST
Updated: Thu, Sep 02 2010. 09 28 PM IST
At a time when foreign investment flows threaten to flood India’s economy in some quarters, is there a need to relax the regime overseeing them?
A working group constituted by the ministry of finance, led by UTI Asset Management Co.’s U.K. Sinha, thinks so. In a report published this week to look at these foreign flows, the group has reviewed the current regime and recommended changes, much of them aimed at getting rid of the bottlenecks that restrict foreign finance.
Policymakers should pay attention to some of the bottlenecks which do add burdens without good reason. Consider taxation. Levies such as the stamp duty have proved to be a thorn in the side of a more robust debt market at home. A capital gains tax, for instance, may well be persuading a foreign pension fund to route money from abroad suboptimally.
But a lot of bottlenecks for foreign finance actually exist for good reasons.
The group, for example, recommends that there shouldn’t be caps for foreign investors to buy Indian debt. Yet, panicked foreigners amid a crisis will pull out debt, sending interest rates soaring, affecting much more than the borrower of that debt. That’s why it matters what asset foreigners invest in: Debt and currency have broader implications than simple equity, while foreign direct investment is more stable and longer term than portfolio flows.
The group doesn’t think such distinctions should exist—that for certain qualified foreign investors, regulators should remain agnostic to the vehicle of investment they use. On the contrary, regulators should keep making such distinctions. The question isn’t that of an optimal micro-market anymore; the macroeconomy is at stake.
This issue harks back to the old debate on opening up India’s capital account, where the Reserve Bank of India (RBI) has stuck to a cautious approach, calibrated to changing conditions and demands at home and abroad. If India keeps running large deficits, and if easy money in the West currently turns foreigners desperate for higher yield Indian debt, should we really be widening the doorway at this point?
The working group—which doesn’t include RBI members— tries to steer clear of this old debate, but no discussion on foreign flows really can. So before these recommendations are formalized, it would help to take RBI’s viewpoint into account.
Foreign flows: boon or bane? Tell us at views@livemint.com
Comment E-mail Print Share
First Published: Thu, Sep 02 2010. 09 28 PM IST