New Delhi: Prime Minister Manmohan Singh’s pledge to reform the financial sector evoked lively debate at a session on private capital flows at the World Economic Forum’s India Economic Summit, which concluded on Tuesday.
Kevan V. Watts, country head, Bank of America-Merrill Lynch, India; and Ashok Jha, chairman of MCX Stock Exchange, found common cause when their views on policy priorities and stock markets converged.
Watts and Jha, who was earlier the top bureaucrat in the finance ministry, felt domestic financial sector reforms, which could enhance the efficiency of capital allocation, had to be the priority.
The bulk of India’s investment is funded through domestic savings, which is now around 38% of gross domestic product. Even in India’s best year for net foreign direct investment, 2007-08, the inflow was $15.5 billion, less than 2% of gross domestic product (GDP), Jha pointed out.
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It did not make sense for the debate on private capital flows to draw distinctions between foreign and domestic capital, Watts said. “Reform has to make the financial system recycle Indian capital more efficiently,” he said. Once the financial architecture did a good job of allocating Indian savings efficiently, foreign capital would follow, he added.
Jim Quigley, chief executive officer of Deloitte Touche Tohmatsu echoed Watts’s views on the inappropriateness of drawing distinctions between capital according to origin. Any growth engine needs multiple sources of capital, he said.
“Capital stays where it’s well treated, just like all of us,” Quigley said, directing the debate to the regulatory environment. If the regulatory environment is characterised by mistrust of other stakeholders, it could create problems. In the new environment, the capital market is going to exist at the intersection of government, investment and finance, he said.
While the bulk of domestic investment is financed through household savings in India, foreign capital has played an important role at the margin.
Robert Morrice, Asia Pacific chairman and chief executive of Barclays Plc, pointed out that the percentage of foreign direct investment to GDP had increased after 2006, a phase when the economy recorded the fastest average growth rates.
“India would need foreign capital to drive growth,” said Tejpreet Singh Chopra, India chief executive of General Electric Co.
The environment for foreign capital flows following the unprecedented loosening of monetary policy by central banks around the world as an antidote to the financial crisis could be an unknown factor, Watts felt.
“I don’t think any of us understand how we will extricate ourselves from this,” Watts said.
A fallout of all the measures taken could show up in the foreign exchange market. “Government will have to think on how it will manage the rupee,” Watts said.
As discussions in earlier sessions suggested, one factor which enhances India’s competitive advantage in attracting foreign capital is its scale and growth projections.
Watts did not see India competing very hard for foreign capital as economic growth rates would pull it in.
When the discussion swung towards segments of the capital market in India, some of the panellists felt equity markets would gain in importance.
At a regional level, Morrice said Asia is seeing a move from lending to capital markets. Within India, Jha and Watts said small industries would benefit from a deeper and wide equity market as it would improve availability to capital.