It is an irony that in an age of extreme capital glut, India should be fretting about the lack of capital investment to boost growth. True, our savings and investment rates have plummeted, and we also have a double balance-sheet problem which is yet to be fully corrected. But globally the one commodity that is being doled out at firesale prices is financial capital.

Two years ago, three Bain & Co partners and executives wrote an article in the Harvard Business Review suggesting, inter alia, that we are entering an age of “superabundant capital", with global financial capital estimated at 10 times global GDP. And it is rising. They wrote that financial capital was not only plentiful but also cheap – available at close to inflation rates. That means real rates close to zero for top companies.

Since that article appeared in the HBR in early 2017, capital has, if anything, become cheaper everywhere as all countries grapple with growth challenges. Globally, according to a Bloomberg report, nearly $17 trillion bonds yield negative returns. If you buy these bonds today, you will get less than what you paid for when they are redeemed.

The European Central Bank reduced its rate for bank reserves – money held by banks with it – to minus 0.5%, and will begin buying $22 billion worth of bonds from November in another bout of quantitative easing. In the US, the Fed may cut rates sooner than later to boost growth as Donald Trump’s trade wars slow the economy. US 10-year bonds are quoting at barely above 1.5%, and could trend lower if the Fed turns dovish. China has been aggressively cutting rates, and so has India, even though real interest rates at home are still well above the inflation rate.

The signals are obvious for anyone willing to see them. The world is not suffering from any shortage of capital, even if it seems so in India. If anything, the world is suffering from risk-aversion. This implies that if a country is willing to address the risks, massive capital could flow into India. Our real problems will be in handling volatile exchange rates, preventing a collapse in exports, and sterilising the inflows.

We can’t have it both ways. We can’t say we lack investment, and still remain cautious about where the money is coming from. To use Deng Xiaoping’s words, it doesn’t matter what the colour of the cat is, as long as it catches mice.

It is in our interests to encourage long-term capital flows when there is a lot of “patient capital" – capital willing to work on lower returns with longer payback horizons – waiting in the wings for the right opportunity. Consider the sheer number of European of Japanese pension funds stuck with investing in negative yielding bonds.

The primary risk that needs addressing is obviously the exchange rate for foreign investors. If we can assure investors that these risks can be cheaply hedged, capital will be keen to flow in, not just in technology start-ups and infrastructure, but also into companies marked for resolution or liquidation at the insolvency and bankruptcy courts.

The big question is: what cost are we willing to incur to bring in these foreign capital flows? The right precedent to look at is the Raghuram Rajan scheme of 2013, when foreign currency deposits were given forward cover at subsidised rates of 3.5 percent. We got around $34 billion in deposits, and these sums were unwound without rocking either the forex or domestic rupee markets too much. Now, with the economy growing larger, our ability to create such a subsidised forward cover regime should be higher – which means we can easily obtain flows of $20-$30 billion every year, in additional to normal FDI and portfolio flows, for the foreseeable future. This could add up to $100 billion annually, and be hugely beneficial for a general revival in demand.

India is financing the bullet train with a Japanese loan at 0.1% interest. If we can draw 10-year funds in dollars and euros at 2-3 percent rates, the post-hedging returns needed to make such flows viable for the investor would be from 5% upwards. India will have many such infrastructure and industrial projects that can attract these funds.

In the budget, Finance Minister Nirmala Sitharaman had talked of floating a sovereign bond abroad, but the matter has since died down due to falling interest rates domestically, and also because of negative commentaries in the press.

India should cautiously dabble with sovereign bonds to test the market’s appetite and to prevent an expansion in domestic borrowing requirements that could pressure yields upwards. We must shed our pre-1990s mindset and invite foreign capital in larger quantities and reverse the investment slowdown. The pump needs to be primed, and there is nothing better than tapping near zero-cost foreign capital for this purpose. The inflows will put money in the hands of infrastructure builders, who will then boost demand for other goods and services when they spend the money, thus restarting the virtuous cycle of investment, demand growth, higher incomes, and higher savings.

The key is to overcome the exchange rate risk aversion among investors. In the age of “superabundant" capital, one wonders why our economics is still operating from a shortage mentality. The answer to our weak capex cycle lies abroad in the medium term.

R Jagannathan is editorial director, ‘Swarajya’ magazine


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