Back to ResearchPrime Minister Narendra Modi’s first budget was a disappointment, his first winter session of Parliament was an embarrassment, his passage of a slew of ordinances was touched by a hint of panic, and it’s still unclear if key economic legislation like insurance FDI and the general services tax will even get past his second budget.
Yet, foreign capital continues to flow. Greenfield foreign investment remains low, though it has at least rebounded from the bottom-scraping levels it reached last fiscal. Once you took out the usual end-of-the-year profit taking, the FII flow into India has been remarkable. And it continues to come in.
The Indian investor remains cautious about the stockmarket. The Indian corporate investor is even more wary. Having been burnt by the previous six or seven years by the last government, they are all waiting for concrete evidence of policy change before they put more money into expanding factories and plants.
Yet the foreigners keep coming.
One reason for this is that there aren’t too many places a foreign emerging market fund manager can put his money. As one equity player in London once told me,” There are a billion pounds in floating emerging market funds that have almost only India to go to these days now that Turkey, Brazil, Russia and a few others are belly-up. The FIIs, he told me, were buying and selling to each other so the Indian investor didn’t really matter.
Two, many overseas investors understand the damage done to the Indian economy by the United Progressive Alliance regime, especially the last five years of the Manmohan singh government. The fiscal deficit remains out of control. Bad loans are clogging up the banking system. The energy sector remains paralyzed.
If anything, many of the institutional investors see how this would take a long time to unwind.
What worries them more is the tomtomming of calls for interest rate cuts by various senior government officials. This unnerves long-term financial investors, like pension funds, who focus on the broad parameters of the economy and policy and not short-term measures to get a quick burst of growth. For them, cutting interest rates prematurely is a sign of bad policy, that Modi wants to suborn an independent central bank, and means inflation would come back sooner than later.
They thus applaud Raghuram Rajan’s stance. As a Citibank study noted, India was a good place to be because of three things 1) Rajan, 2) the fall in global commodity prices and 3) Modi’s absolute majority in the lower house. No mention of Arun Jaitley or the key personnel in government.
In other words, Modi’s seeming “haste makes waste” method of governance gets him applaud with foreign investors who seen in this exactly the sort of long-term, stable policy mindset that they want.
Even on foreign policy, New Delhi is working on an ad hoc, ultra-pragmatic approach to diplomacy – and this is earning him points. This lack of geopolitical vision is actually acceptable now because there are no major government to government threats in the region. Sparring on the borders yes, but the chance of even a Kargil type situation is minimal. Modi is doing exactly what a Wall Street investor would want him to do in foreign policy.
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