Bull run: Hardly a reason to smile

FDI-inflow promoted by strong infrastructure should make the market cheer, not the fleeting FIIs.

Reema Sharma

The bulls are all charged up again. Sensex breaching the 20,000 mark for the first time since 2008 is a matter of delight for Dalal Street. But the stock market rally brings with it certain apprehensions as well. Commenting on the surge, Finance Secretary Ashok Chawla said the rise pointed to the confidence that Foreign Institutional Investors (FIIs) had in the Indian growth story. Criticism of the bullish sentiment might seem harsh and undue, but a dispassionate analysis of the equity market is the need of the hour. Sustainable growth of the Indian economy, which is expected to grow by 8.5% in 2010-11, is dependent on stable investments. Notional growth, however, as represented by the stock market, is no mirror of the real growth index. India has made remarkable economic progress since the beginning of the liberalisation era in the early 1990s. And crucial to this have been the inflows of Foreign Direct Investment (FDI) as well as the portfolio investments of FIIs. But, given the peculiarities of the Indian condition, it is a fact that we have not been as successful in attracting FDI as we have been in seducing the FIIs. The latter can indirectly boost economic activities and serve as a good barometer of growth sentiments, but are certainly no replacement for FDI inflows. At present, uncertainty still plagues the global economy. The possibility of double dip recession in the US is haunting financial markets. Europe is still struggling to pull itself together. In such a scenario, the recent bull-run at Sensex deserves only a lukewarm response. There is no guarantee FIIs won’t pull out once markets in Europe begin to recover in the fourth quarter of this fiscal. In the meantime, we would do well to boost our FDI inflows. Although a recent survey by the United Nations Conference on Trade and Development affirms that India has replaced the US as the second most important FDI destination for trans-national corporations for 2010-2012, the picture is not as rosy as it seems. China is way ahead of us in attracting FDI. Data for the current fiscal shows that in the first six months of this year, China has been able to attract FDI worth $ 58.35 billion --- up by 20.7 per cent from the same period last year --- as opposed to $ 10.78 billion for India --- down by 18 percent. In other words, China has been able to funnel a far larger quantity of foreign funds into its real economy than India. The reason for India’s sluggish performance in comparison to China lies in our poor quality of infrastructure. And in a risk-averse environment, such as at present, this plays a crucial part in deciding who gets the larger chunk of the investment pie. Unless we are able to fight back corruption and lay a sound foundation in sectors such as education, healthcare, manufacturing and, most importantly, agriculture, foreign investors will simply be happy skimming off the cream from the fat by indirectly investing in a select few, premier companies. The sociological implications of this are indeed significant. Not only is FII-driven growth intangible over the long run, at the macro-economic level it will help to perpetuate the divide between the haves and the have-nots. In this backdrop, there is little reason to cheer the recent Sensex rally. It will only help a handful of investors whose financial fortunes are influenced by the stock market. But for the vast majority in this country, it means very little. Instead, our policymakers should endeavour to relax FDI norms in critical infrastructure sectors and incentivise the direct funnelling of foreign funds into the real economy on a war footing.