The article looks like having a good discussion on FDI and FII , even though old article( 2006

April). India doesn't need FDI It won't be an exaggeration to say Nimesh Kampani, Chairman, JM Morgan Stanley, knows the Bombay Stock Exchange like the back of his hand. Kampani was one of those who propelled the stock exchange boom in the early 1980s when Reliance Industries founder Dhirubhai Ambani entered the world of equities. Nimeshbhai, as he is popularly known, is media-shy and a man of few words. For a change, he agreed to a rare and exclusive interview with Managing Editor (National Affairs) Sheela Bhatt in New Delhi and discussed what can bring about changes in India. The world is saying <st1:country-region w:st="on">India</st1:country-region> will grow, <st1:country-region w:st="on">India</st1:country-region> will become a big power. What are the hidden risk factors in this hype? There is too much liquidity across the globe. Rich people all around have so much cash in hand that they are looking for markets that are growing. How many places in the world are registering growth? Europe doesn't have much of it. OnlyAsia is attractive. The <st1:country-region w:st="on">US</st1:country-region> is showing one to three per cent growth in most sectors. The <st1:country-region w:st="on">US</st1:country-region>economy is developed. People there have cash in hand to spend. People in the<st1:country-region w:st="on">US</st1:country-region> want to consume using credit cards. Our risk factor lies in liquidity. Too much liquidity of those consumer economies is chasing Indian stocks. Because there is an absence of growth in their domestic markets. Their money is welcomed in <st1:country-region w:st="on">India</st1:country-region> but the risk of withdrawal comes along with that. If withdrawal of money happens it can very well bust Indian stocks. In the last five years, $45 billion investment has come to the Indian markets from foreign institutional investors. Today, the market value of their money should be around $120 billion. Who will buy when they will rush in to sell? Right now, one lot is selling and the other lot is buying. Those who bought shares at much lower price of say, Rs 80 are selling at Rs 800 and booking profit. The newcomers, on the other hand, are buying at Rs 800 with confidence in market. The new buyers will like to wait for the next five years for the stock prices to go further up. We know <st1:country-region w:st="on">Japan</st1:country-region> has invested $5 billion in the Indian market. Much of it is retail money. These days, as soon as new public issue opens, it gets filled up within the first few hours. Why is it so? Because <st1:country-region w:st="on">Japan</st1:country-region> has saved money for years. Investors there get zero or negligible interest. At some places, bank charges them for keeping deposits. In our banks, on the contrary, we get four per cent, at least. The Japanese are tired of dead investment. So they are looking out.

In the last one year, the Japanese have got return of 48 per cent in the Indian stock exchange. They had started with $1 billion. Now it has reached $5 billion. Nomura Securities and others invested in it. They take index stocks. When an investor does not know the country well, he tends to buy index shares only. The Japanese and the Koreans have invested. Recently I met 30 parliamentarians from <st1:country-region w:st="on">Denmark</st1:country-region>. I made a presentation to them on <st1:country-region w:st="on">India</st1:country-region>'s future. Thereafter, two of them came and talked about investing in Indian stocks. What can go wrong in realising your dreams of <st1:country-region w:st="on">India</st1:country-region>? Politics. If something happens to this government and there is instability at the Centre, it can affect our growth. In 2004, between May 13 and 18, the stock index plunged when Sonia Gandhi delayed her decision to announce (Dr Manmohan) Singh's name as the prime minister. The market picked up only when the announcement was made. The investor does not like political uncertainty. They are afraid of power in the hands of Left parties or the so-called Third Front because all they want is a stable government. These days people say Dr Singh is the weakest prime minister but the stock market does not think so. Dr Singh may be weak politically but he is the best prime minister as far as the country's economy is concerned. The prime minister along with Finance Minister P Chidambaram, Commerce and Industry Minister Kamal Nath and Deputy Chairman of Planning Commission Montek Singh Ahluwalia are too good for Indian markets.

<st1:country-region w:st="on">China</st1:country-region> has

help of FII investment. Your comment.

not grown with the

Yes. <st1:country-region w:st="on">China</st1:country-region> has grown with the help of bank money, or people's money.<st1:country-region w:st="on">China</st1:countryregion> has got four prime banks owned by the government. These banks' non-performing assets is approximately above 30 per cent. Can you imagine about Rs 6 lakh crore (Rs 6 trillion) is disappearing from the total deposits of Indian people kept in the Indian banks? Indian banks have deposits worth around Rs 20 lakh crore (Rs 20 trillion). Chinese banks have more than what Indian banks have. Out of that money, 30 per cent has vanished. Its savings rate is around 40 per cent. The question is: Where has people's money gone? It has gone into building infrastructure. They have issued loans to whoever came to the bank. To build infrastructure, they were fast to disburse money. Now, they are writing off those loans. In <st1:country-region w:st="on">India</st1:country-region>, bad debts of banking industry stands at a meagre 1.75 per cent. <st1:country-region w:st="on">China</st1:country-region> went ahead full steam without taking care of
the accounting and financial niceties.<st1:country-region w:st="on">India</st1:country-region> is a democratic

country. Here, journalists and Parliament would ask questions about fiscal management. About 30 per cent of bad debts won't be allowed.

A friend of mine was in <st1:country-region w:st="on">China</st1:country-region> recently. He was travelling along a road lined with houses on both sides. After 15 days, when he returned along the same road, he saw those homes had disappeared and a bigger road was being built. That is<st1:country-region w:st="on">China</st1:country-region>. There the government can evacuate you in no time. Many of us feel the Sensex boom helps only a few people. Indian slums are growing as ever. Slums will not go away in the next two decades. You need wealth to distribute it. We need to create wealth in private hands. In <st1:country-region w:st="on">China</st1:country-region>, government created wealth. In <st1:country-region w:st="on">India</st1:country-region>, we are following a different route. The Indian process will be a slow one. Recently we at Morgan Stanley, handled the issue of China Construction Bank. It is the first government-owned bank in <st1:country-region w:st="on">China</st1:country-region> to go public. It was heavily subscribed. Meaning, <st1:country-region w:st="on">China</st1:countryregion> is now adopting discipline in fiscal management. Recently, <st1:country-region w:st="on">China</st1:country-region> collected around $8 billion from the <st1:country-region w:st="on">US</st1:country-region> and Hong Kong and other places and wrote off old bad debts. Now, it has begun repairing its balancesheet. Therefore, we need huge investment in infrastructure before we can even think of removing slums. We cannot tackle poverty until we raise money to finance infrastructure. I always believe that more roads, more construction and development of tourism are sure-shot ways to create huge employment. Do you find deficit financing a big issue for Indian fiscal management? I don't think it's an issue. <st1:country-region w:st="on">India</st1:country-region>'s deficit is under control. The problem lies with the states and not with the Centre. <st1:country-region w:st="on">India</st1:country-region>'s combined deficit is 10 per cent. States should improve financial management. Gujarat and Tamil Nadu are the best managed states as the governments there are excellent in financial management. They are developing their states' resources impressively. If you are asked to take one creative decision as finance minister, what will that be? I will go to Parliament and ask for permission to create fiscal deficit. I want to spend $50 billion on infrastructure! Here deficit financing is justified because I am not spending on people. Rather, I am creating assets. People will get employment and that should justify deficit planning. You need political guts and courage to do it. Planners would fear that if tax does not rise, inflation will increase and savings would pump in more money. This, in turn, will increase liquidity. But all depends on the management of spending on infrastructure. Spending on infrastructure will increase internal mobility of our people. I feel tourism and infrastructure are the areas where the Indian government should be involved. All other areas can be developed with private money. Does <st1:country-region w:st="on">India</st1:country-region> need more foreign direct investment? <st1:country-region w:st="on">India</st1:country-region> doesn't need FDI. To get FDI, you have to
install infrastructure first. <st1:country-region w:st="on">China</st1:country-region> is getting 10 times more FDI

than <st1:country-region w:st="on">India</st1:country-region> because they have invested in roads and bridges and airports.

Why do you say <st1:country-region w:st="on">India</st1:country-region> doesn't need FDI? You need infrastructure to manage incoming FDI. You need clear policy. FDI is not needed in <st1:country-region w:st="on">India</st1:country-region> because we are getting more money from the FIIs. We are getting around $12 billion from them. They are buying in secondary markets and that money gets into the Indian economy. While <st1:country-region w:st="on">India</st1:country-region> gets around FDI worth $5 billion, <st1:country-region w:st="on">China</st1:country-region> gets around $50 billion. They don't have our types of stockmarkets. So FIIs are absent there. In <st1:country-region w:st="on">India</st1:country-region>, when FIIs pump in $12 billion, it means a few Indians have sold their shares to them (the FIIs), so that free cash gets invested somewhere within <st1:country-region w:st="on">India</st1:countryregion> by Indians. That money goes into land, buying of new stocks and into banks. The fundamentals of money are that it goes where it gets sound returns. Therefore, if you keep up our policies and make them fair, <st1:country-region w:st="on">India</st1:countryregion> should not worry which way it gets money. Mittal Steel, Reliance, Tata, Vedanta and other Indian companies are going to invest more than Rs 2 lakh crore (Rs 2 trillion) in the coming years. FDI is not a big issue because Indians are in now a position to raise big money and invest in <st1:country-region w:st="on">India</st1:country-region>. The government should see that people get returns
FII - is Foreign Institutional Investors, i.e, foreign Investment Bankers like goldman sachs, merill lynch, lehman bros..etc...investing in indian markets......in other words buying indian stocks.....FII's generally buy in large volumes ..which has an impact on the stock markets...

FDI - is foreign direct investments, i.e. a foreign company having a stake in a public sector undertaking in india .....latest news is tht FDI in telecom sector has been increased to 74%..so..if vodafone wants a share in indian market ...it can penetrate indian market with max of 74% stake...

THE Common Minimum Programme of the new Government at the Centre stresses Foreign Direct Investment over Foreign Institutional Investment. Its position is that "FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports and where local assets are created on a significant scale. The country needs and can easily absorb at least two to three times the present level of FDI inflows," after which the document hurries to add that "Indian industry will be given every support to become productive and competitive" and that all efforts will be made to provide a level playing field. Cynics will no doubt point disdainfully in this connection to the Finance Minister, Mr P. Chidambaram's recent statement about the need to take a second look at the policy of foreign investors having to get the permission of their local collaborators before branching out on their own. The position of the Common Minimum Programme on FII inflows is spelt out many pages later, in the section dealing with the capital market. The FIIs, too, the CMP says, "will continue to be encouraged," but immediately thereafter goes on to state, in the very same sentence that "the vulnerability of the financial system to the flow of speculative capital will be reduced." It is against this background that one must view Mr Chidambaram's comment about the need to take a second look at the concessional rate of capital gains tax levied on shortterm gains (10 per cent) that applies to FII investments but not to those made by domestic players in the secondary market. It needs to be noted in this connection that a former Finance Minister, Mr Yashwant Singh, announced some years ago that the government knew all along that domestic investors, too, were using the Mauritius channel, but chose not to clamp down on this, presumably in the interest of ensuring a level playing field between domestic `FIIs' and FIIs that were really foreign. Be that as it may, it is worth noting that the section in the CMP dealing with capital market opens with the statement that the government "is deeply committed, through tax and other policies, to the orderly development and functioning of capital markets that reflect the true fundamentals of the economy," before going on to talk of FIIs. Actually the latter half of this sentence is a mere platitude; it is an open secret that the one thing the capital market the world over pay little or no attention to is the `true fundamentals'. (No one I have spoken to or read has ever meaningfully discussed the relation of `fundamentals' to the stock market.) The concern of market regulators the world over is focussed, rather, on ensuring a wellordered market. One SEBI chairman in fact specifically stated that he was least interested in the question of whether the stock market was or was not in tune with the fundamentals. The level of share prices, he said, was not his job; his job was to avoid large and sudden fluctuations in these levels. This may have be one of the things the present Finance Minister has in mind when he speaks of `going back' to reforms. The economic policy of the BJP-led coalition was, especially the past few years, was very much focussed on the stock market rather on the growth of productivity and on sustainable increases in GDP; apparently in an effort to indirectly boost the rate of growth of the market. A number of analysts of the US economy have pointed out that every dollar of growth in market capitalisation boosts spending by 5-7 cents. Sauce for the gander, sauce for the goose? Not really.

The estimates about the effect of the amount by which stock market increases or decreases spending relate to situations in which the market is relatively stable, and therefore might have a somewhat more limited effect in the Indian case, particularly when the stock market is on way up. It is, therefore, in our best interests to be cautious about the demand-enhancing aspects of runaway booms, rather than getting excited every time the market seems suddenly to be reaching new highs. Whenever the market seems all set to touch the skies, it is the pessimists that we ought to pay more attention to than the optimists. The point is not that a rising market is bad in itself; but rather that one needs to pay serious attention to the fall that might follow. Pumping public sector funds to prop or push up the market is not healthy. It only heightens the risks. This logic particularly applies to situations in which market regulators seem better at `tackling' crises after they arise than at preventing them from happening. One last thing: Foreign investments in supply-side infrastructural investments will probably look a great deal less appealing to foreign investors than we try to make them out to be. Costs are large and certain; benefits can at best be termed dubious. Things are very different in the case of direct foreign investments in fast moving goods; but in the context of a low-tariff regime, many potential investors could well look at imports as a better and safer way of getting more bang for their buck.
More Stories on : Foreign Direct Investment | Foreign Institutional Investors

What explains the greater attraction of the Indian market for portfolio investors as compared to foreign direct investment (FDI)? In his column Bullish FII versus cautious FDI in these pages (FE, February 14), Senthil Chengalvarayan has compared the Indian scenario, characterised by strong portfolio inflows and much weaker foreign direct investment (FDI), with China, where the situation is the reverse. He attributes the difference to the opening of the capital market. Open up the real sector and investments will flow, he argues. While his broad thrust is correct, there is another factor thats just as critical, if not more. Ease of entry and exit. Today, it is relatively effortless for a foreign institutional investor (FII) to enter the capital market. A Sebi registration, preceded by a fairly perfunctory due diligence, is all it takes before an FII can enter the Indian stock market and commence trading. Exit is equally simple. For FDI, however, both entry and exit are far more difficult. Even in sectors opened to FDI on paper, problems remain at the grassroots. There are innumerable clearances that need to be obtained at the state and district levels. There are also a number of practical hurdles, such as infrastructure bottlenecks, all of which make entry difficult. Exit is more complicated. Archaic labour laws, such as the Industrial Disputes Act, prohibit the closure of any company employing more than 100 workers without obtaining prior state government permission. Bankruptcy laws are convoluted and legal processes costly and long-winded. No wonder portfolio inflows into India far exceed direct investment flows. FII flows topped $8.5 billion last year and have already exceeded $1 billion in the current year to date. In contrast, FDI flows have remained stuck in the $3-4 billion groove for the past many years. Its just the reverse in China. FDI is in the range of $50 billion, while portfolio flows are much lower, in the range of $4-5 billion. Part of the reason is that equity markets are far less open than in India. The market is segregated between resident and non-resident investors and there are strict controls.

Given that FDI is far more beneficial to the recipient country than FII, the big question troubling Indian policymakers is how do we replicate the Chinese example. We would say open up and, equally, make exit easier as well.